Behavioural economics points out that all of us tend to be susceptible to psychological bias. Most Importantly we tend to overweight recent evidence and especially evidence that is negative in nature, a lot more than evidence of importance.
The economic impact of covid-19 gets further magnified by the fact that it is a health crisis and every individual feels susceptible to it. In contrast to the previous pandemic Spanish Flu of 1918, covid-19 has been less devastating as the infected people in Spanish flu were way higher at 33%, while covid-19, which expected to peak (peaked in few regions) is well below 1% of the global population. (At least this is what data tells you).
Though, R0 (R- Naught), a parameter that is used to measure how many people will get infected by one carrier, is the same as both Covid-19 & Spanish flu at 2.2-2.5. Meaning one carrier can potentially infect 2.5 persons. And if Spanish flu is a reasonable comparison to contemplate economic recovery, then it will be logical to say there will be a V-Shaped Economic recovery. As it was during the Spanish Flu.
Most Analysts including CRISIL are of opinion that maximum damage is done in the current Quarter 1 (FY21- April-June), with India Embracing one of the world’s strictest Lockdown.
India faced the most stringent lockdown, With April being extreme and some breather in May 2020.
General Consensus of FY 2021 GDP (Including CRISIL)
- Q1- FY 21:-25%-40% GDP Contraction ( As India was under tough Lockdown).
- FY 21: OUR GDP will contract -5%. Though Chief Economic Advisor (Mr. Subramania) Pegs GDP to increase by 2% in this Financial Year.
- Further a smart recovery in Q2 FY21. July 2020 Onwards. This Quarter is going to be most devastating.
This will be India’s 4th Recession (2 quarters of negative GDP is recession) earlier it was in 1958. 1966 and 1980. The reason was poor monsoons in all our previous three recessions. Our economy was heavily reliant on Agriculture that day, with agriculture’s contribution to GDP ranging from 57% in 1958 to 40% in 1980 and currently its 15% only.
Inflation & Interest rates:
As per CRISIL, headline Inflation remains modest in FY 21 as over 60 days of lockdown has done demand destruction, Oil prices remain soft as global demand has been badly hit. RBI continues to be accommodative on interest rates and has slashed the benchmark interest rate (repo) to 4% on 22nd May 2020. Now, this is over 50% lower than the last high of 6.5%.
India’s Inflation rate since 1984. Lowest at this time.
- Red and Orange Zones have maximum containment Zones but contribute to almost 88% of State GDP. ( IMP: This is As under Lockdown 3.0). With a lot of ease of business after lockdown 3.0 and large-scale freedom from 1st June 2020, business activities would limp back towards normalcy.
Data As under Lockdown 3.0
- With Large scale migrants returning back to the hinterland, it surfaces 2 issues. First, as laborers return back to their villages they also carry back an unwanted guest, Covid-19. I was talking to a friend in Pithoragarh, a district in Uttarakhand, a corner of India, therefrom Zero cases in April now they are over 22 Covid cases, as thousands of worker from Delhi and Mumbai have returned back. Secondly, as the Red and orange zone opens up for the business they will struggle for quite some time to get back these Labours.
Doom & gloom all around, recall my opening line on Behavioural Economics. When Fear sets in and there is dark all around, if difficult to think of Sun Rise. Look at it this way, we are at the worst of the crisis, it may continue for some more time but eventually, the economy will be back on track. It happened after World War 1 (20 Million Deaths), the Spanish Flu ( 17-50+ Million deaths), Great Depression, World War 2 (75 Million Deaths), Sun will rise back this time as well and it is not as bad as those earth-shattering incidences.
From an investments perspective: We all know the Only Way to Create Wealth is to Buy businesses when they are selling at a low price. But this wisdom is rarely practiced. In a BASE CASE, we will see Economic Recovery starting from July 2020 onwards and tone-setting up in the next few months. If there is a massive rise of Covid-19 cases, it might not lead to another lockdown, but a few restrictions and recovery will take a setback of few more months.
Looking at 24-36 months from now, CY 2022-23. Businesses would have normalized, Vaccine in all likelihood would be there, Market would back to 2019 levels or higher as Economic downturns leads to economy revving up faster.