The novel Coronavirus pandemic has become an unprecedented phenomenal threat for humanity. Each and every part of the world economy has been adversely affected by this pandemic, leaving humanity at the verse of some economic curses like an increase in poverty, deaths due to starvation, and worst is yet to come. China- the epicentre of this man-made disaster, is alleged to have intentionally helped this virus to spread in the world instead of focusing on its containment. A $20 trillion lawsuit has been filed against Chinese authorities by the plaintiff(Mississippi a US state). Going beyond the line, they compared it to a form of ‘international terrorism’. The UK think tank has also advocated reparation. In India, it has crossed the 21000 infection marks. Tremors of this outbreak are visible in the Indian economy as well. Covid-19 is going to cost ₹ 9 lakh crores or 4% of GDP to India.
India is facing the first and longest ever national lockdown in its history. It has suspended most of the economic activity despite already facing a demand-side slowdown. Many economic analysts have reduced their forecast regarding the Indian economy. Moody’s has reduced India’s growth forecast for 2020 from 5.3% to 2.5%. Goldman Sachs has cut India’s real GDP growth rate from 3.3% to 1.6%. Here, we are to focus on two key sectors of the Indian economy- Real Estate sector and Micro, Small and Medium Enterprises sector.
There are an estimated 6.33 crore unincorporated MSMEs engaged in non-agricultural economic activities, employing 11 crore persons across the country. MSMEs contribute nearly 30 per cent of India’s gross domestic product and close to half of the country’s total exports. According to data of MSE experts,” the work from home (WFH) is applicable to less than 8 per cent of the core MSME and services sector.” WFH has resulted in over 63 per cent drop in productivity in the services industry. As per the reports from clusters of the MSME sector over the past few weeks, over 60 million MSMEs are in real danger due to market issues with over 92 per cent drop in domestic sales compared to the same time last year. There is a 100 per cent drop in export sales compared to the same time last year, this sector has seen a mass migration of labour to the villages.
Many economists have already predicted slowdown in production and demand in the world economy. So adverse outcomes are looming large in this sector, which in turn may adversely affect our CAD. Estimates indicate that 30-60% MSMEs will get wiped out from India if the lockdown extends for 8-12 weeks. This may cause the highest ever unemployment in the history of India since independence.
The same story lies with the Real Estate Sector, which hasn’t recovered from shocks of demonetisation, improper implications of GST, and IL&FS crisis yet. This sector contributes 7% to the GDP of the country, employing approximately 15% of the Labour force. 209 other Industries directly depend on this sector, among which the steel industry is most important. This is a labour-intensive sector and most of the labourers have already migrated to village areas due to a lockdown crisis. Since it depends on foreign collaborations too and not getting any type of foreign collaboration due to complete lockdown, so it seems impossible to complete already initiated projects on time. There is going to be a contraction of demand in the near future because savings are already in the 15 years now, many people are conserving their money due to the apprehensions of unemployment.
According to the India rating estimates, a month’s lockdown can erode a significant chunk of the fourth quarter revenue of Construction Companies. “Fourth quarter of every fiscal typically accounts for 30-35 per cent of the annual revenue of construction companies, of which a month’s lockdown can erode 8-10 percent.” This may cause many Real Estate companies to go bankrupt.
However, RBI is giving 2 years sabbatical leave for loans outstanding on 31st March 2020. The total stimulus should be at least 10% of the GDP and additional credit guarantee should be given.
Given the clampdown on economic activity in the past few weeks, it is imperative that a vast number of these units will be choked, possibly due to the point of perpetual closure. Until and unless quick measures are taken for Real Estate and MSME Sectors, it’s undeniable that this is going to be the last nail in the coffin of these sectors.
Indian government must be particularly cautious about these 2 sectors in specific and for their impact whole economy in general. Former RBI governor Raghuram Rajan already said,” Economically speaking, India is faced today with perhaps it’s the greatest emergency since independence.”
Akhil Pandey
(Writer is a student of FOC,BHU and Member of Finance and Economics Think Council)