Coronavirus: 'Black Swan' of Global Economy; How it Impacts India?

(Updated on July 09, 2020)


With 1 crore and 25 lakhs people infected globally by the Covid-19 and 5.53 lakh casualties across the world including 21000 in India due to the global spread of Corona Virus – Covid-19 that originated from China, has claimed its toll in Italy, Germany, Taiwan, Singapore, Hongkong, France, Canada, Russia, USA among other countries. The World Health Organization (WHO) is taking twists and turns in its announcements about Covid-19 pandemic but still the world has not been able to come up any anti-dote vaccine against this virus which is believed to have been developed in man made laboratory in China, but is vehemently denied.

The US has surpassed China in the number of confirmed Covid-19 cases along with Italy, Spain and other countries. More people in USA have died than in China due to the spread of Corona Virus. More than 2.5 million people in Europe alone are infected by this virus.


Cases in India have also shot up sharply and have crossed 7.69 lakhs as on July 9, 2020. Scientists including those affiliated to Indian Council of Medical Research (ICMR) expect the Corona infected people to reach its peak in November, as various preventive measures like Lock Down, Social Distancing, Frequent washing of hands, wearing masks, PPE Kits have delayed the spread of Corona virus in India. This has given more time to the country to make proper medical and preventive arrangements to fight the pandemic. 

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Latest Update: The total number of cases in India, infected by Corona Virus have gone up to 7.69 lakhs and the death toll has gone up to 21,200 as on July 8, 2020. In a single day more than 24000 cases have been added. Government of India has applied five country wide lock down since March 22, 2020 to check the further spread of Corona Virus  


Government of India had announced Rs.20 lakh crore relief package to revive the economic growth. The Reserve Bank of India has already announced the  key policy measures to counter economic slowdown and joined the fight against the corona virus.  India expects most multinationals operating from China to leave that country and establish the new manufacturing base in India which will help the Indian Economy to bounce back with high growth rate. 


Global Economy, which was already reeling under severe slow down, is facing the brunt of the virus. Visa bans on tourists and restrictions on visiting the other countries have put the tourism, aviation and hospitality industry in jeopardy. Social gatherings, malls, schools, multiplexes are closed till the situation improves.


Global higher education including MBA education is also affected as even the top MBA colleges of the world like Harvard, Chicago Booth, Wharton, Stanford, Kellog, MIT Sloan and hundreds of others have decided to move to online teaching instead of class room teaching. Besides, the B-schools have extended their spring break, have stopped international exchange programs, have cancelled the events like convocation, have restricted international travel and have taken other measures to restrict the movement of students and faculty. In India also, B-schools have postponed their Convocations, delayed admission process and session commencements, and are conducting awareness programs for Corona virus.


The outbreak of the coronavirus that emerged in Wuhan city of China brought forward the possibility of further economic slow down thereby increasing concerns about the global economy, apart from the sever impact on human lives. China has allocated more than $10 billion to contain the coronavirus. Many China provinces have shut businesses for weeks now and it is not certain whether they will re-open anytime soon.


The growth rates due to this virus for numerous countries have been cut. S&P Global Ratings has cut China's 2020 growth forecast muchbelow 5 per cent from 5.7 per cent.


More than 100 countries in the world are affected by the virus and apart from China from where the virus spread, they include India, USA, UK,Canada, Hong Kong, Singapore, Taiwan, Italy, Iran, Japan, South Korea, North Korea, Thailand, Malaysia, Philippines among others.


Impact on India


Monitoring Closely with preventive and curative measures
Corona virus is spreading its wings in India. So far, more than 7.69 lakh cases have been reported with 21000 deaths. However, the silver lining is that 4.77 lakh infected people in India have recovered fully from the corona virus. With more than 22000 to 24000 fresh cases being confirmed in one day, Scientists are expecting the cases to reach at peak in November 2020.


