A Tale of Two Crises
Written on March 29th, 2020 by {"login"=>"jcbphc21", "email"=>"f20181005@hyderabad.bits-pilani.ac.in", "display_name"=>"Journal Club, BPHC", "first_name"=>"Journal Club", "last_name"=>"BPHC"}The world has officially stopped. It might be weird to fathom that large of a concept- but it well and truly has. The Coronavirus pandemic ravaging the world right now has jolted the world shut. While this does sound like something out of a sci-fi television show - it’s true. Around a quarter of the world’s population is currently in some form of a lockdown due to the spread of CoVID-19, and that’s a dystopian sobering thought.
While we’re in lockdown - it is important to recognize that there is a world after we emerge from this travesty - lives that have to be reformed, societies that have to be restructured and economies that have to be rebuilt or, more correctly redefined.
Now, while the actual impact of COVID-19 is immeasurable in terms of the lives it has ruined, the people it has killed and the livelihoods that it has so unceremoniously torn apart - it is important to quantitatively measure, at least to an extent, the impact this virus will have on the global economy - an economy that all of us in a few short years will be expected to contribute to. Moreover, with all the doom and gloom within the headlines - it’s also important to recognize the long term impact this will have on our lives and as to whether an improvement is possible.
Social Distancing
The consensus exists that once a cure is found, the markets will rebound and the world will go back to its stress-free past - a little shaken, yes, but not incurably distressed. While this may have an element of truth to it - other factors need to be considered.
Firstly, it is important to recognize that public health and economic activity are two sides of the same coin. When people are being told to social distance and work from home - they are, by definition, not going to be participating in traditional activities that make the economy work. People aren’t going to be going out to restaurants or traveling or using Ubers that often. That has a knock-on effect on the rest of the economy. If a large portion of the leisure and hospitality industry are worried about their jobs and their livelihoods - they aren’t going to spend as much as they would have on other aspects of their lives.
In a nutshell, in times of such a severe economic slowdown - people aren’t going to spend money and people spending money is what keeps the gears of our economy in motion.
None of this is to say that lockdowns or social distancing is a bad idea. On the contrary - it’s probably the singular most important thing we can all do to help ourselves not succumb to the virus and to keep afloat a healthcare system that is in deep trouble.
Hard decisions have tough choices and this, unfortunately, is one of them.
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One of the first major indicators that an economy is in trouble is the stock market - more specifically, the stock market indices.
Benchmark indices are usually a fairly decent indicator that we’re nearing an economic slowdown. India’s benchmark index (the NIFTY 50) has fallen 35% in 1 month. The Dow Jones (the US’s index) and the FTSE (in the UK) have seen their biggest one day declines since 1987 and India’s other index, the SENSEX, fell nearly 4000 points in one day.[1] And those are just the headline figures - there are multiple different aspects to focus on here.
- This has been one of the fastest bull to bear markets ever seen - from a period of rampant expansion, the market has fallen into treacherous lows in a matter of around 2-3 weeks, and there isn’t a clear bottom to this slide.
- The current market also, understandably, has a very high degree of volatility associated with it. This is an issue for emerging markets like India for very important reasons. Markets with a high degree of volatility in these uncertain times are not the most optimum investments - especially for an emerging market highly dependent on investments. The cost of this economic calamity is estimated to be over 2.7 trillion dollars.[2]
- At this point, we don’t have a handle on the end cost to the economy, but, if you take those points as an indicator. It doesn’t look that great. There are already indications and forebodings that this could lead to a recession as bad as (or worse) than the financial crisis of 2008.
The second indicator that is important to look at is the GDP numbers. India had already been witnessing an economic slowdown in the latter half of 2019 with its GDP numbers contracting rather sharply, from 5.6% to 4.5% to 4.7% in the final two quarters of 2019. The unprecedented contraction in investment and manufacturing output in two successive quarters dragged down India’s economic growth to a 27-quarter low of 4.7% in the quarter that ended December 2019.
