COVID-19 and Its Impact: The Experiences of US and India
The coronavirus (COVID-19) has proved that it is a once-in-a-lifetime situation with its multi-faceted impact set to render the world into pre- and post-COVID-19 eras—and there is no better example of the devastation that COVID-19 is unleashing than in the US, where president Donald Trump’s administration, the Congress (with bipartisan support) and the governors of the various states have taken major steps to contain the impact on health as well as the economic scenario, despite early blunders.
 
As of 11 May 2020 (02:59 GMT), the total worldwide COVID-19 cases stood at 41,80,305 with 2,83,860 deaths. In the US alone, there have been 1,367,638 cases with a total of 80,787 deaths. Although the spread of COVID-19 in the US has been contained somewhat in recent times,  there were reportedly 20,329 fresh cases coupled with 750 deaths during the previous 24 hours. The US has been doing a lot of tests, especially recently, and the total tests are close to 9.5 million (9,444,525 to be precise) while tests per million population stand at 28,533.
 
In countries where data is available, the situation on the economic front is clearly devastating. Again, take the US for example, which confronts unmatched unemployment levels not witnessed since the Great Depression of the 1930s. Both the Trump administration and Congress face a crucial choice—either keep pushing trillions of dollars trying to support workers and businesses, or simply hope that the reopening of various activities in the different states will kick-start the US economy, which is perhaps at its nadir, since the Great Depression.
 
Without a doubt, the month of April 2020 was simply devastating for the American economy as it sank deeper into the pits—an estimated 20.5 million jobs were reportedly lost even as the unemployment rate is said to have peaked at 14.7%, which is the highest in the past 75 years. 
 
And, to make matters worse, it is reported that more Americans (millions of them literally) have apparently filed unemployment claims since the data was collected and compiled in mid-April. According to observers, this should enhance the unemployment rate to as high as 20%, leaving just over 51% of Americans with a job.
 
So, what do we have in the US? Unemployment for at least 20 million Americans, with a vast majority of the nation’s small businesses being shut and many of them likely to become bankrupt.
 
This is where policy action is really crucial and errors by the Trump administration and Congress could turn the 20 million temporary job losses into permanent ones—which, in turn, could sink the US into its deepest and longest recession, possibly unmatched over the last 75 years.
 
Having said that, the US has so far spent nearly 14% of its GDP as a direct stimulus—i.e., almost $3 trillion—to assist companies, workers and the unemployed. That is phenomenal by any standards and as far as I can see the US is not done as yet. 
 
Additionally, the Federal Reserve has undertaken several astonishing steps—this includes actions to ensure that the financial system functions very well, purchase of government-sponsored securities and operationalising strategies to purchase corporate and municipal debt so that credit can flow seamlessly.
 
On their part, the governors of various states have promulgated stay-at-home orders in an effort to retard the growth and spread of the virus.
 
Now, if this is the situation in the US, imagine how other countries, especially emerging economies like India, can manage the fallout of COVID-19 and its health and economic impacts. 
 
India has been under lock-down since the midnight of 24 March 2020 and has been fighting hard in its battle against the virus. Apart from the healthcare strategies and three phases of lock-downs, India has allocated between 0.7% - 0.8% of its GDP as a direct stimulus (Rs 1.7 lakh crore) and the Rreserve Bank of India (RBI) has taken several actions but a lot more is required. 
 
That apart, while the total number of cases in India stand at 67,161 with about 2,212 deaths (as of 11 May  2020, 02:59 GMT), the levels of testing are low, despite having been ramped up recently. As on date, the total tests in India stand at 1,609,037 and tests per million population stand at 1,166. As India tests more, it is expected that the number of COVID-19 cases would naturally go up.,
 
Now, the key question is, how can countries like India win the battle against COVID-19, both health-wise and in an economic sense especially, when countries like the US are themselves struggling. Health-wise, we have a long way to go as our health infrastructure is woefully inadequate. 
 
I was informed by a colleague that his relative in Mumbai heard the authorities stating over loud speakers that the paucity of beds means that positive COVID-19 cases will have to stay at home and take care of themselves—that is indeed a sad state of affairs, if true. 
 
 
If this is the situation in Mumbai, which is India’s financial capital with unparalleled medical facilities in comparison to the rest of the country (barring Tamil Nadu, which also is reportedly known for its strong healthcare infrastructure), then imagine what the circumstances could be in other states of India, especially as testing is ramped up and the number of cases also commensurately rise. 
 
This calls for the government of India and respective state governments to immediately requisition the services and infrastructure of all private healthcare providers. At least 40% capacity of corporate hospitals and individual healthcare clinics and practitioners need to be made available so that we have the necessary health infrastructure to tackle the COVID-19 cases. COVID-19 is a national health emergency and the private sector must be roped in to play a bigger role. 
 
Apart from the brutal individual and corporate distress, many SMEs are on the verge of closure because they don’t have the much needed liquidity to survive. Likewise, there are many poor and vulnerable people who are suffering as are companies in key sectors of aviation, hospitality, travel, tourism etc. 
 