Key Covid-19 Trends in India

  • Covid-19 cases reported in more than 400 districts in India
  • Over 80% of the total positive cases traced to 62 districts across the country
  • Current rate of doubling of COVID-19 cases is 4.1 days. It would have been 7.4 days if the TablighiJamat congregation had not happened in Delhi in March 2020 
  • Government sources said that Lockdown 5.0 from June 1, 2020, which was aimed to unlock the economic activities in many areas has boosted economic growth especially for MSME, labourersm poor daily workers, farmers among others.
  • Government of India has announced massive Rs.20 lakh crore relief package for poor, daily wage earners, MSMEs, Agriculture sector, to revive economic growth
  • Government isfocusing an aggressive containment strategy as per the Bhilwara model in 62 districts. The “Bhilwara Model” refers to the containment zones, or areas reporting large number of cases. These 62 districts are sealed off. The strategy was found to be effective in Bhilwara (Rajasthan), which had emerged as a hotspot in March 2020.
  • Number of tests being conducted in India now runs in lakhs. They were doubled and will again double in the next few days. Amid criticism that India is not doing enough tests, the number of government labs involved in testing has risen to 646 and private labs numbers increased to 247. Total 893 labs in India are currently carrying out testing for Sars-Cov-2 virus. According to the official figures, 3 lakhs samples are tested in one day. Total number of samples tested so far are more than 1 crore.
  • The reports and studies hinting at the possibility of the virus being airborne, the Indian Council of Medical Research (ICMR) is of the view that there was no credible evidence in this regard. According to Dr R RGangakhedkar, HoD, Epidemiology and Infectious Diseases, ICMR,“If this was an airborne infection, and not a droplet infection, every person in a family would be infected; the same would apply for other patients in a hospital. But we have not seen any evidence of that happening so far. There have been one million cases the world over, and no such instance has been found. I think we should trust that evidence.”
  • India has also pressed into service CBNAAT (cartridge based nucleic acid amplification test) machines for COVID-19 tests.

India has however taken timely measures to control the situation. A few have fully recovered while others are recovering fast. As Covid19, the Corona virus has almost entered stage-3 in India, the Prime Minister of India, in his address on March 19, 2020 at 8 PM on the Corona pandemic, called for a Janata Curfew on March 22 between 7 a.m. and 9 p.m. to control the spread of the virus. With effect from 12 midnight on March 22, a complete lockdown across the country for 21 days was announced by the Prime Minister. Later it was extended to May 3, 2020 and then to May 17 and the Lockdown 4.0 was extended to May 31, 2020 with some relaxations. The phase-5 of Lockdown that started on June 1, 2020 is called the Unlock-1 followed by Unlock-2, as it has allowed many economic activities to resume. It may take few months in India to get clear of the problem.


Declares ‘Notified Disaster’
Government of India as well as State governments are treating and monitoring the situation closely to control the coronavirus pandemic. The Ministry of Home Affairs has decided to treat Covid-19 as a "notified disaster". This will enable the states to spend a larger chunk of funds from the State Disaster Response Fund (SDRF) to fight the pandemic.


RBI Announces Policy Rate Cuts: Takes Measures to Counter Economic Slowdown
On March 27, 2020, The Reserve Bank of India joined the big fight with a host of measures aimed at minimising the damage from Covid-19. Reserve Bank of India (RBI) Governor Shaktikanta Das has announced a series of measures including policy rate cuts to bolster economy in the wake of covid-19 menace.


Sharing that large part of major global economies are likely to be heading toward recession, the RBI governor stated that economic recovery in 2020 would be slow. This comes hours after Moody's Investors Service cut its estimate of India's GDP growth during 2020 to 2.5 per cent from an earlier estimate of 5.3 per cent.


Following key policy announcements were made by the RBI Governor on March 27, 2020:

  • A 75 basis points cut in repo rates was announced as a measure to counter the economic slowdown caused by the COVID-19 pandemic. Now the Repo rate  stands at 4.40% as against 5.15% earlier
  • The reverse repo rate has been cut by 90 basis points to 4 percent. According to RBI Governor this has been done to make it unattractive for banks to passively deposit funds with the RBI and instead lend it to the productive sectors
  • CRR has been reduced by 100 bps to 3%, for 1 year to release 1.37 lakh crores
  • Minimum daily CRR balance reduced from 90% - 80% till 30/06/2020
  • 3.74 lakh crore liquidity injected
  • Banks are allowed 3-month moratorium on all loans. According to RBI, “All commercial, regional, rural, NBFCs and small finance banks are being permitted to allow 3-month moratorium on payment of instalments in respect of all term loan EMIs outstanding on March 31." This is going to be a huge relief for all EMI payers, especially for those — such as the self-employed — whose income had become uncertain in the wake of the lockdown
  • Interest on WC facilities to be deferred by 3 months. Such deferment not to be considered for NPA
  • Total liquidity injection 3.4% of GDP
  • Along with it, the Central government on March 26 announced the first instalment of a fiscal relief package, worth Rs 170,000 crore, to protect the weaker sections of the society from the economic fallout of Covid-19 in the country. Announcing the measures, Finance Minister Nirmala Sitharaman said the PM Garib Kalyan Yojana will benefit migrant workers, rural poor and women.

