IMPACT OF CORONA VIRUS PANDEMIC ON INDIAN AND GLOBAL ECONOMY

Impact of Corona virus Pandemic on Indian and Global Economy

ARUN RAGAVENDAR¹, AISWARIYA.G², PAVITHRAN.K.M³, KARTHIKEYAN.P⁴, NIRANJAN.V⁵, NAYANA.R⁶, GOKUL.A⁷

19MBA0039¹, 19MBA0046², 19MBA0017³, 19MBA0090⁴, 19MBA0052⁵, 19MBA0107⁶, 19MBA0093⁷,

VIT BUSINESS SCHOOL, VIT UNIVERSITY, VELLORE, TN

ABSTRACT:

The world is witnessing one of its worse economic inactivity due to the outbreak of the Corona Pandemic. Many companies are undergoing a supply chain slowdown, due to which they experience slow down in their sales and revenue. For example, let us take the automotive industry because there is a supply shock as the companies will not be able to produce cars or launch any new cars, which will affect their projected sales and revenue. These might have a domino effect on their suppliers and also the raw materials industries. This effect will radiate to all other companies related to the automotive industry, and it is evident when a company sees a drop in sales and revenue, they tend to implement cost-cutting methods such as Layoffs or bankruptcies. These things lead to a higher unemployment rate, which would lead to fewer purchases by the consumers, which will, in turn, lead to fewer sales made by businesses, and this cycle will continue until the economy hits a low point like the Great Recession or Great Depression. The drop in sales will affect almost all the industries due to the lockdown imposed in various courtiers to tackle the Corona Pandemic.

It is different from the economic recession that we had experienced in 2008, as it was caused due to flaws in the financial system. So, what we are experiencing today is very different and would require novel initiatives to boost our economies. There is also a projected demand shock that is going to be witnessed in the days to come, as the numbers of job losses are increasing rapidly, creating a high level of unemployment globally. This will create a spiral effect in our economy as more and more people become unemployed, their expenditure and consumption will drastically reduce, thus decreasing the demand in the economy.

In uncontrollable and unpredictable situations like these, the government should play an essential role in creating demand in the economy through spending on projects like infrastructure building and creating credit access. By adopting insight from Milton Friedman, the governments can induce helicopter money in the most desirable way possible for their country. In India, most of the citizens have access to bank accounts through the Pradhan Mantri Jan Dhan Yojana(PMJDY) scheme. This will help our government to credit the money directly into their account as a measure of increasing the supply of money in the economy and ensuring stable economic growth for India.

INTRODUCTION:

The entire world has witnessed the radical change over the past three months due to a rare disaster called the coronavirus pandemic that has led to a global economic breakdown. The magnitude and velocity of this collapse are unlike anything experienced in our world. Similar to SARS, the coronavirus has two significant effects. As the virus leads to sickness and death, the first significant effect, the direct effects are less production and trade. The outbreak of the virus in that way has had a considerable effect on commodity prices and equity markets. If the virus spread is contained in small regions, and the spread is limited, the economy will grow at a slower phase, which deteriorates the trade balance. 

This pandemic has also increased the ambiguities and unknowns. Specifically, the stock markets do not like any uncertainties. These events can lead up to disruption in production and supply that results in an abnormality in the economic process, demand & supply, investment options, and pricing of securities as the risk is much higher in the current situation. This has drastically changed the behavior of investors and customers.

Source: IMF, World Economic Outlook

After the infamous Great Depression, the world is observing a period where both developed and emerging market is on the verge of recession. For the year 2020, the growth for the developed economies is estimated at -6.1%. The developing and emerging market of standardized growth levels are also predicted to move towards negative growth rates of -1.0% for this year, and if we exclude China, it is said to be about -2.2%. Almost over 170 countries, the income per capita is estimated to decrease. All these economies are expected to retrieve from the downfall in 2021 partially.

The IMF has forecasted that excluding China and India, many other countries worldwide will experience negative growth. This provides hope for the Indian economy, and such a favoring situation was created due to the dissatisfactions among people on China for mediocre handling of the overall pandemic. This has paved the way for India to become the manufacturing hub for leading the market in electronics and communication. Countries such as Japan and a few other nations have already drafted plans to reduce the dependency on China. However, this all depends upon how effectively India clears off the COVID-19 pandemic. The projected growth of China is because they are already back to business, which makes them the only country to be actively working during this pandemic.