All of them need substantial levels of on-going economic support (this should equal at least 5% of the GDP, if not more, for it to be effective) by way of direct money transfers to the poor and the vulnerable people, enhanced liquidity and other support for MSMEs and corporations and direct subsidies for the hugely impacted sectors of aviation, hospitality, travel and tourism. 
 
Failure to act now is likely to push India into one of its deepest recessions of all times. 
 
(Ramesh S Arunachalam is author of 12 critically acclaimed books. His latest release in January 2020 is titled, “Powering India to Double Digit Growth: Five Key Steps To A Robust Economy”. Apart from being an author, Ramesh provides strategic advice on a wide variety of financial sector/economic development issues. He has worked on over 311 assignments with multi-laterals, governments, private sector, banks, NBFCs, regulators, supervisors, MFIs and other stakeholders in 31 countries globally in five continents and 640 districts of India during the last 31 years.)
 
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    The Key Role of Liquidity and Possible Policy Interventions to Ensure It Amid COVID-19 Crisis
    I cannot imagine any event in recent times that has impacted the corporate sector so intensely on a worldwide scale as has the corona virus (COVID-19) crisis in terms of macroeconomic supply and demand side shock. So what has been the blow on Indian small and medium enterprises (SMEs) and other firms?
     
    Worldwide, many SMEs and larger corporations are now confronting unparalleled and phenomenal falls in revenues as country-wide lockdowns (that are indeed necessary) have been instituted to prevent or contain the spread of COVID-19 and safeguard the health of the general population. Many countries are yet to fully open up (as is India). 
     
    The key question here is whether these companies, including the SMEs, have the ability to wade through and overcome these truly extraordinary circumstances and survive the long-drawn and uncertain impact of COVID-19. If not, then what policy measures could possibly salvage them out of the COVID-19 crisis? 
     
    In the short-term, the COVID-19 crisis impacts corporate liquidity by denting corporate cash-flows significantly. Cash-flows have already become profoundly negative for many companies, and especially for those that have not been able to reduce costs commensurately, especially in the context of the huge fall in revenues. It is set to worsen, if there is no strong and immediate policy intervention.
     
    A number of issues further compound this aspect. As a result of restrictions against commercial activity, many companies have not even been able to borrow against the existing inventories, let alone sell them. Trade credit has also stalled as companies have started deferring the making of due payments—this has further exacerbated the woes of the corporate sector and deprived it of an important lubricant, which is very necessary for smoothing functioning. 
     
    Third, while it is normal to expect existing (institutional) credit lines to provide companies with the much required additional resources—often to meet short-run liquidity aspects—increasingly, banks and financial institutions (FIs) are reluctant to lend further to these companies as they do not find it worthwhile to put good money out in the current very uncertain and stressed environments. 
     
    It is here that policy interventions could make a substantial difference.
     
    First and foremost, it would be very appropriate for the respective central banks to intervene and ensure that 'bridge loans' are provided to all companies so that there is no further breakage in corporate cash-flows. This will help ensure that companies do not default on operating expenses, wages, salaries and short-term obligations. This is very, very critical to keep the engine of the economy running in good and lubricated condition. 
     
    That said, let us not forget that such (exceptional) credit will unduly enhance corporate leverage, which, in turn, could possibly create solvency problems later on. But, let us leave that aside for the moment as companies have to survive to fight another day. 
     
    Bridge loans, with sunset clauses can be guaranteed in part or full by the central banks (say from 60% – 90% as appropriate) through special purpose vehicles (SPVs) that can be capitalised in eclectic ways. These bridge loans can be made available through banks, non-banking finance companies (NBFCs) and alternative finance institutions including FINTECH companies, which are new kids on the block.  
     
    Second, governments must provide subsidies for firms in the hardest hit sectors like aviation, hospitality, tourism, travel and the like. This must be conditional on these companies maintaining or reinstating employment, which, in turn, will ensure stable income for wage earners and prevent sudden lay-offs. It should also help prevent corporate bankruptcies. 
     
    Of course, much of this will depend on how long the lockdowns last. Indeed, recovery of these subsidies is very much possible as in the case of the global financial crisis of 2008, when many large banks that owed their existence to bailouts by governments using tax payers’ money, eventually turned the corner and paid back the subsidies in good measure.
     
    Alternatively, the subsidies could also be treated as quasi-equity and sold off at a later date, when these companies have turned the corner and become profitable. Remember, there is huge cost to recreating institutions with the right set of people and that is why governments must do all that they can to help companies) survive. 
     
    The existing corporate infrastructure is far too valuable to discard as the trickle-down effects will be huge. And make no mistake, it cannot be rebuilt that easily again. This is a key lesson from the Great Depression of the 1930s as well as the 2008 global financial crisis. 
     
    Third, we also would need ways to prevent the stalling of trade credit. For example, special schemes that can help corporates and SMEs dispose of their receivables or at least receive specialised credit against them, would be helpful and required here. Here again, there is ample scope for central banks to intervene. 
     