For 2020-21, the Chief Economic Advisor Krishnamurthy Subramanian had forecast a GDP growth of 6-6.5%. However, experts at rating agencies like ICRA suggest that a further contraction due to the COVID outbreak is likely, with an estimate of around 4.3% GDP growth for January-March and dropping to maybe 3.9/sub-4% for April-June. The numbers from other rating agencies are even more concerning. Moody’s has slashed its estimate of India’s economic growth forecast to 2.5% in 2020 from an earlier estimate of 5.3% amid the rising economic cost of the pandemic. Those are big dramatic shifts for a country that boasted a 6+% quarterly GDP growth rate not 2 years ago.[3]
Moody’s has also said it expects the growth to bounce back to 5.8% in the calendar year of 2021 and GDP growth of -0.5% in CY20 at the global level, before bouncing back to more stable levels in CY21.
The third indicator that we could be in for a major economic shift has to do with the bond markets.
Government bonds are said to be one of the safest investment opportunities. The government is one institution that’ll pay its debts back and hence, government bonds are known to be one of the most secure holdings, especially in times of a crisis.
However, the first signs that India’s $790 billion sovereign bond market cracked under the strain of the coronavirus pandemic showed up in the past week on the 24th of March.
For half an hour after trading started, nobody bought or sold a bond on the Reserve Bank of India’s platform. Let that sink in again - even in the time of a crisis, where stock market volatility was beyond the scale- people were unwilling to spend on government bonds.
Volumes at the mid-day was just 6.55 billion rupees ($86 million), compared with the year’s daily average of 453 billion rupees. The bond yields have also begun a slow but significant shift - contracting around 3.5 percent over the past month.[4]
The final indicator has to do with India’s Forex Reserves. India's foreign exchange reserve fell the most in nearly 12 years by as much as $11.98 billion in the week ended March 20, as the central bank sold to arrest the slide of the rupee, which has fallen to a record low amid a flight of capital from emerging markets to safe havens. Care Ratings’ survey also predicts further contraction in imports and exports for 2020-21, due to the supply chain malfunctions caused by the COVID-19 outbreak.[5]
Forex reserves are expected to drain further in the subsequent weeks as major financial markets fell sharply with investors rushing to park their money in safe-haven assets such as the US treasury.
That’s an understandable sentiment - and one that may not bring good tidings for India or other emerging markets.
Supply Shortages
While the endless barrage of toilet paper hoarding memes on social media make for light-reading of the situation - there is a pretty grave concern that needs to be considered here.
The Coronavirus outbreak has a pretty marked effect on the supply chains we take for granted, in more ways than one.
Firstly, protectionist measures by national governments could disrupt vital supply chains. Countries like Kazakhstan, for instance, have reportedly banned the export of wheat flour and placed restrictions on vegetables including onions, carrots and potatoes.
Vietnam, the world’s third biggest rice exporter, has also temporarily suspended its rice export contracts.Russia, the United States and China - all major producers of vital consumer goods - may also threaten to restrict exports. For context, Russia is the world’s largest wheat exporter in the world - a change in the same could have wide ranging impacts on the entire world.
Now, there is absolutely no need to panic right now. Countries across the world, including India, have been assuring their citizens that there is enough of a stockpile to get everyone through this crisis, as long as people don’t panic buy and hoard items.
However, the second issue is one that is even more concerning. While, harvests have been good across the world and the outlook for staple crops is more than promising, a shortage of field workers (due to the lockdown), and a move towards protectionism through tariffs and export bans, mean that stress lines could easily appear in the coming weeks. Moreover, once the harvest season of perishable seasonal crops comes into the time frame, the issue of logistical supply chains will be brought to the fore again. These types of produce often have short harvest windows and are highly perishable, and need skilled pickers to work quickly at the right time. While India may be relatively shielded from this aspect, countries like the United Kingdom, with a sinking currency and a very high level of imports are likely to see rampant food price rises without emergency action.
There is yet another variable to consider in the fabric of India’s problems over food security - it’s migrant worker population. A large percentage of the migrant worker population from Uttar Pradesh rely on daily wages for their sustenance. A lack of this has meant an en masse mobilization of this workforce back to their villages - leading to twin problems.
- If the food requirements of these migrant workers with no income is not met - then civil law and order disruptions may become a real possibility.
