COVID-19 Poised to Cause Severe Disruption to Indian Business Conditions - Global Trade Magazine
  June 8th, 2020 | Written by

COVID-19 Poised to Cause Severe Disruption to Indian Business Conditions

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  • The business environment in India ahead of the global crisis was already on the shaky side.
  • The extent and duration of the economic impact of the COVID-19 pandemic remains uncertain.
  • External demand for Indian products has plummeted as key export markets such as the U.S. & China are facing recessions.

As in so many other countries in the world, turbulent skies lie ahead for India’s economy as a result of the widespread upheaval COVID-19 is leaving in its wake.

Analysts from trade credit insurer Atradius expect that the repercussions of the pandemic will be widespread in India, having dire consequences for trade and causing GDP to contract 3% and business insolvencies to increase more than 30% year-on-year in 2020. This negative outlook tracks with the scenario for the rest of the southeast Asian region, which overall is expected to see a 25% increase in insolvencies this year.

Trouble Brewing For India Ahead of COVID-19

The business environment in India ahead of the global crisis was already on the shaky side. Last year, India’s economy saw weak economic performance, growing only 5.3%, the lowest increase in more than six years. The government – led by Prime Minister Narendra Modi’s reform-minded Bharatiya Janata Party – was focused on solving some of these economic issues, including resolving the banking sector’s bad debt and liberalizing foreign investment restrictions in key sectors. However, it remains to be seen whether those steps will make any difference when the coming wave of business and trade problems hit.

Although the lockdowns imposed to stop the spread of the coronavirus have put an end to clashes for now, an economic downturn that plunges many Indians into poverty could renew and increase social tensions.

Indian Firms Face Significant Headwinds

The comprehensive lockdowns in India that began in late March have caused a drop in domestic demand and a sharp increase in unemployment. Investment and industrial production will likely contract, as well, leading to a 10% or more decline in exports this year. Lockdown measures have especially impacted the millions of daily wage earners and migrant workers employed in India’s informal sector.

Supply disruptions from China, where many manufacturing facilities stood idle for weeks, have caused issues for import-reliant industries, such as pharmaceuticals, consumer durables and electronic manufacturing. Although Chinese plants are largely up and running, supply chain problems could continue should a second spike in COVID-19 cases occur.

Finally, external demand for Indian products has plummeted as key export markets such as the U.S. and China are facing recessions. Although there is no clarity for how long recessions will linger, it is safe to say that export-dependent sectors are in for a tough ride.

All this means most of India’s key sectors are poised to see a deterioration of performance and rise in insolvencies. Specifically, the outlook is poor for India’s automotive and transport, construction and construction materials, consumer durables, electronics and ICT, machines, metals, paper, services, steel and textiles industries. As of this writing, the only major sector with a positive outlook is food.

SMEs, which do not have the financial resilience as larger firms, will likely bear the brunt of the insolvency growth. Even though the Indian government has put forth a sizable stimulus package worth USD 266 billion that includes tax breaks for SMEs and domestic manufacturing incentives, the fundamental weaknesses of the economy represents a severe limit on how much protection the government is ultimately able to provide. In comparison to India’s stimulus package, which Citi analysts peg at around 4% of GDP, Singapore, one of the most stable economies in the region, passed stimulus measures worth more than 10% of GDP.

A Rapid Rebound in India Not Likely

 High corporate debt and the problems plaguing India’s financial sector pre-pandemic will likely get in the way of a quick rebound of the economy. In late 2018, the default of IL&FS, India’s large infrastructure financing and construction company, led to concerns about the financial standing of other non-bank lenders and straining corporate and consumer debt markets. In addition, India’s banks carry a high amount of bad debt – non-performing loans accounted for approximately 9% of bank lending last year.

At the same time, the rupee is seeing depreciation pressure and is at risk of volatility in coming months – a scenario caused in part by the withdrawal of global investments in emerging markets in Q1 as financial markets have become more risk averse since the beginning of the coronavirus outbreak. For Indian firms, this adds to already significant cashflow issues, especially those with high loans in foreign currencies.

The extent and duration of the economic impact of the COVID-19 pandemic remains uncertain, but Indian firms face a variety of significant headwinds. Many won’t survive. For businesses trading with Indian companies, it’s imperative that they closely monitor the financial health of trade partners and mitigate credit risk to protect cash flow.

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Gordon Cessford is the President and Regional Director of North America for Atradius Trade Credit Insurance, Inc.