Stock Markets globally dropped fast in a reminder of ‘Manic Monday’. Indian markets were expected to fall after the news of Yes Bank and the spread of corona virus. Global stock markets are reacting to the expected slowdown in the world economy due to the spread of the virus to almost 100 countries.
The epicenter of the virus, China has however reported a decline in its spread but the damage to the world economy has already occurred. Crude oil prices were dropping due to fears of global recession and drop in demand for energy. Now a war over market shares has started between the Saudi’s and the Russians forcing crude oil prices to collapse. So, shares of energy companies like, ONGC and Vedanta have dropped sharply
The Indian stock market is reacting to multiple bad news. The economy was already slowing down, financial markets are stressed as reflected in the problems of Yes Bank and the expected ripple effect on other financial institutions. Add to that the global decline. So, the distant threat in Wuhan has come home in a major way.
The President had given a lead in cancelling Holi celebrations since gatherings are being curtailed due to corona virus spread. In several countries people are not attending their favorite sports events. There is a possibility that the Olympics to be held in Japan this summer may be postponed. Travel and trade have been severely affected in large parts of the world with restrictions on movement and cancellations of visa, etc. The impact is not just in individual nations but global.
The economic impact has been coursing through the global economy once it became clear that the virus has spread across China. Uncertainty in financial markets has been growing since then and the stock markets have been reacting with volatility as hope and despair alternate about containing the spread of the virus globally.
China as the largest supplier of many basic and intermediate manufactured goods has come to dominate the supply chain of production of a large number of final goods. So, multiple industries are impacted. For instance, India has come to depend on China for supply of inputs into electronics, medicines, automobile parts and components used by small and cottage sectors.
The Chinese juggernaut has been supplying even basically Indian cultural symbols like, pitchkaris for Holi and idols of Indian gods. It produces these items cheaply on a scale that other countries cannot match. In spite of the low wages in India and the additional transport costs of getting these items from China, the Chinese goods have displaced a big portion of Indian manufacturing.
The supply chain disruption due corona virus requires that either Indian production is ramped up where possible or alternative sources of supply abroad have to be found. But much of the alternative production possibility has been disrupted in the last 20 years by cheap Chinese production. Finding new producers who can quickly ramp up production is not easy.
Even if alternative sources are found within India or abroad, their prices will be higher so that inflation is likely to go up. The inflationary tendency will be countered by the global decline in demand and the fall in commodity prices, like is being witnessed in the case of energy.
So, on the one hand, decline in prices will boost demand but on the other hand, the decline in production that has already occurred and is likely to continue, will lead to fall in incomes and a reduction in demand. In a recession, the latter dominates, otherwise the commodity prices would not fall. Expenditures on health and disease control will rise but not enough to counter the slowdown.
The impact on the small and tiny sector is likely to be sharper due to the fact that they have small amounts of working capital. As demand declines, they are left holding inventory and also have to pay wages; this exhausts their working capital. If their unit shuts down for even a few months, it becomes difficult to revive. The financial sector is not very much attuned to catering to their demand and they have to depend on the more expensive source of private funds. The financial sector also worries about lending further and having more NPAs on their balance sheet. The large scale units will also face similar problems.
As the economy declines, the already substantial NPAs of banks and the NBFCs will increase in India. The trouble in the telecom sector and the near collapse of the Yes has only increased this worry. The RBI’s steps in superseding the Yes Bank board and putting a cap on withdrawals is a drastic step which may have long term beneficial effects but immediately it can only dent confidence in the financial sector. The volatile and declining international markets impact our stock markets since the economy is much more open now.
The RBI has reported falling business and consumer confidence and a decline in capacity utilisation in the organized sectors of the economy. These present trends are aggravating these factors and further denting investment in India.
Consumer confidence will remain low for a while even after the intensity of the spread of the virus declines with the onset of the hot season. But there is no certainty of this since the WHO says that not enough is known about this virus.
People the world over have got scared and anticipate trouble ahead so that they are unlikely to resume buying of discretionary items. Car sales in China have plummeted and are unlikely to revive soon. People save more when the future is uncertain so that demand does not increase immediately. Due to fear of lockdown and shortages, it is likely that people will hold more cash and essential items in homes.
Central banks will have to be prepared to issue more currency. At present, to boost investment, Central banks have reduced interest rates but this will have little impact since the primary reason for the global down turn and stock market volatility is decline in sentiment following the spread of the virus. It is not a cyclical downturn. The IMF and the World Bank have also stepped in and announced billions of dollars of help.
In brief, the problem is not fully understood but the world over the fear of a big impact has grown. Supply shocks emanating from China have spread and due to impact on production, incomes are declining, leading to a fall in demand and threat of global recession.
The poor are likely to be impacted more in India due to their vulnerability to disease and lack of resilience to bear shocks. The stock markets which were at unduly high levels in India have fallen.
Since not enough is known about the virus only the short run can be anticipated but since uncertainty has increased, governments will have to take fiscal steps anticipating the worst in the long run.