As the third wave of the pandemic sweeps across India, distress lines are already visible. Night and weekend curfews and other regulations to avoid crowding, along with travel restrictions, have already hit hotels, bars, restaurants, cinema halls and retail outlets hard. Automakers worry about another demand drought, retail businesses about restrictions on shop timings wiping out whatever uptick they saw in the festive season. Policymakers worry that supply disruptions could stoke inflation and further dampen consumer spending, hurting the economy and the job market. Harried investors resort to heavy selling in the stock markets, leading to frequent market crashes. On January 6, the benchmark Sensex of the BSE fell over 700 points on concerns over Omicron and the impending hardening of US interest rates. Many worry whether Covid-related uncertainties will create a situation like last year’s when the Sensex fell over 1,000 points on 14 different occasions, wiping out lakhs of crores in investor wealth.
The first wave of the pandemic in early 2020 resulted in the Indian economy going into a recession for the first time in four decades, with growth contracting 23.9 per cent in the first quarter of 2020-21 and by 7.5 per cent in the second. The impact of the second wave in early 2021 wasn’t as harsh, since restrictions happened mostly at the local level. How badly the economy is impacted this time depends to a large extent on the spread of the Omicron variant and how early it peaks. The initial signs are not too encouraging. Although cases of hospitalisation have been low so far, the rapid spread itself could make authorities resort to more stringent measures, hurting businesses further.
*WPI: Wholesale Price Index; #includes food & non-food; Source: CMIE, MoSPI, Care Ratings
The industry has already raised a word of caution. “We need to make sure that only minimum restrictions are in place to help slow down the spread (of the virus), rather than restrictions for the sake of it,” says T.V. Narendran, Confederation of Indian Industry (CII) president and CEO of Tata Steel. A big learning from the first two waves has been that decisions on lockdown/ restrictions are best left to the states and local authorities, where containment becomes more effective while allowing essential services to operate. This helped businesses get back on their feet quickly, and the country posted a second quarter GDP growth of 8.4 per cent in 2021-22 (marginally better than the same period in pre-pandemic 2019-20). “Last year, states did not stop logistics, and allowed most manufacturing to open. This time too, we expect the states to be a lot more balanced,” says Naushad Forbes, co-chairman of engineering firm Forbes Marshall.
Services in peril
As in the previous two Covid waves, the sectors that will be most affected are hospitality, travel and tourism and the retail segment, wiping out whatever rebound had happened in the past 2-3 months. “The services sector is unlucky for the third time,” says Madan Sabnavis, chief economist, Bank of Baroda. Despite all the growth in online retail, firms still bet on offline sales as consumers have a tendency to spend on impulsive buying when they do physical purchases. The wedding season, added to the year-end celebrations, had been much anticipated by hotel owners. “There is so much uncertainty now. We have started to see cancellations, especially since participants at weddings are now limited to 50,” says a hotel owner in Pune. Tourism in the national capital region has seen a 70 per cent drop as Covid cases flare up. Goa is looking at a 25 per cent drop, while in Kerala, where the tourism sector employs 25 per cent of the workforce, the jitters are setting in again. Federation of Hotel & Restaurant Associations of India (FHRAI) estimates say cancellations of meetings, weddings and other Christmas and New Year celebrations alone has cost the industry Rs 200 crore. “There is a lot of anxiety, because considerable capital has been put in after two successive lockdowns to reopen and restart operations,” says Pradeep Shetty of FHRAI.
“We only need minimum restrictions in place to help slow down the spread (of the virus), rather than restrictions for the sake of it”
– T.V. Narendran, CII president and CEO, Tata Steel
“Businesses will not hire in an uncertain environment,” says Sabnavis. “The question they would ask is: should we be taking in someone at this stage?” Despite an uptick in many businesses over the past couple of months, job creation is still under a cloud. The Centre for Monitoring Indian Economy (CMIE) estimates that India is still 3 million jobs short of pre-pandemic levels. Also dampening sentiment is high inflation. Consumer price inflation (CPI) is expected to have touched 6 per cent in December, according to analysts.
The aviation sector, which had been hit hard in the past two years, is bracing for yet another jolt. Indigo Airlines says it will reduce flights by up to 20 per cent, and waive its changing fee as passengers are altering travel dates. Aviation research firm Capa has said international travel will remain 70 per cent lower in 2021-22 compared to 2019-20 levels. The Indian airline industry may report a loss of up to $3.8 billion (Rs 28,120 crore) in 2021-22, it estimates.
Big damage to small units
One of the worst affected sectors in the two waves was the MSME (micro, small and medium scale enterprises) segment. India’s MSMEs account for 45 per cent of manufacturing output, 40 per cent of exports and employ about 120 million people. In addition to the pandemic and the demand crunch, most MSMEs have been impacted by high raw material and transportation costs as commodity prices shot up globally. The third wave could push many of them deeper into the red. Their workforce too will be affected more, especially since they tend to live in crowded camps. According to traders’ body Confederation of All India Traders, MSMEs and other traders in 36 Indian cities suffered a 45 per cent average loss in business during the first week of 2022 due to regulations by state governments and local authorities. Around 35 per cent of the decline was in FMCG, 45 per cent in electronics, 50 per cent in mobile phone sales, 60 per cent in footwear and so on. Business during the wedding season (October-March) is expected to drop to Rs 1.25 lakh crore from an expected Rs 4 lakh crore.
However, these issues are not limited to small industries alone. “The big challenge this time, given the spread of the virus, is higher absenteeism. It’s already happening,” says Deepak Jain, CMD of Gurugram-based Lumax Industries, a large auto component manufacturer. “The past two years have taught us the need to have a robust risk mitigation system in place,” he adds. While most firms have adopted a hybrid model, companies like Reliance Industries (RIL) have told all their staff, except for those at their refineries, manufacturing sites or retail outlets, to work from home.
Companies that are largely unaffected include the online start-ups. India added 42 unicorns (start-ups with over $1 billion or Rs 7,400 crore in valuation) in calendar year 2021, a nearly four-fold leap from just 11 unicorns added in 2020.
Mitigating the pain
While there is no escaping the virus, the industry and experts advocate several policy measures that can mitigate the pain (see accompanying story, Wanted: A Healing Touch). The government needs to support the vulnerable, be it the poor or the small industries and retail segments that are the most impacted by Covid. “Contact-based industries need help, so do the urban poor,” says D.K. Joshi, chief economist with Crisil. Potential beneficiaries of an urban jobs guarantee scheme, the clamour for which is getting louder, can be identified through the government’s e-Shram portal where already 200 million people have registered, he adds. There is also a call to extend the Emergency Credit Guarantee Scheme for MSMEs, that allows them government-backed loans beyond March. Investing in infrastructure will create a multiplier effect. But it is not just about allocating funds, execution capacity too needs to be beefed up. Hotel owners under the Hotel and Restaurant Association of Western India have demanded succour to their staff in the form of a direct salary transfer scheme in addition to waiving statutory fees, taxes and utility bills.
CII’s Narendran says hospitality and travel-related sectors and infrastructure construction will need assistance, and continuing the performance-linked incentive scheme that targets 13 key sectors will be key to industry revival. Despite two years of disruptions, India’s economy has proved to be resilient, bouncing back from deep distress and emerging stronger. Although this is not the case for all industrial sectors, some of which are still in need of targeted succour, it offers reason for optimism that the country will come out quickly from the third wave impact as well.
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