COVID-19 Impact: Sensex among the worst-performing markets globally in 2020 YTD, down 23%

The pullulation of Covid-19 has rendered all major economies catatonic. As India grapples with the death-grip of the virus, our equity market has taken to new lows making it one of the worst performers globally.

Take a look at the GDP growth projections of major economies that run the show.

As is starkly clear, the spotlight rests upon the largely underperforming country which is none other than Asia’s 3^rd largest economy.

With the enforcement of Lockdown 3.0, the manufacturing and services sectors are still partially defunct with a few of them opening up in Green & Orange Zones & SEZ’s with low staff and heavy hygiene setups. These sectors combined contribute ~80% to the GDP of India. With critical limbs severed, the economy is close to being brought to its knees. Manufacturing lies bleeding as most industrial areas fall in the red zones that are reporting new covid positive cases every day. These zones contribute ~50% to the GDP.

Speculations are that in the financial year 2020-21, the Indian economy my shrink by ~2%. The growth rate of the economy has been contracted by a downward revision of 2-3 percentage points with the announcement of the extension in lockdown alone. Prior to the announcement, there was still a meagre chance to grow at a sluggish 1-2%.

How did other leading economies perform vis-à-vis the pandemic driven crisis?

To those uninitiated, the question ‘WHY’ may perk up. Let’s understand how this flow works:

1. India’s Fiscal Deficit is most likely to be ~ 5.4% of GDP for FY 2020-21 as quoted by Former Finance Minister Mr. P Chidambaram.

(Fiscal deficit = Total expenditure – Total receipts excluding borrowings)

(FD / GDP x 100 = 5.4%)

Fiscal deficit is bridged by borrowing and is hence in fact equivalent to the value of borrowing. Higher the Fiscal Deficit, greater is the need for additional borrowing.

• The nosedive in collection of revenue and unprecedented spending to reverse the economic slump during the pandemic further drove the necessity to borrow and close the gap. Annual borrowings had to be jacked up to INR 12 trillion ($159 billion) from INR 7.8 trillion, a 53.8% swell over the budgeted borrowing!
  
• Lower growth in GDP means that the Fiscal Deficit % of GDP will be higher in the current financial year. Secondly, the crippling of various industries will continually weaken capital markets leading to under achievement of divestment targets.

• Divestment will be the Achilles’ Heel in jump-starting the failing economy. Reduced tax collections versus the budgeted collection will further wedge into the fiscal deficit thus exacerbating the situation.

Although the GOI has sanctioned increased borrowing, whether it covers the fiscal deficit and leaves room for spending is still a lurking dilemma. If the borrowing is deficient, it could further complicate the current economic meltdown.

Another possibility that RBI may increase its share of the government debt from it’s current 15%.

A Barclays research indicates that the additional borrowing would allow augmented expenditure of up to ~0.9% of the GDP. But it’s still research and although numbers don’t lie, it is still speculation.

Small cap and mid cap indices fell 4-5% last week but when looking at a period of 1-2%, they are likely to outperform based on the next level of investments. However how effectively can the pandemic be contained and how quickly can we resume manufacturing, remains to be seen.