The coronavirus outbreak is seen as a Black Swan Event by most of the economists and financial analysts. This can provoke destructive damage for the global economy, and due to their unpredictable nature, we can only be expected to be equipped to tackle it by building a robust economic system that we have failed during this crisis. Throughout history, there have been many notable black swan event observed; some of the prominent ones are:

     [I]            The 1997 Asian Financial Crisis

The crisis resulted in a series of devaluations of currency that was widespread across many Asian markets. It started when Thailand unpegged its currency Bhat to the US dollar. Due to this crisis, the Asian currencies were devalued as much as 38%, and it also affected the global stocks, which recorded a decline of 60%.

  [II]            The “Dotcom” Crash

The 1980s and 1990s witnessed a drastic growth in the internet sector, and many companies were founded during this period. However, soon most of these companies could not survive the business markets and failed to become successful. Furthermore, even the successful companies that existed during that time were overvalued. From 2000 to 2002, this led to the crash of many of these companies resulting in a severe loss for the investors. This event wiped out nearly a trillion dollars worth of stock value.

[III]            9/11 Attacks

The world-famous attack of Twin Tower at New York's World Trade Centre leads to the closure of US stock markets on the morning of September 11, 2001. This resulted in the stocks plunge immediately after the initial trading week post 9/11 – within a week the world had witnessed a loss in stock market value about $1.4 trillion.

[IV]            The 2008 Global Financial Crisis

The severity of the crisis during this period had forced the big companies like Lehman Brothers to file for bankruptcy – the largest bankruptcy filing in US history. It had a ripple effect all over the world as the global market was trying to stabilize from the downfall created due to the flawed financial systems. All these impacted the global equity markets, which wiped out over $10 trillion.

  [V]            Brexit

 The British referendum's decision to leave the European Union was surprising news to many global investors during the year 2016. This paved way to the value drop of the British pound to a 31-year low. The decision of Brexit had a profound effect on the global market by wiping out approximately $2 trillion.

CHALLENGES:

The year 2020 has started with numerous hurdles such as stock market opening price was overpriced, there were existing trade tensions between the USA and China, which set the uncertainty in the market and the outbreak of Corona Virus pandemic aggravated the pace of the change. These conditions have paved the road towards recession. The forthcoming months are going to be difficult while we fight the coronavirus pandemic and to stabilize the global markets at the same time. Recession would be a certainty if the two-quarters of negative impact on stock markets, though this is just the beginning; we will have to wait and see how long it lasts. Depression will occur if the country's GDP drops by 10% over a short period. This implies that countries that were heavily dependent on social, economic activities will face a drastic drop in GDP. Example – Gulf countries on the export of oil.

Bear Market

A bear market is a period when the broader stock market declines by a significant amount. The decline in broader stock is a normal part of the investing process. It can happen in two folds: Minor corrections (That happens several times a year because of different factors) and Full Fledged (It is a more significant decline in the broader market which might occur when the Stock market drops by more than 20%). Uncertainty of the future will drive the asset prices down is the key driving factor of the bear market. Primarily investing in stocks can be volatile because it involves higher risks than other commodities.

Trade Tension between USA and China

The two countries have disputed over trade by imposing tariffs on hundreds of billions of dollars worth of one other's goods. The USA has dissatisfactions in unfair trading practices and intellectual property theft of China. Nevertheless, China has a perception that the USA is trying to curb its rise as a global economic power. This trade tension has created uncertainty in the global stock market as the investors are not able to predict the end of it. This tit-for-tat tariff retaliation during the 18 months trade war has been paused due to the ongoing pandemic but not completely ended.

Effect of Corona

It has lead freefall of the output for many weeks in various countries due to the lockdown and economic inactivity

¡ Stock market - The global stock market is perplexed due to the ongoing pandemic. This has increase uncertainty to the highest level in history.

¡ Unemployment rate – Due to the lack of sales and revenue, most of the companies have started following their cost-cutting measures, which mostly involves significant lay-offs. Thus, increasing the unemployment rate to a great extent.