    This would entail central banks, offering through an SPV, a specialized facility where certain short-run claims collateralised with certain types of assets can be rediscounted. This again could come with a specific sunset clause on when this scheme would come to an end as also other conditions to prevent free riding in common economic parlance. 
     
    Without a doubt, corporate liquidity is more important than ever before as COVID-19 has caused brutal corporate distress for many companies and SMEs the world over. Before the spillover impact becomes huge and percolates to the entire global economy, it is imperative for central banks and governments to be bold, unconventional and take a key lesson from the 2008 global financial crisis—where many firms were brought back from the brink of disaster to succeed—and the same lesson is very relevant today. 
     
    If institutions and people don’t survive, nothing will, and we will have to rebuild from scratch after the holocaust caused by COVID-19 is over.
     
    (Ramesh S Arunachalam is author of 12 critically acclaimed books. His latest release in January 2020 is titled, “Powering India to Double Digit Growth: Five Key Steps To A Robust Economy”. Apart from being an author, Ramesh provides strategic advice on a wide variety of financial sector/economic development issues. He has worked on over 311 assignments with multi-laterals, governments, private sector, banks, NBFCs, regulators, supervisors, MFIs and other stakeholders in 31 countries globally in five continents and 640 districts of India during the last 31 years.)
     
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    Discretionary consumption will change in 2020 due to COVID-19: Morgan Stanley
    Discretionary consumption will change in 2020 due to COVID-19 as food, health, clothing, and shelter will take over high-end consumption in terms of lifestyle and adornment, Morgan Stanley said in a note.
     
    The COVID-19 outbreak, the current lockdown, and social distancing measures for the next few months will hurt pockets of discretionary consumption.
     
    "In our view, the COVID-19 outbreak will bring in a shift in behaviour of not just the consumer but also the businesses, and the lower-end discretionary consumption products could do better than the higher-end. One of the fallouts of COVID-19 is social distancing and, thus, indulgences will need to be more digital-driven than non-digital", it added.
     
    The report said that the COVID-19outbreak is going to change consumer behaviour – health, social distancing, and saving will be a priority. "Simply put, food, health, clothing, and shelter will take over high-end consumption in terms of lifestyle and adornment", the report said.
     
    Separately, the outbreak will make companies across the spectrum re-think their business strategy. Essential activities (e.g., travel) may become non-essential activity. Companies may re-think costs that are fixed in nature and convert them to more variable.
     
    In the last decade, discretionary stocks (such as Jubilant and Titan) have outperformed the Sensex by over 6 times given upgrades in the Indian household lifestyle.
     
    There is a consensus view that this story will continue to unfold over the longer term with rising per capita income. Nevertheless, over the next 12M, we think the ongoing Covid-19 outbreak will bring in a shift in behaviour of not just the consumer but also the businesses, and lower-end discretionary consumption products could do better than higher-end.
     
    "While Titan will likely find it challenging to weather the downturn, we think Jubilant is better positioned, underscoring the benefits of a modified business strategy and higher delivery sales mix", it said.
     
    QSRs will be among the first beneficiaries of the recovery in discretionary consumption after the sharp slowdown due to the nationwide lockdown.
     
    "We think the ongoing outbreak-related slowdown does not corroborate completely with any of the previous slowdown periods. While this is as global as the global financial crisis (GFC) of 2008-09, it is also as local as the Demonetisation in November 2016", Morgan Stanley said.
     
    In the current environment, job losses and an income slowdown (in an already tepid macro environment) will make high-end discretionary spend less likely. "We think Titan's business will slow given the macro headwinds, and the nationwide lockdown and social distancing will hurt its business even more sharply. Weddings that were originally scheduled from 1QF21 have now likely been postponed due to the lockdown, and social distancing measures will create uncertainty around re-planning, which usually starts one or two quarters before the event", the report said.
     
    It added that social distancing also works against Jubilant's business, but food is part of essential businesses and has not been shut completely. Further, QSRs are at the lower end of the discretionary consumption pyramid, enabling a quicker recovery cycle for Jubilant's business.
     
    "Our India economist expects GDP growth to slow to 0.5% in F21, a 40-year low in growth. Consumption growth is likely to follow this trend, particularly discretionary consumption due to income and job losses and consumer downtrading. While QSR demand and retail sales have slowed due to the lockdown, we expect recovery to pickup once the lockdown measures are eased but shopping mall visits may not see a pickup. Meanwhile, jewellery demand could be deferred for some time, in our view, due to social distancing", it said.
     
    "Chinese consumers are back on the streets, but they are still showing a propensity to avoid social and discretionary shopping activities. It has now been six weeks since the lockdown was eased in China", Morgan Stanley said.
     
    Discretionary and retail-based consumer categories were hit the most during the country's lockdown. Most of these categories have recovered to 60-70% by March (four weeks post the lockdown). In terms of offline channels such as restaurants, 90-95% of the stores have opened but traffic is lagging at 40-50%. Among restaurant categories, QSRs have seen faster recovery.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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