COVID-19: Will It Crush The Economy?
The outbreak of the COVID-19 or the Novel Coronavirus, that emerged in Wuhan, China, has affected the world in ways that are beyond prognostications. What had started as a contagion, spreading through human contact, has today assumed immense proportions, being declared a pandemic by the World Health Organization.
While the impact of the COVID-19 on the economy is multipronged, much of the concern is regarding the active trading ties that most countries have with China. The constriction of trade with China will strain the supply side, significantly affecting the manufacturing and pharmaceutical industries. The majority of the intermediate goods are imported from China, putting global supply chains under tremendous stress. With China shutting down its manufacturing plants owing to the COVID-19 outbreak, production across the globe is bound to be impacted adversely, leading to inventories drying up if manufacturing does not pick up within the next couple of months. The outbreak would also result in slowing down the movement of goods, with the logistics sector expected to impose newer restrictions, testing/examination of goods and other stringent procedures to contain or prevent the contagion. Besides, with the ebbing away of economic activity, financial stress would build in companies, which would already be under additional strain on account of the work disruption - the workforce having to work away from their workplaces. Despite these hardships, the regular financial commitments of these companies would have to be maintained, creating further stress on the balance sheet.
The COVID-19 pandemic has had not only affected the supply side of the economy but also has its bearing on consumption as well. With reduced household financial means anticipated as a result of declining economic activities and insecurity enveloping the labour force, consumption will get impacted, the majority of the purchasing decisions curtailed or postponed. Sectors such as consumer durables and automobiles would be most affected by this development.
In India, early estimates by the government suggest that the country’s economic growth could take a hit of 0.3%-0.5% on the GDP in FY21 owing to the disruptions caused by the Covid-19 outbreak. While the RBI is of the opinion that India is relatively shielded from the global value chain and the extent of the impact on India will be less, there is no denying the fact that repercussions are bound to occur as the country is integrated into the global economy.
Governments across the world must chart out a recovery plan before their respective economies sink into deeper recessions. Factors such as the degree to which demand will be delayed and whether the shock is an aberration that would last only short term or would last longer, need to be understood in depth before doling out any remedial measures. It is advisable to measure the extent of loss of economic activity sector-wise and then come up with stimulus packages.
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