The $3 trillion question here is the impact on the economy.
The Indian economy had one of its toughest five-year periods (2015-19) since 1991. The economy was just showing initial signs of recovery in early 2020 with GST collections trending up, auto sector completing transition to BS-VI, corporate non-performing asset cycle flattening out and building of dollar reserves.
The covid-19 pandemic seems to have rewound the tape on recovery, but it is unlikely to have broken it altogether. Before we understand the impact on the economy, there are two unique aspects that are worth considering.
Distributed supply chain: In India, most supply chains are distributed across the country. This is due to the fact that we are a land of small and medium enterprises (SMEs), which gives us efficiency. But the flip side is reduced resilience, which is why most of our SMEs are in a spot today. We have 63 million registered companies, but only 5% of them have more than 10 employees and only 19,000 have paid-up capital more than ₹10 crore.
This mass distribution across a large set of companies leads to issues of coordination. The best illustration of the same is in the auto sector. You may have a ready-to-produce mother plant in the green zone, the maker of the brake pads in amber and the dealers in the red. You can imagine the near-impossible supply chain problem to fix. Hence, the restart of the economy may be ineffective if the majority of our country is non-green. Small gives efficiency but not resilience.
Demand drives supply: With capital shortage (unlike China), India’s supply reacts to demand and not the other way round. We don’t build malls or airports and wait for demand to fill them over a long period of time. Most of our infrastructure on completion are filled to capacity in just a few years and we then do incremental augmentation.
As you can infer, this leads to lag in supply creation and it’s the reason why our country has episodic inflation spikes. These two factors complicate the estimation of impact (how many SMEs will survive) and revival (which will come first—spend or demand).
So how do we think about the impact on the economy then?
The Indian economy is largely consumption-driven, where consumption accounts for 60%. This is how the aggregate consumption basket of our country looks: 1) Largely unaffected—53% of our basket is largely unaffected (food, utilities and communication). 2) Lost sales—goods and services, where if one has foregone consumption, cannot be recouped by consuming more of it in the future (travel and hospitality). This is around 31% of our basket. 3) Postponed sales—This is the bucket where foregone consumption can be made up in future. Some examples being automobile and white goods. This is around 16% of the basket.
Taking all this into consideration, we get a 5-7% drop in GDP for this year. Most of it will be front-loaded and we should start seeing positive print from the second half of the year. This is the bad news, but there is some good news as well.
If you were to sit back and think about the above, we have done a phenomenal job and I have no doubt that we will add our entire GDP of the last 70 years in the next 10-12 years. This could be the most important phase of wealth creation for most of us. The only thing left to do then is to buy quality companies, which will grow profitably for a long period and buy them at a price which is reasonable.
