MONEY MATTERS CLUB The Official Finance Club Of IBS Hyderabad
Presents the March 2020 Edition of
The Financial Bulletin
FROM THE EDITORS
The Financial Bulletin Money Matters Club IBS, Hyderabad Est..—2005
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Dear Readers, It gives us immense pleasure to come up with the March 2020 issue of The Financial Bulletin successfully. In this issue, we present to you a brief description about the impact of Covid-19 pandemic on some important sectors of Indian Economy. We hope to deliver useful insights to the readers. Happy reading!
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Kritika Gupta Jagriti Gupta Juhi Parasrampuria Saisadwik Chodavarapu Newsletter Coordinators
INTRODUCTION As our new financial year commences, the Novel Coronavirus (COVID-19) has infected more than eight hundred thousand people in more than 150 countries- a scourge confronting all of humanity, impacting lifestyles, businesses, economies, and the assumption of common wellbeing that all of us have largely taken for granted. Even before the onset of this pandemic, the Indian economy was confronting turbulence on account of disruptions in trade flows, rising unemployment, and slow growth. The situation has now been aggravated by the demand, supply and liquidity shocks that COVID-19 has inflicted. We have put together this bulletin as an attempt to highlight the most hit sectors in India. (Source: Economic times)
AVIATION INDUSTRY The aviation sector in India contributes around $72 billion to the GDP of the country. If a 25% decline is anticipated in the revenues of this industry keeping in consideration the current lockdown then, the Indian aviation sector may be facing losses amounting to $1.5 billion-$2 billion. The aviation industry has faced an ironic effect as a result of the COVID-19 pandemic. Initially, it resulted in a steep reduction of oil prices, which could have triggered the growth of the aviation industry, however, it resulted in not turning out advantageous for the industry due to a decrease in worldwide demand for oil. This industry witnessed price cuts around the world. Multiple airlines have cut down their routes by 30-35% and have started with issuing of unpaid leaves to their personnel which comprises the cabin crew, pilot and other ground staff members. Most airlines have been operating at lower capacity by flying smaller planes to save costs and accommodate the current demand. ACI (Airports Council International), which has released the world’s latest monthly global traffic data for January, indicates the rapid effect of the pandemic on the aviation industry, particularly in the Asia-Pacific region. Keeping in consideration the present scenario, an exceptional policy response from the government is required to ensure the continuity and sustainability of airport operations. Impact of COVID-19 A 2% dip in international passenger capacity for India was projected by the International Civil Aviation Organization (ICAO) in February when the COVID-19 outbreak was progressing slowly. The same projections jumped to 27% in March when the disease was declared a pandemic. Since then, due to the increase in the number of imported COVID-19 cases, the Indian government has ordered the suspension of all international air travel till April 14. The domestic operations also ceased from the midnight of March 24. This had a huge bearing on the margins of all international and domestic airlines operating in the region which is grounding this sector that accounts for more than $70 billion to the national GDP. Civilaviation authorities have prohibited the planes carrying VIPs and VVIPs to India till April 14. We are well aware that the pandemic has triggered travel restrictions and lockdown which will hit the airline players' revenue and margin significantly. The Indian aviation industry will be operating on sub-par capacity which will result in low
ticket booking, fall in revenues, and low passenger load factor (PLF). The industry, which has been struggling with the lack of travel demand, is finding it difficult to cope with the fall in revenue and is bound to go for measures like trimming of employee salaries. To sight an example, Indigo has announced salary cuts of 5-20% and Go Air has announced rotational leaves for employees without pay. On the other side, Air India has cut allowances which it pays to its executive pilots, cabin crew, and officers. Passenger growth of airlines has fallen sharply from 13.7% during FY 2018-19 to 3.7% during FY 2019-20 (April-February) and has registered a negative 20-25% growth for FY 2020-21.
Future Estimations There is a possibility of the lockdown being extended beyond April, which will lead to further earnings cuts. The fall in crude oil prices may also not help much as its benefit could only be realized once the industry resumes its operations. A weaker yield and low passenger load factor (PLF) environment are expected in the first half of FY 2020-21 due to low demand. In this event, a relief package from the government (interest-free loans, lower taxes, etc.) will be critical for the survival of airlines. Aircraft deliveries could also be under pressure as Boeing and Airbus have taken shut-downs. ICAO, IMO, and UNWTO have called for urgent actions to support the aviation and tourism sectors during the COVID-19 crisis. The immediate relief to the aviation sector could surely come in the form of resumption of domestic flights if and when it happens after April 15. The international sector will still be away from resumption and normalization as much of Europe and the United States are still suffering under the COVID -19 outbreak. It is not yet clear whether the Indian government like other nations is looking at providing some financial package to the aviation industry, which is vastly affected.
