Coronavirus: The Shift From Fear Of Supply To Fear Of Demand

While the global financial market is taking a major hit due to the COVID-19 fear, the risk of a recession is relatively low for the Indian financial market.
Coronavirus: The Shift From Fear Of Supply To Fear Of Demand
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The spread of novel coronavirus has struck fear in the hearts of the retail giants and associated services. In China, the impact was almost immediate – dwindling footfalls and a sharp decline in tourism hit the national economy. Now, China is more integrated into the global economy as compared to 2003, when SARS hit.

The drop in the production and import of electrical components from China is already causing a ripple effect across the globe. Leading carmaker Hyundai has already shut their production in South Korea due to a lack of components from China. Other major automobile and electronic brands are suffering setbacks due to the lack of supply of components from China, and also due to the drastic shift in the buyer’s mood.

People, all across India are stocking up essential items that mainly consist of fast moving consumer goods and pharmaceutical products. Most FMCG brands are seeing a sharp rise in demand and production, but it is unlikely that the temporary spike in demand will increase long-term profit flow to these brands due to the "supply-side contagion effect."

How Fear Is Controlling Consumer Behavior

Consumer behavior has already begun to see a drastic change as the number of novel coronavirus cases has surged outside China. For example, after the announcement of a 21-day lockdown with a short 4-hour notice, supermarkets, medicine stores, grocery stores and other essential services saw a sudden surge of activity. While COVID-19 may not infect the global economy, it has already affected the fear of transmission.

The fear of catching the virus is changing typical consumer behavior and household behavior. The fear affects how people spend on recreational activities, transport, accommodation and food. People are now least inclined to spend their hard-earned money on buying new cars or outdoor experiences.

Automobile industries, airlines, restaurant and hospitality sectors are set to be affected the most by the fear factor. Currently, in the US, around 20 per cent of the consumer expenses are under the influence of fear. The spread of the COVID-19 panic will soon hit other sectors as well, either directly or through a ripple effect.

Industries In India Are Facing the Brunt

Before the outbreak, India import would 40 per cent of organic chemicals, 13 per cent inorganic chemicals and around 70 per cent of pharmaceutical ingredients from China. At the same time, 72 per cent of Indian conglomerates are located in the cities of Beijing, Shanghai, and Jiangsu, Guangdong and Shandong provinces. The sudden halt of import and export from China has impacted IT, BPO, chemicals manufacturing, airlines and logistics industries significantly in India.

The shipping industry in India is facing the maximum losses since the regulations now prevent more than 75 to 80 per cent of import and export of dry bulk from India. The pharmaceuticals industry in India was booming before the outbreak. however, the lack of import of organic and inorganic chemicals coupled with the 21-days lockdown will set the pharma research back by more than 3 months. On the other hand, textiles industries in China have halted operations, thus impacting the raw materials export from India.

Those Suffering Most During Lockdown

While people have confined themselves indoors, several private and government-sponsored projects including construction, renovation, have been shut down. Projects under the 100-day employment act have also shut down in all parts of the country. Currently, the hardest hit are the street vendors, daily wage makers and the homeless people.

The daily-wage workers make up for 450 million among the 1.38 billion of India’s population. The mass exodus of migrant workers from the main cities to nearby villages and even to other states has raised concerns regarding community spread of the virus. Individual states including Maharashtra, Rajasthan and Uttar Pradesh are devising plans to supply food grains and daily essentials to the disenfranchised families.

Impact On National Economy

Amid the 21 days of lockdown, several essential service providers have kept their businesses running. However, the lack of delivery executives and infrastructure is keeping the supplies from reaching the consumers. Several industries are experiencing severe backlogs due to the lack of delivery services and the lack of clear instructions.

The sudden panic might be affecting the small and medium businesses the most in the Indian financial market, but the impact on global conglomerates on Indian soil is not negligible either. The sudden 21-day lockdown can cause the country’s economic growth to plummet to 4 per cent instead of 4.5 per cent as it was estimated earlier.

India might have to face a loss of INR 8.76 lakh crore. Except for essential services including financial services, broadcasting, defence and public administration, all other sectors are not operational or functioning at their bare minimum capacities.

Is There a Chance Of a COVID-19 Related Recession In the Near Future?

The equity markets in India are seeing a drastic shift since multiple experts fear a global recession. While business leaders are still expecting to see a market recession in the next couple of months, projections and indices are not enough to predict the duration, extent or impact of any recession.

It is still uncertain if there will be a lasting impact of the COVID-19 crisis on the global economy, but it is quite evident that it is already wreaking havoc on the global financial markets. Last week’s drawdown indicates that we might be headed towards a recession after the long reign of the bull.

How Will India Fare After the 21-day Lockdown?

The effect of COVID-19 is not uniform since there has been but little rise in credit spreads. In fact, the credit markets don't predict any financing problems soon. On the other hand, equity valuations have dropped sharply, although they are still considerably high considered their long-term history.

A recent FCCCI survey shows that over 53 per cent of Indian businesses indicated a significant impact of the fear of COVID-19 and the 21-days lockdown on their business operations and sales. Some financial experts are of the opinion that larger industries may take up to 3-months to return to normal business operations.

The recuperation of the Indian economy will depend greatly on the global value chain, which is quite complex. For example, the production of a German brand car involves dozens of interim stages which include mining of metals in Australia, manufacturing and import of parts from China, processing in eastern European countries and assembly in Germany. Therefore, the recovery of a German automobile industry depends on every link in the manufacturing chain.

It is safe to say that the Indian economy is far from being entirely self-reliant like that of China. So, while China may recover quickly, the recovery rate will have little positive impact on India’s economy. While the global financial market is taking a major hit due to the COVID-19 fear, the risk of a recession is relatively low for the Indian financial market. Despite the proposition by the Indian PM to form an economic task force, India’s economy will take a long time to recover.

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