What’s different – Then and Now

If you thought that the Global Financial Crisis (GFC) was the worst you had ever seen, then hold on! The coronavirus pandemic is much worse in terms of its impact, as it is also a brewing health emergency. It is truly an unprecedented shock and has left the Indian economy in doldrums, which was already reeling from its twin deficit problem ranging from shrinking tax revenues, stagnant exports to dismal government expenditure and so on. On top of that, the repercussions of COVID-2019 will only aggravate the economic crisis. Also, what’s scarier is its impact on sectors which are the drivers of economic growth like manufacturing, automobile, oil & gas, aviation, travel, among others. Definitely, this too WILL pass but the aftermath impact will be severe and will push India’s economic recovery further by some quarters.

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So, how is COVID-2019 different from GFC in terms of the economic impact?

i) It’s a sudden slump v/s a slow burn – While the 2008 Global Financial Crisis impact was spread over several months with no immediate economic impact, COVID-2019 has led to a sudden slump in economic activity owing to the nationwide lockdown. Several companies in sectors like infra, realty, aviation, hospitality and IT will face a hit on the profitability front owing to high and inevitable fixed costs. This might lead to job cuts and a rise in unemployment levels.

ii) Passenger Vehicle (PV) sales and Power Generation – These two were the immediate victims of the full-blown lockdown. Although both the crisis led to a decline in PV sales, the magnitude of the decline is much more this time. During GFC, PV sales declined by 3.5 per cent (YoY) and 8.1 per cent (MoM) in December 2008. On the contrary, COVID-2019 has let to one of the sharpest decline ever in the PV sales; a 51 per cent YoY decline and 47 per cent MoM decline in March 2020. These statistics clearly reflect how consumers have cut back on discretionary spending.

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Coming to power generation, while the daily average electricity generation was largely flat during the GFC, it declined sharply by 26 per cent from an average of around 3,800 million units (MU) in the first half of March 2020 to around 2,800 MU after March 24, according to the data from the National Load Despatch Centre.

iii) Plunge in Equity and Currency markets – The Equity markets have reacted more aggressively in the COVID-2019 pandemic than the GFC. During the GFC, the decline was more prolonged and recovery was much more gradual. Nifty declined by 60 per cent from its January 2008 high to March 2009. In the current scenario, Nifty declined by 39.40 per cent from 12419.20 to 7526 in a matter of only two months!!
The Indian Rupee has rather stayed strong during the pandemic as compared to the GFC. In the five months culminating with the collapse of Lehman Brothers in September 2008, the rupee had plummeted 15%. In contrast, the currency has lost just 7% since mid-February. In fact, it has been an outlier in the current time when compared to other emerging market currencies like Indonesian rupiah, Thai baht, Malaysian ringgit and Singapore dollar. Lower crude oil prices, decline in non-oil imports and various measures by the RBI supported the Indian rupee to ride through the storm.

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iv) Non-food credit growth – During the six months from Aug’08 till Dec’08, the YoY growth in the non-food credit declined to 23.1 per cent from 25.8 growth per cent while the YoY growth during the six months from Nov’19 till Mar’20 has declined to 6.1 per cent from 7.5 per cent growth. Also, over the last few months, the growth has been on a downward trajectory. The trend clearly shows that financial institutions have become risk-averse in lending for different category of loans owing to the bleak economic outlook.

While the 2008 financial crisis impact was on the financial sector, in particular, the Coronavirus pandemic is much broader in nature, impacting several sectors, with a higher degree of severity and having the capability to spill over to other small and micro sectors and businesses. Now, it all boils down to the Government of India, on how it deals with the situation and minimises the impact of the global pandemic. We think that it will have to provide a booster shot to the economy particularly for the most troubled sectors and a section of people, but that won’t get fulfilled if it still abides by the fiscal consolidation path.

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