By- Tanuja Gupta
BANKING INDUSTRY In an economy staggering with demand depression (in automobiles, iron and steel, manufacturing units, real estate, mining, and power sectors), rising unemployment, low industrial output, all of which have been going on simultaneously, a supply-side blow in the name of lockdown would deliver a serious blow to the social and economic well-being of a populous and developing country like India. None can deny the fact that the 2016 demonetization and the 2017 GST rollout delivered economic shocks from which the country had not yet recovered when this deadly virus struck another blow at it. Impact of COVID-19 Earlier this February, the RBI Governor said that banks should be ready to face the challenges ahead due to the coronavirus that led to the slowdown in global growth. He said that, if global growth slows further, it would create panic and impact the health of the banks thereby. Which is undoubtedly true. After the Yes Bank fiasco, investors feared a more vulnerable formal financial system and therefore, the stocks of the sector have been on a low since February 2020. Banks are already working in a stressful environment and with the country nearly paralyzed with a lockdown, it would hit the cash flows of both individual borrowers and institutions, in turn, delaying payments to the banks. The financials of banks in the nation are already weak and as repayments have been delayed, NPAs would increase. This puts the banks that have lent money to these sectors at risk. The impact on the already weak credit delivery and asset quality of banks would worsen if the conditions continue. It would also impact on the lending to the small and medium-sized businesses and also individual lending both of which have shown stagnant levels of growth (in lending) so far. A stress test conducted by the RBI before the outbreak of the virus showed that in the worst-case scenario, the overall bad loans would increase to 10.5% of total loans by September 2020 as against 9.3% in September last year, the Gross NPAs of public sector banks would rise to 13.5%. Future Estimations Surprisingly, the Finance minister left banks out of the regulatory relief she announced for the individuals and businesses. No doubt in the fact that as businesses come to terms with the 21-day lockdown, they have to account for disruptions in payments, an extended receivables cycle, along with the emergence of contrac-
tual disputes, all of which would strain the liquidity situation, and may lead to a rise in delays in servicing debt obligations. RBI stepped up and asked the banks to assess the impact on their balance sheet, asset quality, and liquidity. The RBI’s monetary policy committee met in the last week of March 2020 and announced the following quantitative easing measures It cut the repo rate (the rate at which it lends to commercial banks) by 75 bps to 4.4% from 5.15% earlier Permitted banks to allow a 3-month moratorium on EMIs meaning people will not have to pay their instalments for the next 3 months Cut the reverse repo rate (the rate at which RBI borrows from the commercial banks) by 90 bps to encourage lending to the productive sectors and making it unattractive for the banks to park their funds with the RBI Reduced the Cash Reserve Ratio by 100 bps to 3% of net demand and time liabilities to help increase liquidity in the economy. “Given the uncertainty surrounding the severity and duration of the pandemic and the associated effects on India’s banks of restrictions on economic activity”, Fitch Ratings downgraded the operational environment score of the Indian banking sector from ‘BB+’ to ‘BB’. From the perspective of banks, travel, which forms 2.2% of all loans and the small business enterprises lending that forms 5.4% would be the sectors that would take the most hit. These small businesses have greater credit constraints and are more sensitive to weak consumer demand and therefore are hit the hardest in economic downturns. In such conditions, banks should focus on prudent lending. While the Centre, in coordination with the States, is already taking steps for preventing and controlling the local transmission of the virus, further steps are required to be taken by the banks/financial institutions as a part of their existing business continuity plans (BCPs). Banks are now demanding forbearance (where the loan payments are postponed but interest continues to accrue during the period of forbearance) on loans from RBI. SBI bank has also taken up the moratorium allowance by RBI and announced a COVID-19 fund which would allow lending at a 7.25% interest rate with a moratorium clause. Public sector banks that account for more than half of credit do not have healthy capital positions. A surge in bad loans and provisioning would make COVID-19 a capital problem from a health issue. Forbearance would ease up the capital.
By– Dhvani Kamdar
PHARMACEUTICAL INDUSTRY Indian pharmaceutical industry manages over 50% of global demand for various vaccines, 40% of generic demand in the US and 25% of all medicine in the UK. According to the estimates of the Indian government, India ranks 3rd worldwide for pharmaceutical production by volume and 13th by value. It accounts for about 10% of the world’s production by volume and 1.5% by value. This points towards the relatively lower price of Indian pharmaceutical products, and the high demand that they enjoy in the global market. The pharma industry exported products worth $13.7 bn and imported worth $1.99 bn in FY2019-20. The Union Cabinet has allowed amendment of the existing Foreign Direct Investment (FDI) policy in the pharmaceutical sector in order to allow FDI up to 100% under the automatic route for the manufacturing of medical devices subject to certain conditions.