Three-way liquidity injection

  • Auction of targeted long term repo operations of 3-year tenor for total amount Rs 1,00,000 crore at floating rate. Will add this to liquidity in the market
  • Reduction of CRR for all banks by 100 basis points will release Rs 1,37,000 crore across banking system
  • Accommodation under Marginal Standing Facility to be increased from 2% from SLR to 3% with immediate effect till June 30. It will release Rs 1.37 lakh crore into the system...

Repo Rate Reduced further on April 17, 2020
On April 17, 2020, addressing media for a second time within a month, RBI Governor Shaktikanta Das unveiled fresh measures aimed at maintaining adequate liquidity in the system, facilitating and incentivising banks to ensure better credit flow and enabling normal functioning of the financial markets.

RBI slashed the reverse repo rate for the second time after March 27, 2020. The Repo rate was reduced by 25 bps to 3.75 per cent, making it less attractive for commercial banks to park cash with the central bank.

The measure freed up more capital for banks to lend as RBI announced a fresh Rs 50,000 crore targeted long-term repo operation (LTRO 2.0) to address the liquidity stress of shadow banks and microfinance institutions and hinted at the possibility of further rate cuts going forward.

Corona Virus a War
The RBI governor warned not to make mistake as it is a fight never seen before. Outlining the risks to Indian economy from coronavirus, he stressed upon the need to keep the credit flowing to the stressed areas of the economy.  

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Prevention & Cure Measures Announced

  • Social Distancing: Social Gatherings are prohibited and restricted at public places, Cinemas, Malls, Multiplexes, schools are closed to prevent the corona virus spreading further
  • Means of Public Transport like Trains, buses and the public places are being sanitized to stop the spreading of virus
  • Advisory on cleanliness, washing of hands, keeping away from the infected people, using masks, sanitizers is issued on social media, print media, digital media by the Ministry of Health, Administration
  • Isolation wards in Hospitals, hotels and other centres have been created to keep the affected patients so that they do not come in contact with others

Hopefully, the peak of the virus may pass if public health measures in India are ultimately successful in containing its spread


Impact on MBA Education in India
Leading institutions such as IIM-Ahmedabad, IIM-Kozhikode, IIM-Indore, IIM-Trichy, Bhavan’s SP Jain Institute of Management & Research (SPJIMR), IIT-Bombay, IIT-Kanpur have introduced measures including postponing of events and large gatherings, imposing travel restrictions and holding extensive awareness generation sessions on campus about the outbreak.

Teaching by foreign faculty has been stopped due to travel restrictions. Top MBA colleges in India invite guest faculty from Harvard, Wharton, INSEAD among others to teach in the full-time MBA programmes. The practice is discontinued for the time being.

IIM-Kozhikode in Kerala, which has reported a higher number of cases than the other parts of India, has postponed its convocation scheduled on April 4 and so has IIM-Ahmedabad and IIM Indore.

IIM-Ahmedabad is organising awareness programmes for students and faculty. As a preventive measure, IIT Delhi has suspended all the academic, co-curricular and extra-curricular activities.


Global schools such as Harvard, INSEAD have already started transitioning to virtual instruction for graduate and undergraduate classes and asking students to meet academic requirement. They are imparting education through MOOCS, Edx and other online platforms.

Impact on Indian Economy
India’s economy was already suffering from slow down. The corona virus has brought various segments to stand still. For example retail, entertainment, hospitality, aviation, tourism sectors are suffering the most. Yet there is silver lining for India, as it could turn this problem into an opportunity also with more exports and achieving high growth rate.


The impact of Coronavirus outbreak in China could have been disastrous for India, had the selective steps not been taken by India. Let us discuss the negative and positive impacts both briefly:


Negative Impact on Indian Economy
India faces a series of challenges due to the coronavirus outbreak. Pharma companies, mobile handset, consumer electronics and automobile sectors in India may witness lower production due to clogged supply from China.


Sunil Damania, CIO, has outlined the possible risks and said "If the outbreak continues for longer than anticipated than risk will not be restricted to a few sectors, but it can hurt the overall Indian economy. The sectors that would be immune will be Banks, Insurance, IT as they will have fewer headwinds to face due to coronavirus."


So, there is a great danger that world economic growth could take a beating due to the virus as China accounts for 12 per cent of world's GDP growth rate. Besides, there could be an indirect impact on many outside China producers who source their raw materials or components from China..


