The devastating second wave of COVID-19 has made Indian equities decline even as other markets are booming.
The world ‘decoupling’ is being heard quite frequently over the last month. This is fair, considering the risky asset class in a country struggling with its most horrific calamity since it’s violent partition and independence almost 75 years ago. Newly recorded COVID-19 cases remained above 3,00,000 for almost 2 weeks in May. The death rate was 3,700 plus probably much higher if one were to discount the underreported official statistics.
The Sensex is down around 8 percent since it’s February peak but markets in most other countries are in fine fettle, hitting new highs in this period.
However, there has been a stark change in the movement of the Indian equity market since March. It did not participate in the rebound in global equity markets since then and has even underperformed some of it’s emerging market peers over the past month.
The COVID-19 crisis comes at a bad time since foreign investors are closely monitoring the progress of the pandemic in each country to decide on their allocations. FPI flows have already turned negative and this is also responsible for Indian equities’ relative underperformance.
A reason for the decoupling to take place is that a number of companies are restructuring. For instance, Tata Steel announced it’s annual results. The next most important theme to come out of the company was a projected Rs 30,000 crore debt reduction. Steel Authority of India (SAIL) announced its annual performance, and it immediately told the market that it repaid Rs 16,150 crore in the fourth quarter.
Reality can be seen in a number of places: companies are restructuring, debt is going out of balance sheets and financials are doing a ramp walk.
GST benefits have begun to become evident for a large number of organized companies. One of the most prominent innerwear companies in India from Kolkata indicated it could get finished products to dealer stores faster than unorganized competitors during the lockdown, a lead it maintained through the rest of the year.
This K-shaped recovery indicates that, perhaps, the organized companies are growing faster. Since the latter are represented on the exchange and indices, their growth is strengthening the indices while those looking at SMEs are likely to ask, “Is the economy really buoyant?”
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In March 2020, the Modi government imposed a nationwide lockdown to prevent the spread Of the COVID-19 pandemic. While containment measures had been used by many other countries the scale of India’s restrictions were unique bringing the country of more than 1.3 billion people to a sudden halt.
Unsurprisingly, the economic hit this caused was staggering. No other major economy was as badly affected by COVID-19 as India’s. In the April- June quarter, The Indian gross domestic product shrank by 23.9%. This was the worst contraction ever in India’s history. The economy also shrank in the following quarter as India entered its first economic recession since the British left in 1947.
By the end of 2020, When lockdown an other restrictions were eased the International Monetary Fund projected that India’s economy would show a V- Shaped recovery and it would take a considerably long time for the economy to reach the pre-pandemic level.
However, as the second wave of COVID- 19 struck every sector of the Indian economy in early 2021, It has become more difficult to say as to what can be done to make the economy recover. The International Monetary Fund’s growth forecast for India in 2021 Is 12.5% Compared to a negative 8.8% in 2020 an it will settle at 6.9% in 2022. Since there are more mutations on a daily basis now I know huge surge in the number of positive cases, we need to have a strong assessment of the trade off between log down, economic activity and livelihood. Economic activities need to be quickly adapted to the pandemic.
Strong containment measures like testing, vaccination, etc, need to be fast tracked and quicker progress in vaccination may raise the growth forecast. Vaccine production needs to be ramped up considerably to provide mass access and stop export controls.
According to the second advance estimates, 2020-21 Is expected to suffer a GDP contraction of 7.96%. The weekly moving average of daily cases Has increased 14 times since February. If supply chains get hit and inflation starts rising, purchasing power and therefore the demand is bound to be squeezed. Similarly, any cutbacks in economic activity, especially in sectors that are being forced to do so because of social distancing requirements, will adversely affect incomes and hence, demand.
However, there is hope for economic recovery an stabilisation. Because, unlike the first wave, we have vaccines this time. It is reasonable to expect that the pace of new infections will slow down as vaccinations pick up. Fiscal support through an institutional mechanism- for instance through the creation of special-purpose vehicles, is required to support stages of vaccine production; it’s distribution through a decentralized supply-chain process for all demographic groups, and a fund to provide money to those in the private sector who can produce vaccines on a large scale.
During the Pandemic as massive digitalization happened, cautious digitalization is suggested otherwise it may end up reducing jobs. Moreover, many jobs are unlikely to return. There are requirements for additional resources to be spent on learning losses to children for future growth prospects. So increasing spending by 0.5% of GDP on education is a viable option.
In a situation like this, India’s economic policy response to both, the crisis at hand and the crisis to come, may benefit from an urgent “3-6-9” month action plan. A plan, whose execution and implementation would need to be scaled on a war footing and for which urgent fiscal support shall need to be prioritized, if the government is serious about addressing the catastrophic impact of a surging pandemic.
Despite being battered by the National Lockdown last year and continuing lockdowns in many areas, many key sectors had bounced back and were struggling to cope with the pent up demand that had been unleashed. Things were looking good- the pandemic had eased considering with daily cases at a fraction of their peak levels and a nationwide vaccination drive in full earnest. The nightmare, 2020 , was fading in the rear view mirror. The second wave of the COVID pandemic , however, is threatening to bring that recovery to a grinding halt. Let us have a look at how four key sectors — auto, pharmaceuticals , consumer durables and aviation — are fairing as the country records over 350000 cases a day.
AUTO — Business in Q4 will be stellar but the lockdown in Maharashtra ,which accounts for 12% of the country’s total market , will bite..
For now , companies are managing the situation , with no visible signs of labour shortage.
Production will be impacted –Tata Motors ,Mahindra and Bajaj Auto have been asked by the Government to operate at 50% of their capacities. Companies are working with Vendors to ensure uninterrupted supply of parts .Dealers are shut, crippling the capacities.
Consumer Durables : Since Diwali , business has been good. ACs, fans and refrigerators have seen the most sales. The lockdown in Maharashtra and the partial ones in other states have not had an impact as e-commerce is still operational in most of the states.
Production continues at peak capacity , as the major hubs are in Gujarat and the National Capital Region. E-commerce is helping maintain stability ,even though in Maharashtra , only essentials can be delivered home.
Pharmaceuticals : Big companies selling medications for chronic ailments are doing well. The non-Covid segment had begun to recover but this recovery may now be disrupted by the Second Wave as the hospitals and the overall healthcare infrastructure focus on dealing with the pandemic.
After a brief disruption last year , production has recovered. Even the latest lockdowns have not impacted production. Raw materials , mostly imported from China , now have alternative sources but vaccine suppliers remain a concern, as manufacturers are willing to scale up. The shortage of Remdesiver ,used in the treatment of Covid, continues, even though companies have promised to increase production.
Aviation : Unless the spread of the virus is arrested quickly , passenger traffic during the otherwise peak summer season is set to take a big hit.
Many who had lost jobs were hoping to get back to work amid signs of an economic recovery . Pilots and crew members were also called back from leaves. This has now slowed down.
Airports will also be badly badly hit. Anecdotal evidence indicates footfalls have fallen dramatically in April at many key airports.
The Centre is examining proposals to extend compliance themselves for Income Tax and GST to provide further reliefs. to businesses during the second COVID19 wave.
The Government has received several industry representations , including from MSME’s seeking an extension of various reliefs upto at least 3 Months.