India is the leading producer of hydroxychloroquine and chloroquine phosphate which are being used to treat Covid19 as of now. The former is used for curing auto-immune disorders and the latter for malaria. IPCA is the largest global manufacturer of these drugs. The USA and other European nations are in need of these in huge quantities. Impact of COVID-19
India has banned the export of critical active pharmaceutical ingredients (APIs), essential medicines, specific medical devices, sanitisers, surgical masks and ventilators to ensure sufficient quantities are available for the domestic market. Generics drugs are most impacted as reliance is highly on imports from China. Supply disruptions over the past 2 months were managed through available inventory. As China limps back to almost full production, raw material supply disruptions should ease out. Imported raw materials like API imports from China have seen a 40-50% rise in prices for specific cases. Supply and distribution of essential medicines, sanitisers and PPEs (masks, gloves, etc.) are impacted, also there is a production slowdown due to raw materials and ancillaries not reaching factories. For Online pharmacies, delivery of medicines has been affected due to staff not turning up and non-availability of passes.
There is a spike in sales over the short term as consumers stock up on essential medicines. Field force impacted. Inventory in the supply chain should cater to sales during the lockdown. The Indian pharmaceutical industry is facing major challenges in transporting ancillary supplies like bottles and caps since they are not a part of the essential services category exempted from the ongoing nationwide lockdown.
Opportunity in a crisis India and several other international economies are becoming cognizant of the risk they face by being overly dependent on one market. Making the current situation a learning opportunity, Confederation of Indian Industry (CII), believe this is the time India should work on capturing potentially 40% of their competitor’s market share by looking at indigenous production of goods, furthering the country’s Make in India campaign. The industry can also resort to the following measures: Create a ‘pharmaceutical critical reserve inventory’ for both API and formulations with the supply of critical drugs for at least three months period – to be maintained at DCGI/state FDA approved warehouses around the country to meet any emergency situation. Create a global multilateral partnership with EU countries and U.S. to address their pharmaceutical supply chain disruptions and how India can be their alternate source of pharmaceutical products over a longer-term. Reduce dependence on China for import of raw materials. Incentivize R&D investment through enhanced collaboration between industry and academia.
By– Rohit Agrawal
RETAIL INDUSTRY India is the world’s fifth-largest preferred retail destination and one of the fastestgrowing sectors worldwide. According to the Confederation of All India Traders (CAIT), India's retail sector which comprises of 70 million small, medium and big traders that are employing around 450 million people, undertakes a monthly business of about USD 70 billion (i.e., approximately Rs 5.2 lakh crore), and is one of the hardest-hit segment due to the global pandemic, COVID’19. Immediate Impacts of COVID-19
Traders’ body, CAIT on 31st March 2020, said that India’s retail trade has incurred losses around $30 billion (which is Rs 2.2 lakh crore) in March alone. FMCG, Online Retail, Telecom, and Pharma are seemed to be the obvious gainers in this pandemic situation. The overall FMCG industry, which has been reeling under the effect of the acute slowdown with growth rates as low as 6%, experienced a 2% jump in February when the COVID-19 outbreak occurred in India. Consumers started stockpiling not only sanitizers and hand washes but also bought the food and other essential items fearing the lockdown. Companies such as Amul saw a 20% rise in demand. Big FMCG giants such as HUL, Godrej, ITC and others have already seen a surge and have ramped up the hygiene portfolio production by 15-20% in the last few weeks. Not only the consumers have been hoarding the essentials, but they have also even taken to shop online. Online grocery shopping platforms like Grofers and Big basket saw around 60% surge in the users’ traffic, of which 20% were new users. A senior executive of Grofers said that they have around 2 lakh orders pending since the lockdown because of the supply chain clogs and the staff shortages. With the implementation of the nationwide lockdown, there has been an over 100% growth in paid Over-the-top (OTT) subscriptions. Television viewership has also gone up by around 8% in March. With an increase of entertainment over the internet and work from home, data consumption volumes of the telecoms have been up by around 15%. The increase in online orders of essentials by the people will affect the offline retailers badly.
Long term Impacts of COVID-19
According to the Secretary-General of CAIT, Mr.Praveen Khandelwal, if global economies and other sectors of the Indian economy bounce back and revive sooner than expected, the traders will have multiple challenges such as commercial rent, statutory payments and business revival strategies which would further make the trader’s financial condition worse. Finished goods’ imports from China, USA, and Europe which are under severe effects of COVID-19 will take more time to normalize and, therefore, the import cycle and supply chain might take much longer to get back on track. CAIT strongly feels that a strong stimulus package is needed for the small businesses who are the contributors to a major chunk of revenue to the government and are also the backbone of the Indian economy. According to Kumar Rajagopalan, chief executive of the Retailers Association of India (RAI) and Reuters, the coronavirus pandemic amid an economic slowdown has hit revenues of the Indian retailers selling non-essential items like clothes and jewellery by 75% so far and is likely to cause widespread losses in jobs. Around 40% of the six million employees working in India's modern, rather than traditional, retail sector could likely lose their jobs in the next four months if the government lacks initiative. The short-term impact of the coronavirus pandemic on retailers will be very severe but an estimated recovery period for the same is expected to kick start from the first week of May, subject to the lockdown not being extended further.