¡ Economic Activity – The inactivity is caused due to the social distancing measure and lockdown. Most of the sectors that involved social gatherings have seen drastic fall due to the pandemic.

¡ Consumption – People are insecure about that ongoing pandemic, so they have drastically reduced their purchasing behavior. Though there is panic buying among customers, which has boosted the consumption of certain essential products, their overall consumption in the economy is in freefall.

¡ Investment – This pandemic has undoubtedly created a cloud of uncertainty among the investors. Since the future is unpredictable, it is only advisable that the individual investors try to keep their money intact in commodities such as gold and bonds rather than risking it on other investment options.

¡ Capex – Since most of the companies are undergoing a considerable loss and are struggling to survive in the industry until the pandemic is at ease, they have shown less interest in increasing their Capex. This will be the situation at least until the scenario becomes stable.

The ongoing global pandemic has led the financial quarters by:

—  Q1 – Supply shock

—  Q2 – Demand Shock

An observed trend during any recession is a shortfall of demand proportionate to supply. In less complex scenarios, the policymakers and economists will have various remedies to fill in the missing demand. However, this case where the pandemic has led to the Great Lockdown has given rise to a more complicated scenario where both supply and demand are affected inadequately.

Most economists are wondering how these two shocks will reverberate in the economy. We are noticing a bearish push in our economy, which is the weakest since the 2008 recession, which is caused due to the supply-cum-demand shock.

Domino Effect

—  How will it affect the market? ( Non-Motivated Buyer power will increase, increasing the Motivated Sellers and Distress Sellers)

—  How quickly will it affect? ( Fast, Immediate – people in fear and how it is going to impact so they freeze their investment and spending)

—  How long will it last? ( We are not certain as of now, how long the corona last, and how long the curve is pushed down)

—  How badly will it affect the market( Scale – Not sure yet, influenced by how long it lasts and economic activity )

Inflation + Unemployment= Stagflation

By injections of money in the economy does not slow down the journey towards recession and help to tackle the economic breakdown, it would lead to even more severe problems of Inflation. Businesses are contracting, and cash flow will be affected, and implicate cost-cutting methods such as reduced salaries and Layoffs leading to unemployment. The high level of unemployment and Inflation causes Stagflation. In such a situation, no Monetary and Fiscal Policies will be sufficient enough to fight the supply shocks.

Opportunities:

Many countries around the world like Japan have already started looking for newer destinations to spread out their manufacturing and supply chains; they are engaged to address impairment across various sectors, including pharmaceuticals and automobiles, by trying to build India as an alternative to China. The Indian government is very much aware of all country's cases due to the Covid-19, which are experiencing significant setbacks and realize they need to diversify risk in their production lines.

The Great Lockdown

If most of the nations tackle the outbreak and retreats in the second half of the year by incorporating the necessary control measure, our economies will see a slow and steady rise. On April World Economic Outlook anticipated worldwide development in 2020 to tumble to - 3 percent. This is a downsizing of 6.3 rate focuses from January 2020, a significant amendment over a brief period. This makes the Great Lockdown the most exceedingly terrible downturn since the Great Depression, and far more terrible than the Global Financial Crisis.

This is certainly a global emergency, as no country is exempted.  Nations dependent on the travel industry, hospitality & services, and entertainment for their development are encountering especially enormous challenges. While the worldwide pandemic is still ongoing, the developing business sector and economies face an exceptional challenge of reversal in capital cashflows.  Besides, a few economies entered this emergency in a vulnerable state with slow development and high debt levels.

India is at a delightful spot, and the Indian government wants to 'tap' into this potential. India had swiftly engaged in action to seize this opportunity; however, is has been focusing only on electronics manufacturing. If India can tap these opportunities by accommodating the prospective investors into the Indian economy, it will witness an increase in GDP as projected by many analysts.

These tremendous opportunities can revive the "Make in India" campaign. India is already a global leader in the Pharma Industry, and if we can create a space of alternate energy and encouraging new start-up ventures.

It could be observed from the below-given graph that there is a steady increase in NIFTY Pharma ever since the coronavirus has become a global threat. So we can infer that specific sectors are benefiting out this pandemic, and PHARMA sector is one among them and sure will witness an increase in their index growing.