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The impact on the Indian economy due to the Covid-19 pandemic: Which wave affected the economy more?

by Tavaga Invest

It has been over a year and a half since the COVID-19 pandemic struck the world. The response of the government  to the first covid wave and second covid wave has been different. During the first wave, the government opted for a national lockdown but in the second wave, there was no national lockdown but it was more localised and driven by the states.

As per the central government data, the first wave had majorly affected the urban areas and reported more cases than the rural areas. However, in the second wave, rural areas began reporting more cases than urban areas from the second month itself. The situation became worse due to the lack of adequate medical infrastructure in rural areas and the covid patients from villages started visiting the hospitals in the nearby towns and urban cities.

Impact of Covid on Agriculture Industry

We experienced a prolonged national lockdown and a significantly lower number of peak cases during the first wave. Manufacturing and the urban economy had ground to a halt, while the rural economy remained active due to less stringent lockdowns. As a result, agriculture, which employs 58% of the Indian population and is the primary driver of the economy, has continued to grow. 

Agriculture also benefited from a good monsoon and cheaper availability of labour. The agricultural economy grew by 3.4% in FY 20-21, while the overall economy contracted by 7.7% (as per the figures posted in GDP data).

The second wave had stricter and longer lockdowns in the country’s rural areas. Because of the lockdowns, APMC Mandis had been closed for operations. Farmers were unprepared for the sudden shutdown of these operations. Crops were rotting, vegetable vendors and processing industries had also suffered because of the shutdown of Mandis. The average wage growth rate in the agriculture sector fell from 8.5% during the first wave to 2.9% in the second wave. 

Kaveri Seed Co. Ltd. is a seed company that produces, processes, and distributes seeds. Field crops and vegetables are also among its products. The stock was trading at its 52-week high level in June 2020. Net sales during the Q4FY20 increased 18.3% at Rs 63.12 crore, while consolidated net profit stood at Rs 7.57 crore.

However, Kaveri Seed Co. Ltd’s FY21 June quarter results were harmed by lower cottonseed volumes. Maize volumes fell as well, owing to the absence of government sales in the quarter. Vegetable sales also performed on an average basis. Overall, the company’s consolidated revenues fell 12.5% year on year to nearly Rs630 crore.

Many other listed Agriculture companies like Balrampur Chini Mills, Bharat Rasayan, PI Industries were also impacted during the Covid-19 in the second wave. 

Impact of Covid on Manufacturing Industry

All kinds of manufacturing industries were hit hard during both waves. To control the spread of the covid, most of the manufacturing industries had to work at a reduced capacity or shut down. Non-essentials manufacturing (industries which do not help in the manufacture of any covid related essentials) was hit harder and for a longer time. 

Furthermore, the global and local supply chains had not fully normalised after the first wave, with the second wave it caused more disruption in the industry. It resulted in higher raw material costs for both small and large industries. The only difference in the first and second wave is, the government has attempted to facilitate lending in the hopes of getting these industries up and running.

Covid-19 impacted the business operations of both big and small manufacturing companies like Ashok Leyland, Bajaj Autos, Maruti Suzuki, Dabur India, HUL, and many more by way of interruption in manpower, supply chain, production, lockdown of production facilities which has, in turn, impacted the sale volumes and, consequently, revenue and market share.

Impact of Covid on Services Industry

In the last two decades, the services sector has become the major contributor to the GDP of the Indian economy. They are accounting for more than half of GDP. Last year, the IT industry was still figuring out how to work remotely. The restaurant industry was finding it difficult to transition to a delivery-only model. And the banking industry was embracing digital initiatives at a faster rate than ever before.

The first wave required organisations to go through a steep learning curve to develop infrastructure and processes for remote working. First wave lockdowns were a new reality for the employees, and it took some time for them to adjust to working from home and being productive. Prolonged lockdown and unlocking phases during the first wave ensured that both the employer and the employee settled into the new way of working, and productivity began to return to pre-covid levels. 

However, the rhythm between the employers and employees was thrown off by the second wave, but the second wave’s lockdown had been localised, therefore the disruptions cost only 3 to 4 weeks of productivity. According to experts, the services industry was the least affected industry during both waves.

We could see a lot of new-age IT companies which made their IPO debut in the stock markets. Nazara Technology is among the leading gaming platforms in India that developed the early gaming market in India and Southeast Asian countries. Nazara tech IPO opened on March 17 2021 with an issue size of Rs. 583 crore. The issue was oversubscribed 175 times and the stock was listed with a gain of 43% over the issue price. The Nazara stock touched an all-time high of Rs. 1922 on 16th July 2021.

In the past 1 year Nifty IT has outperformed the bordered market index Nifty 50. Most of the IT companies have given stellar performance. Infosys, TCS, HCL, Wipro, Tech Mahindra have brilliantly performed.

However, the travel industry was highly impacted during both waves. According to a National Council of Applied Economic Research study on the impact of coronavirus on tourism, the pandemic resulted in significant job losses in the tourism sector after the lockdown was implemented. Intermittent border closures caused by nationwide lockdowns halted international travel. There has been a significant decrease in business travel, which has been replaced by an increase in Zoom or Microsoft Team meetings. Large global events and large gatherings have been banned, and group and leisure travel has almost ceased due to the fear of getting infected and spreading the infection. 

Easy Trip Planners Ltd. went on an IPO in March 2021 and made decent listing gains. But the performance of the stock post listing has not been great due to the effect of the second wave. Wonderla Holidays, which is the largest chain of amusement parks in India, had a very bad year in 2020 with almost no revenue. It has been drastically affected during both the waves.

Impact of Covid on Unemployment

Unemployment reached double digits in April 2020. But as the government began to ease lockdown measures, unemployment rates began to fall. By January 2021, it had returned to pre-covid levels but the unemployment rate has risen since then. Although lockdowns haven’t been as severe during the second wave, employment was severely hit.

The overall impact of Covid on GDP

India’s GDP has shrunk by 7.3%. It is the most severe contraction since India’s independence. The reasons for this trajectory are essentially the lockdown, which has resulted in the closure of business entities, an increase in the unemployment rate, and a significant decline in domestic consumption.

The Reserve Bank of India (RBI) forecasted a 10.5% growth for the current fiscal year. However, due to the impact of the second wave of COVID-19, rating agencies around the world have downgraded it. Moody’s initially forecasted 13.7% growth for the fiscal year 2021-22, but later reduced it to 9.3%. The fright of a third wave and Delta variant can further hamper the growth of GDP.

Ending Note

The second wave surely had a less severe impact than the first wave due to localised lockdowns and a shorter number of days in reaching the peak number of infections. Agriculture was hit harder by the second wave than it was by the first. But the services industry was able to sustain and outperform during both waves. The economic revival hopes are pinned on us having an express vaccination drive, which removes the fear of a third wave and a rebound in consumer confidence and spending.

What should Retail Investors do?

Investors are often scared of market corrections. However, it is important to remember that such declines and corrections are common and should not discourage investors from participating in the markets. Markets might perform great now and might underperform next year but Indian Markets are known to provide consistent growth in the long run.

The most important thing to remember during a market downturn is to remain calm and not panic. 

Retail investors should continue with their investment in the SIPs. They should continue to invest while keeping their asset allocation and financial goals in mind. 

Retail investors can also select a low-cost fund pool, such as exchange-traded funds (ETFs) and index funds.

Disclaimer: This write up is solely for educational purposes. This in no way should be construed as a buy/sell recommendation. Please consult your investment advisor before investing.

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