The corona virus outbreak made RBI Governor Shaktikanta Das take note and suggest the need for a contingency plan to deal with the unfolding situation. According to Jimeet Modi of SAMCO Securities, “The overhang of Coronavirus will largely drive the mood of stocks in the short term. Investors are advised to wait and let the market settle down before allocating any meaningful savings to direct equities.”  

It implies that if the global environment remains weak, commodity prices would fall, as is the case with the 20 per cent drop in crude oil prices, which should benefit India. However, India is not immune to a global slowdown. UBS said reports of the virus contagion have contributed to investors' concerns during its marketing trip.

The report said, “Potential similarities between the Wuhan virus Coronavirus and SARS in 2003 have led many investors to question the extent of the impact on India. At this early stage, we only see a negligible economic impact, but India is not immune. India's tourism contributed only 1 per cent of GDP in FY19. But, China is India's third-largest goods export partner ($17 billion; 5 per cent share in India's exports). Any likely slowdown in growth in affected Chinese cities could result in a further drag on raw material demand from India and thus could drag exports further.”

Opportunity for India: Positive Impact
Economists are of the opinion that the disruption caused by the virus in China could pave way for more foreign investments in emerging economies like India, Bangladesh, and Vietnam as the world looks to reduce dependency on China, the largest manufacturing hub in the world.


Experts feel that India has a good chance of becoming an attractive manufacturing hub given the present situation, provided the government changes some of its trade policies to bring down commodity prices. An example of Vietnam, which has gained a huge growth boost due to higher density of electronics manufacturing, is before everyone.


H Nemkumar, Head - Institutional Equities, IIFL, said that ill-fated coronavirus outbreak in China has offered India with an opening to revive the 'Make in India' programme.


According to the Chief Economic Advisor of India, Krishnamurthy Subramanian the coronavirus outbreak in China provides an opportunity for India to expand exports. India is one of China's leading trade partners in Asia and has a huge trade deficit with that country.


Sharing his views at IIM Calcutta, Subramanian said, “The coronavirus outbreak in China provides a good opportunity to India to expand trade and follow an export-driven model."  He said that China imports a lot of components, parts, assembles and integrates and then exports them.

"India has been following the same pattern in terms of mobile manufacturing in the country. So, if one looks from this perspective, it provides a good opportunity for India." said Subramanian

Coronavirus Vs SARS
The impacts of the coronavirus, also called the “Wuhan virus,” could be felt more deeply than that of SARS outbreak in 2003.


SARS claimed 774 lives globally in 2002-2003. However, the latest data from global health authorities show that Coronavirus has infected more than 43,000 people globally and out of them, 42,638 are confirmed cases in mainland China, with the toll surpassing 1,000 deaths. It could be turning into a Pandemic than the epidemic.


Despite the SARS outbreak, the Chinese economy compensated for shrinking domestic demand in the second quarter of 2003 by exporting more goods and services. Consequently, export rates of China increased by 35% in 2003. The fact that China became a member of the World Trade Organization in 2001 also had a great role to play in this impressive export performance. The economic stimulus packages by the Chinese government succeeded in closing 2003 with a 10% growth rate. It is estimated that global economic growth lost 0.1 percentage point of real GDP due to SARS.


Coronavirus: A Black Swan for Global Economy
Nassim Nicholas Taleb, a former options market broker was the first to suggest the term “Black Swan,” which is used to emphasize unpredictable, rare events that have the potential to deeply affect the financial world and global economic systems.


With the impact of trade wars, Brexit and various geopolitical issues, the global economy has been going through a hard time and the possibilities of recession and economic slowdown are on the global agenda. One of the concerns is the fear of a “Black Swan” scenario coming true, further deteriorating the global economy, which has already been on fragile ground for some time.


Impacts of such outbreaks like Cornonavirus, are interpreted primarily through their impact on exchanges. Financial markets strongly react to the flow of information about these kinds of unexpected events. An increase in the death toll might suddenly result in a 10% loss of value in stock markets. On the other hand, even a shred of good news could be regarded as an opportunity to buy. Because we are talking about China, which is considered the “factory of the world,” it would be wise to assess the impacts through supply chains, foreign trade and real sector channels.


The impacts of the coronavirus could be felt more deeply than that of SARS. China no longer has the same radius of action that would enable it to increase its exports in  significant numbers. In recent years, China has gone through a transformation from an export-based growth model to a model dependent on domestic demand. The share of domestic demand in the growth composition is much heavier now than it was in the past.