- If the pandemic spreads across to rural areas - the containment of it becomes practically impossible. [6]
Jobs, Jobs and Jobs
Now, a third issue to take cognizance of is job losses.
This is a particularly tough issue to take into consideration and will end up being speculative for that reason.
Let’s look at some historical data here - the US’s recession in 2008 was partially triggered by the collapse of the Lehman Brothers Investment Bank in September 2008. The unemployment rate then was 6.1%. The unemployment rate skyrocketed after that event - a main headline during the recession of 2008. It’s important to note that the figures only stabilized to that number 6 years later in 2014. It’s also important to note that the 2008 recession was a lot better than what we have right now - for reasons that will be dealt with later.
It took 6 years for the job numbers to stabilize in the US and 6 years is a long time to go without having solid employment.
There is this underlying misunderstanding that exists within everyone over the term “job security”. At a time like this, there doesn’t really exist a concept of job security. Almost everyone in every sector has been told to work from home or take a paid or unpaid leave. While this might be fine for those with a reasonable safety net, the longer this outbreak spreads - the more the damage to the economy and to people who heavily depend on it.
Needless to say, a lot of jobs have and will be lost in the aftermath of this crisis. While those in the leisure, hospitality and travel sectors are likely to suffer the most from layoffs - there is also a impact on the jobs in the IT sector that must be considered.
Firstly, start-ups, which rely heavily on a burgeoning economy and a high revenue flow in their initial years, are likely to struggle heavily. Start-ups rely heavily on investor money flowing across their books in their early years; a lack of which would present an issue for most (even the viable) start-ups. This would probably result in a knock-on effect, limiting the expansion of the start-up industry across the globe.
Secondly, in times where people aren’t spending and as a consequence, companies aren’t spending - the future job market really tanks. To exemplify this point, if people aren’t buying iPhones and Apple is losing billions of dollars annually - they won’t be opening a new factory or a new R&D centre. Jobs that would have been created a few years from now would now be lost. For a job market as saturated as India’s B.Tech graduates one - that presents a pretty big problem. Similarly, companies that recruit en masse or have a relatively high burn rate, might be unwilling to take in graduates.
Thirdly, while jobs in warehousing and logistics have seen an uptick - they do not represent anything nearly as extensive as to absorb the job losses in leisure alone. If a country is in lockdown, people with high cash flow ventures like those in leisure, are destined to struggle even after the direct crisis has passed.
Finally, in a matter of even more urgent concern, the short-term job market is likely to struggle even more. The United States has already reported 3.28 million jobless claims over the past week. For perspective, the number stood at 282,000 just 1 week ago.[7]
Just let that sink in for a minute, the current numbers are 4 times higher than they ever were in US history.
That’s just in the United States - compound that across the entire world.
In short, and in fear of being alarmist here - people are going to lose their jobs.
The Crude Oil Market
In light of the pandemic, another commodity has taken a major hit - and it is one that makes the world go round.
As a result of the pandemic, factory output and transportation demand fell drastically - reducing demand for oil and causing the oil prices in the markets to markedly fall. A conglomerate known as the Organization of Petroleum Exporting Countries, decided to reduce oil production and exports. However, on the 6th of March, Russia rejected the partnership - causing oil prices to fall by around 10%. This triggered a disturbing sequence of events. On the 8th of March, Saudi Arabia announced major price discounts of $6 to $8 per barrel to its customers in Europe, Asia and the USA. That announcement triggered a free-fall in oil prices - with crude oil’s prices falling by 30% - the largest drop since the Gulf War. This resulted in a major crash to the global stock market and to the currency exchanges. On the 10th of March, Saudi Arabia announced that it would ramp up oil production to 12.3 million barrels per day (while their production capacity was only 12 mbpd) reaching into their reserve stockpiles to fill the delta. As demand continued to fall dramatically over the next 2 weeks, oil prices continued to tank - reaching a 17-year low on the 18th of March and then continuing to fall over the next few days. For context, the start of the year had crude oil prices at $60+ per barrel - however, this crisis has tanked the crude oil prices to the mid $20’s.[8]
Now, there does exist a philosophy that when the price of oil falls - India, being one of the world’s largest importers of crude oil benefits.While that may be true, currently, India’s economic machine is so inextricably linked to the crisis in its downslide that it would be unable to reap the benefits of such a slide.
