COVID-19 and its impact on Indian economy
With the number of COVID-19 cases leaning dangerously more than 200,000 and the worldwide death toll crossing more than 8,000, the World Health Organization (WHO) declared the virus outbreak a pandemic in the second week of March 2020, four months after the novel virus first made headlines.
Nearly 162 countries are steadily going into lockdown, and businesses across the globe are operating in fear of an impending collapse of global financial markets. This situation, clubbed with sluggish economic growth in the previous year, especially in a developing country like India, is leading to extremely volatile market conditions. Let's understand how the coronavirus is impacting business and subsequent tax reforms in India.
With rising unemployment, interest rates, and fiscal deficit, the economy in India has seen better days. Adding fuel to this fire is the novel Coronavirus that is sending tremors down Indian trade markets dependent on China for imports.
Raw materials and spare parts
Nearly 55% of electronics imported by India originate from China. These imports have already slid down to 40% in light of the coronavirus outbreak and subsequent lockdown. As a countermeasure, India is considering the promotion of indigenous production in a bid to reduce dependency on a single market. Additionally, China is India's third-largest export partner for export of raw materials like organic chemicals, mineral fuels, cotton, etc.; and a lockdown of the countries is likely to lead to a substantial trade deficit for India.
The toll on the pharmaceutical industry is of significant concern for India, mainly as 70% of active pharmaceutical ingredients (API) are imported from China. These active pharmaceutical ingredients are essential to a large number of pharmaceutical manufacturing companies in the country. As COVID-19 is rapidly making its way through India, medication is going to be the number one consumer demand, and because there aren't nearly enough APIs to manufacture drugs, the subsequent traders and the market are witnessing skyrocketing prices. The prices of vitamins and penicillin alone already see a 50% surge.
India is big on cultural and historical tourism, attracting domestic and foreign nationals throughout the year. It does not come as a surprise that a large number of confirmed COVID-19 cases in India include foreign tourists. But with visas being suspended and tourist attractions being shut indefinitely, the whole tourism value chain, which includes hotels, restaurants, attractions, agents, and operators is expected to face losses worth thousands of crores. Experts believe the tourism industry is likely to take a massive hit, and it could end up crippling the industry for the foreseeable future.
After the Government of India indefinitely suspended tourist visas, airlines are said to be working under pressure. Nearly 600 international flights to and from India were canceled for varying periods. Around 90 domestic flights have been canceled, leading to a sharp drop in airline fares, even on popular local routes. Private airport operators have requested the Government to grant permission to impose a nominal passenger facilitation charge on airfares to cover the increased operating cost.
Will rationalizing tax rates or providing tax relief help curb the impact of COVID-19 on the Indian economy?
Speaking on measures to combat the economic impact from the rapidly spreading coronavirus, Chief Economist of the International Monetary Fund, Gita Gopinath said that Government policymakers would need to implement a substantial targeted fiscal. She also advised on broader monetary stimulus and policy rate cuts to help normalize the economic situation.
India is already running short on its GST revenue collection, and the coronavirus scare could make matters worse. With less than 200 active COVID-19 cases in a 1.33 billion population, the Government of India is not in a rush to make any drastic changes in policy and offer tax relief (even though Indian enterprise leaders are calling for cuts in import duties). They have, however, announced an extension in filings of GST for FY 2018-19 until June 30, 2020. India has also rescheduled the introduction of mandatory e-invoicing until October 1, 2020.
The learning curve
Every crisis serves as a learning opportunity for organizations, and this pandemic is proving to be quite the lesson. Here's how organizations are figuring out their next moves.
With major cities on lockdown, organizations have had no choice but to dig into their business continuity and contingency plans. Since the first COVID-19 case was confirmed in India, numerous companies have instituted a 'work from home' drill using critical resources to understand whether remote working conditions are feasible. That being said, remote working also has its limitations and cannot be carried out by other sectors like retail, hospitality, or manufacturing, leaving them no choice but to face business interruption.
Safety measures for employees
Employee safety is the need of the hour. Still, with no experience of dealing with a virus that has the potential to spread rapidly, most companies are brushing off their hands by asking employees to stay home. Some organizations, however, are implementing measures like temperature screening, disinfection of office premises, setting up COVID-19 response teams, distribution of COVID-19 precautionary packages.
An open line of communication
Even though the mortality rate of COVID-19 is lower than the 1918 influenza pandemic, it has caused a widespread panic due to unclear lines of communication. Organizations are stepping up and maintaining an open line of communication with all their stakeholders, including employees and customers.
Opportunity in a crisis
Like India, several international economies are becoming cognizant of the risk they face by being overly dependent on one market. Making the current situation a learning opportunity, CXOs of Indian multinationals, who recently attended the annual meeting of the Confederation of Indian Industry (CII), believe this is the time India can work on capturing potentially 40% of their competitor's market share by looking at indigenous production of goods, furthering the country's Make in India campaign.
Author: Manjula Muthukrishnan, Managing Director – India
Source: BW Businessworld