Recently various agencies came out with prediction for FY 20-21 GDP growth. The aftermath figures are varying by huge margin (see table 1).
The above figures are based on various data points and varying assumptions about how long and how deep COVID 19 is going to impact the local and global economy. My assessment is that these figures are not realistic.
India and the world will have to take a deeper cut in their GDP growth. For our discussion, let’s stay focused on India’s number only. My calculations in this article are based on India’s GDP composition and what I observed around over last 45 days through media, exodus of migrant labor, reduced consumption across spectrum of income strata, products and services.
The COVID19 shock is threefold:
- Demand Shock (due to income uncertainties),
- Supply Shock (due to lockdowns), and
- Financial Shock (tumbling stock markets, Earnings downgrade and expected bankruptcies)
In comparison to 2008 which was a sudden & sharp slowdown, COVID is a total Breakdown. It is like a big ship which still kept moving during 2008, has actually been halted by COVID lockdown in 2020. This is an extreme event. That’s why RBI had to announce emergency measure like loan deferment / moratorium for 90 days. This was not the case during 2008. There has never been such a universal suspension of loan collecting activity for financial institutions imposed by the central bank. During 2008, the companies in India and the world adopted various cost cutting methods which boiled down to minute actions like reducing the number of lights & switch boards in the offices. But in 2020, the companies are contemplating pushing the force majeure clause to avoid the real estate costs (rents, maintenance costs, etc), and asking Insurance companies to pay for loss of productivity. The unemployment numbers for India are now at 23 million (CMIE.com). Just for reference sake, even US unemployment is likely to be almost double of 2008 level. While some business activities in India are running as usual or in overutilized mode (healthcare & telecom), a very large portion of the economy is running at Zero utilization to 70% utilization. This may vary from airlines or hotels to FMCG companies. As per a recent report by Economic Times, FMCG companies are running at 60% capacity as they are hit by lower demand, logistics challenges and labor issues. The power demand has shrunk by 30% in the month of March. India is consuming 30% less OIL. Though, not all numbers are out yet, I see similar fate across banking, life insurance, real estate, e-commerce, luxury items, etc.
As investors, we should appreciate that due to severe lockdowns, the economic activities shall be reduced to merely 8 to 10 months in new FY. Therefore, it looks highly improbable that India is likely to witness a positive GDP growth.
To arrive at the realistic GDP scenario, we shall look at the breakup of GDP and how COVID is affecting various sectors & income groups. We can consider two approaches: Production approach (Table 2), and Income approach (Table 3).
- COVID Lockdown gets lifted completely by June 2020 start.
- For lack of 2019-20 data, GDP sectoral weights of 2018-19 have been considered. This doesn’t vary hugely on year to year basis.
- Loss of economic activity due to COVID includes Demand, Supply and Financial Shocks to each sector (including Domestic & International factors)
- Each sector shall have varying degree of impact. Some shall get normal soon, while the rest will take longer.
The above analysis shows a 14.75% shock to the Indian GDP
Assumptions / Clarifications:
- Top 10% include Urban Wholesalers, Retailers, Hotel Owners, Transport owners, factory owners, professionals, managers, executives, etc.
- Next 10% include junior staff of Top 10%, street vendors, mason, carpenters, etc
- Bottom 80% include farmers, day labourers, etc.
The above estimates show a degrowth of GDP by 11.96%
The loss of economic activity during lockdown is a permanent loss. Even if the lockdown is for 2 months on weighted basis across all sector, the businesses shall have only 10 months of productive cycle. During this period, fixed costs will continue to accrue, even if variable costs reduce somewhat. Worse, the businesses will have to face gradual recovery to normalcy as the demand will recover gradually for most sectors, thereby running at sub-optimal capacity for some more time. Any government aid/bailouts shall prevent any collapse of business. It shall do little to jack up the GDP.