Competitive Sport
While at this time, competitive sport is probably right at the bottom of the totem pole of global concerns - it is important to recognize the toll the virus has taken on arguably one of the most iconic aspects of modern life. Every major sporting event around the world has been either postponed or cancelled. To put things into perspective, the Tokyo Olympics scheduled to happen later this year have been postponed to 2021. That’s the first time the Olympics have not happened according to schedule while we’ve been in peacetime. The IPL has been pushed forward by at least 2 weeks and is possibly going to be held behind closed doors. The mere possibility of this happening has dropped at least 700-1000 million dollars from the IPL’s valuation.[9] This is discounting the noticeable loss to the BCCI, the IPL franchises, the sponsorship losses (in this year and subsequent years) and the broadcasting losses, which have been estimated to be around 10,000 crore.[10] Just as an example, Star India - the broadcaster for the IPL in India, has paid around 55 crore PER MATCH to broadcast the IPL - money they may still have to pay if the season is called off. The IPL is by far not even the biggest loss venture here - the NBA, the MLB, the Formula 1 season, the Tennis Grand Slams, the NHL, NASCAR, the NCAA, and the Premier League, to the dismay of all Liverpool fans, all stand in real risk due to the outbreak.
Other Indicators
It might seem weird to say it - but this crisis has affected people. Emphasis on the word ‘people’.
A lot of activities that people perform, that we take for granted have simply stopped at this point in time.
- Travel - for instance, has seen a major fall in activity over the past year. It has been estimated that upto 48,200 flights with 10.2 million seats could be affected by the ban on flying imposed by many countries. Airline travel is an extremely expensive venture - and airlines are losing a lot of money with each day that the crisis continues. Airlines in the US and the UK are now asking governments for bailouts over the current situation - or risk laying off a large percentage of their staff. Taxi services have had their services suspended in a number of countries and the one of the largest rail networks in the world, India’s - has been closed until the 14th of April.[1]
- The restaurant and food business has also been severely impacted. While the latter stages of the lockdown have forced all restaurants to shut shop entirely, the initial few weeks of lockdown saw an immense drop in the number of reservations - with reservations in some countries dropping by over 90% compared to the previous years.[1]
- Amazon, Flipkart and a high amount of these online delivery services have had to recalibrate their delivery mechanisms - with the lockdown severely disrupting their delivery mechanisms - causing them to temporarily shut their services.
- In a volatile world - one of the safest investments India turns to is gold. The price of gold hasn’t been saved from the volatility either - with the price of gold falling around Rs. 3000 - since the start of March (after rising throughout the year).
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It is possible that the virus does cease in the summer and that the latter half of the year brings a strong growth in the economy. But, on the chance that that fairy tale scenario doesn’t work out, the ground could collapse underneath the economy. A chain reaction of falling businesses - first small and medium sized enterprises.
It’s virtually every small, low-margin business that relies, in some way or another, on face-to-face interaction and on people doing, well, “stuff”. Imagine a world without gyms, physical therapists, nail salons, stationary stores and like. The virus outbreak is likely to impact all those industries, among many more.
Big businesses, even with their huge cushions of money will not be spared. The airline industry is already on the verge of needing a gigantic bailout and anyone whose profits are based on live events is in serious danger (look no further than Pearl). Millennial mainstay companies like Uber and the like were already burning through investor money before this - will they be able to survive this pandemic?
At this risk of seeming glib, you can’t make money while driving cars if there’s no one who wants to go anywhere in them. The more businesses that fail, the more firms that were built to serve them will fail. The more businesses that fail, the more people that lose their jobs and the likelihood that we fall into a grave economic trap rises.
Another possibility is a financial crisis, in which the markets for corporate debt or government bonds or international currency flows lock up, and create a contagion of their own. Already we’re seeing signs of strain: strange movements in bond markets (the bond yield curve inverting a few months ago is a pretty strong indicator of recession), shortages of dollars, economic slowdowns and problems with the corporate debt markets. If any of these collapse into panic, we could add a 2008-style financial crisis atop our 2020-style economic and public health crisis wrapped around a classic global financial recession. If that happens, then... [11]
India’s Healthcare System
Unfortunately, this brings us to India’s special issue with this problem here. Over 90% of the persons employed in this country - are employed in the informal sector. With a lack of secure wages, no pension schemes, no job security and a lack of other job options to say the least - if the situation seems grave for all the white-collar jobs, the situation in the informal sector is much worse.