By– Srinivas Sharma
TOURISM INDUSTRY The travel and tourism industry was already hit by the economic slowdown in 2019, joined with macro challenges and geopolitical issues. Then came the COVID-19 pandemic that didn't take much time to shut the entire world down. According to the World Travel and Tourism Council India Initiative (WTTCII) and the Federation of Associations in Indian Tourism and Hospitality, the coronavirus pandemic could leave over 38 million people jobless, which is around 70% of the total tourism and hospitality sector workforce. Due to COVID–19, Airlines Industry will have to face a burn of $61 billion of cash reserves in the second quarter. According to the analysis, there will be a 38% drop in travellers all around the world. Just like all the other sectors, the Travel & Tourism Industry will also have to bug up. Impact on India The tourism industry accounts for 10% of the GDP and provides more than 50 million jobs. According to the Federation of Associations in Indian Tourism & Hospitality (FAITH), the tourism sector estimates an overall loss of Rs.5 Lakh crore. Industry's key source markets are heavily impacted due to the coronavirus. The Federation doesn’t anticipate the tourism market to be up in India before the next 12-18 months. In a letter to the PM, the Federation highlighted that “around 70% out of a total estimated workforce of 5.5 crores (direct and indirect) could get unemployed. This effect of job losses and layoffs has already begun throughout the country. A large percentage of total tourism business activity of India, which is estimated at more than $ 28 billion in foreign exchange and more than ₹ 2 lakh crores in domestic tourism activity will be at economic risk throughout the year. Thus, in excess of ₹ 5 lakh crores of the direct tourism industry and almost double that of total economic activity is at risk.” The tourism value chain across hotels, travel agents, tour operators, destinations, restaurants, family entertainment venues, and all transport modes has collapsed, paving way for further economic loss. Impact on Hotels The impact of the novel coronavirus on India’s hospitality sector is nothing short of severe. Due to the nationwide lockdown, the Travel and Tourism sector is facing negligible demand of both international and domestic travellers.
Occupancies in hotels have come to single-digit and recoveries are not expected shortly. According to a report by HVS India and South Asia, a global consulting firm, the overall occupancy in the branded hotels segment in 2020 is estimated to decline by 16.7 – 20.5 percentage points over 2019. The overall revenue of the Indian hotel sector is set to decline by anywhere between the US $8.85 billion-$10 billion, reflecting an erosion of 39% to 45% compared to last year. Besides the actual business loss, the hotel owners will also incur losses due to fixed operating expenses, debt repayments, interest payments and several other compliances required to be undertaken as part of the sector. The hotel industry expects to lose over 2 crore jobs. According to the Confederation of Indian Industry, the industry will see improved cash flows only at the beginning of November 2020 and perhaps get to normal levels by early 2021. Impact on Air Transport Due to a fall in the volume of travel and tourism, the aviation industry is struggling. Because of the lockdown, all domestic and international flights are charged a parking fee with no revenue. Impact on World’s Tourism Coronavirus has thrashed the world’s travel industry in enormous stages. As far as China is concerned, the tourism industry there accounts for 11% of its GDP. Now, after the pandemic, people are reluctant about travelling to China. This will bring down China’s GDP rapidly in the coming months. In Asian countries, the bookings have dropped severely. Asia will be the largest affected continent worldwide and will take approximately 10 months to recover from this condition.
By– Pooja Poojara
CONCLUSION The increasing widespread COVID-19 has transformed the world’s hustle into varying degrees of uncertainty. One of the few things that seem fairly certain is that the downturn is fundamentally different from recessions we have seen in the past. This is not just another turn of the business cycle, but a shakeup of the world economic order. While countries and companies continue to comprehend the scale of this pandemic, it is certainly undeniable that we are staring at more permanent, structural changes to the way we live, work and play. The collective experience of going through this common crisis will lead to questioning of fundamental assumptions and priorities which will be both a challenge and an opportunity. While we are now focusing in India on securing the population from health hazards and on providing relief, especially to the poor, we also need to think about the long term health of the economy, the viability of businesses, and all the livelihoods of people. Apart from providing robust safety nets for the vulnerable, ensuring job continuity and job creation is key. And there is an urgent need to mobilize resources to stimulate the economy. In sum, this crisis is a story with an uncertain ending. However, what is clear is COVID-19 has introduced new challenges to the business environment which call for a measured, practical and informed approach from political and business leaders. We also need to realize that COVID-19 is likely to lead to a new normal “a new beginning�.
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