Accordingly, the virus would slow down domestic demand that would have a more distinct impact on economic growth. Within the economic sphere, epidemics and natural disasters tend to impact the service industries the most. The importance of the service industry in the Chinese economy has increased from 40% to at least 50% in the past 20 years. This shift in the sectoral structure of the economy might result in the impact of the coronavirus on growth to be stronger compared to 2003.


In comparison with 2003, China’s foreign trade is five times bigger today, the number of tourists sent abroad is six times more and its share from the global economy has also increased fourfold. It would not be a surprise if developments in China impact the global economy more deeply than it would 17 years ago.


The deterioration of expectations on the global economy might render the impacts of the virus a tad stronger.


How much will these factors increase the negative impact of the Wuhan virus on the economy compared to that of SARS? With reference to the scenario in which the coronavirus outbreak would be under control by April, Shang-Jin Wei from Columbia University made a very optimistic prediction that the impact of the virus on Chinese economic growth would be limited to only 0.1 percentage point.


International finance organizations predict that the Chinese economy will experience a loss of growth by 0.5 percentage point on average. There are also grave pessimists who predict that the Chinese economy will face a loss of growth of more than 1 percentage point. Predictions about the overall global economic growth loss due to the virus range between 0.02 to 0.03 percentage point.


Impact on World Economy

Disturbance caused by Coronavirus has affected key sectors like global tourism, trade, manufacturing and export/import. But the biggest jolt has come from the shutdown of many businesses--from major retail chains to automobile and smartphone manufacturing firms--in mainland China.


As a result, countries that have a high dependency on China for goods--especially small components and parts--have suffered. Market experts fear that the world's over-reliance on China will continue to hurt global growth until the virus is contained.


According to predictions by Bloomberg Economics, the global economy might face a loss of 0.416 percentage point in the first quarter of 2020. Deeply conjoint to China in terms of finance, logistics and merchandise, Hong Kong is one of the most likely countries to be affected by the virus.


Slowing down of China means less product exports, which would affect the main product exporters such as Brazil and Australia. Mostly dependent on China in its intermediate goods, South Korea’s economic growth in the first quarter of the year might end up 0.4 percentage point, less than expected due to the virus.


Owing to the deficiencies in intermediate good supplies coming from China, a South Korean automobile company decided to halt its operations for some time. Problems to be caused by the virus and a breakdown in expectations in the global supply chain are expected to negatively impact the U.S. and various EU countries. Among the EU countries, the virus is expected to affect German economy the most.


The dependency of Turkish economy on China is less compared to other G20 countries. The impact of Wuhan virus on Turkey might be relatively less. The loss of acceleration in global economic growth and trading volumes might also slow down the growth of export rates in Turkey. On the other hand, Turkey’s foreign trade deficit to China might become tighter. A decrease in global growth expectations also brings down the petroleum prices. The petroleum prices dropping below 55 dollars is a positive development in terms of inflation and account balances.


If the expectations about the impact of the virus on the global economy further deteriorate, significant central banks such as FED and ECB could go for an additional monetary expansion. The final and concrete outcomes of the current possible (positive and negative) impacts will be dependent on which actors are stronger and more influential in the process.


The Risky scenarios
There are three risky scenarios that might increase the impact of the virus on the global economy. The first significant risk is the possibility to not be able to get the virus under total control by the end of the second quarter of the year. As the weather temperatures increase, the possibility of the virus losing its durability might result in this scenario to not happen.


The growing social tension in China due to the virus and the Beijing government overreacting to this situation is another risky scenario. Although some criticize this, it is obvious that China is acting in a more transparent manner compared to its reaction to SARS outbreak in 2003. In such a serious situation, it is not easy to keep all related issues under control -- first and most important of which are quarantine processes.


The possibility of social tension growing and things getting out of control of the Beijing government is low at present.


The third risky scenario may emerge if Beijing misses the import product total that it guaranteed to buy from the U.S. within the framework of the first phase agreement, which would result in a blunt reaction from U.S. President Donald Trump (such as the threat of raising the tariffs again).


In his statement on the issue last week, Trump emphasized that he would comply by the requirements of the deal and that he has full faith in China overcoming the virus crisis. There is a high chance of China experiencing the lowest growth rates after 1990, along with falling behind in global growth, dropping under 3%.


Pitching India as Strong Investment Destination
A recent surge in order queries has been received by Indian traders across various domains. Trade analysts expect more investment opportunities for emerging economies in the backdrop of the coronavirus outbreak in China.


However, it now remains to be seen whether the government can ease policies and pitch India as a strong investment destination for major companies around the globe. . . Read More GD Topics


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