Moreover, a large percentage of those employed in India in the informal sector are hand to mouth workers - having little to no saving capacity. In times like this, people are having to make the hard decision between starving at home or risking their lives to go out and look for work.
Now, the government has taken measures involving an economic relief plan to the order of 1.7 lakh crore rupees for the poor and middle class - measures which will surely help a population that desperately needs government assistance. However, the extent to how helpful and accessible these measures will be has to be seen.
Unfortunately, this brings us to probably the most important point in this article. India has a devastatingly poor public health system. Private health care is expensive and inaccessible to a large percentage of the population. About a quarter of the population is illiterate. Coupled with that, the massive citizenry in the country makes social distancing nearly impossible — a big issue when around 100 million people in the country are over the age of 60. Estimates go as far to say that around 55% of the Indian populace [12] will get infected with around 300-500 million cases over the next 4 months. Going by the current disease trends, that could result in 1 million to 2 million deaths in the country over the next year. Coupled with that, the fact that India doesn’t have nearly enough health equipment to deal with the crisis and the numbers could go dangerously high. Irrespective of how far the pandemic spreads in the country - the poor, with low spending capacity and poor access to quality healthcare - are likely to be exposed in a much worse form.
Maybe this isn't the right time to talk about class inequality. But maybe, it has to be.
And again, when the wheels of a country’s economy are slammed shut - especially when the country is already experiencing a serious economic slowdown, people are going to suffer. The decision to lockdown the country is one that wasn’t taken lightly. The economic repercussions of the same are immense - one that a lot of communities cannot bear.
Shutting down 1.3 billion people for 21 days is as big as it gets. Whether the gamble succeeds or fails, the India that emerges at the other end of these three weeks will be irrevocably changed forever.
A run of the lockdown into May - would impact the world at large, possibly severely straining India’s already weak healthcare system. Indications from New York, Italy and China have already shown the faults the virus can expose on even the strongest of public healthcare systems.
India’s Response
Beyond the 21 day lockdown, both the government and the RBI have taken noticeable steps to ensure that the country isn’t hit hard by the virus.
While the Finance Minister’s 1.7 lakh crore relief fund for the poor has been well documented - the RBI’s decisions are important as well.
In a recent meeting, the RBI announced that they would slash the repo rate to 4.4% and the reverse repo rate to 4%. Both of these measures are designed to inject liquidity into the economy - to get the banks depositing less and lending out more. In a time where people aren’t going to spend money - cheaper credit in that form would be immensely helpful. For context - this is the lowest the repo rate has ever been in the history of the RBI. The RBI also announced a moratorium on all personal and corporate. loan repayments over the next three months.
Coupled with the announcements of the Finance Minister - this would eventually release over 3.7 lakh crore of liquidity into the system - forming India’s frontline response to this pandemic.[13]
Whether the measures are enough - depends partially on how the government reacts to the expanding spread of the disease and the people’s decisions over the next 20 days, but mostly on the length of this pandemic.
Honestly, we don’t know how long this will last. India’s numbers are already over 900 cases. However, this number is probably a small subset of the actual infections as our testing rate is still low.
At this pretty helpless time, we can only ask ourselves two questions:
- How do we stop the masses of people suffering and dying at the hands of this virus?
- If and when this is all done - will we have an economy to come back to?
An attempt to look for a silver lining in the dark cloud we’re in seems bleak at best. We’re in for a few hard weeks of lockdown - with all these preventive measures set to get a whole lot worse. Beyond that, we’ve got a few difficult years to deal with before the economy gets back into any semblance of normality and no amount of farcical banging of plates will stop that. The IMF has already said that we’ve entered a recession, worse than that of 2008 - with the earliest recovery possible in 2021.
The world is changing. Social structures are changing, economies are changing and our lives are changing - and all we can do is hope and wash our hands.