Is Covid-19 pushing World economies into vicious cycle of recession [CA. Keshav R Garg]

Is Covid-19 pushing World economies into vicious cycle of recession

[CA. Keshav R Garg]

As a commerce student, I had studied about the vicious circle of poverty in my school times and to be honest, I could not understand it properly. As a young lad, I always felt how can a chain of events impact each other to an extent that the it comes back and effects the original event. Somehow our teachers taught us well and I proceeded ahead to become a Chartered Accountant. But now, being an integral part of the financial world, I can sense that what is happening these days might push the world economy into another vicious cycle of recession, recouping from which looks difficult in next 2-3 years.

Every sector, be it manufacturing, services or trading has already entered into a phase of tremendous financial pressure. With future remaining absolutely uncertain, they are unable to plan things properly. Recently, Singapore opened its first lockdown after few days but then again they realized that the impact was not yet over and hence decided to lockdown again with even more strict controls. The situation remains the same all across the globe, except few countries which had been able to prevent the spread of Covid-19.

From automobile sector, education, professional consultancy, service industry, restaurant and hotels, electronics market, petroleum and what not, has been impacted by Covid-19. There is huge challenge for these industries waiting for them. All sorts of labour has already migrated to their home town in a fear of huger taking their lives before corona. Hunger was the not the only cause for them to migrate, lack of proper food, shelter and safety left them with no option other than to run towards their home towns in other states. Bringing them back after the lockdown period would be daunting task. Deficiency of skilled labour would severely hit the costing of manufacturing industry also resulting into reduced their operational efficiency. On the other hand, procurement of good quality raw material is equally important for the industry. Since lockdown has resulted into shutting down of almost all manufacturing units, there will be huge imbalance between the demand and supply of such raw materials, which will again spike up the costs. From all perspectives, manufacturing industry is worried how things will settle in these trying times.

Service Industry is also equally hit by the slow down similar to those of manufacturing units. The lockdown situation has forced the industry to either hold salaries of their employees or pay them with  a major cut. Lower salaries has drastically hampered the purchasing power of the salaried class. Under the pressure to pay EMIs, pay rents, meet household expenses and other daily shores, they are finding even school fees of their children quite burdensome. This has resulted into lesser collection of revenue by the educational institutions. This has further resulted into no/reduced salaries of teachers/professors and other non-teaching staff. Under all these circumstances, there is a vicious cycle which is building up which doesn’t look to break very soon. The long duration of this cycle might hamper the economies of the world, recovery of which will become really a nightmare.

Similarly restaurant and hotel industry is quite worried. Their concerns are even more grave as their major inputs are fragile having low shelf life. The raw material which was already lying the day lockdown was announced, has already spoiled and is no more usable. Huge amount of food in form of raw veggies, snack items, sweets and beverages will be one their way to dustbins once the business resumes. This spoilage will give major blow to the restaurants. With the deficiency of skilled labour, huge spoilage and changed consumption patterns will seriously dent the margins of the industry. If the lockdown period get extended further, the level of acceptance of eating outside by consumers shall also get reduced. I wont be surprised if consumers start preferring cooking at home instead of buying from outside. The fear of contaminated food carrying germs and virus will restrict the purchase to only utmost necessary purchases. Creating that trust again in minds of the consumers, not only calls for additional working capital but also best in class services to regain the trust in quality of food at restaurants.

On same lines, hotel industry will also witness a new low in their work. With a fear of virus still prevalent in hotel properties, people will prefer only those travels which they can’t avoid. With reduced occupancy and major inventory remaining vacant, fetching good price from few travellers wont be easy. There would result into severe impact on the tourism industry as well. I fear if some of these hotel owners might have to find out alternative use of their properties for sustaining themselves for next 2-3 years. Their decision to permanently shut down due to non-viability of the business, might also seem sensible.

I would restrict myself to these few industries, to make my readers imagine the level of difficult we are going to face in times to come. Regaining faith and ensuring the utmost comfort to all segment of the society will be a haunting job. The loss of labour, enhanced working capital requirements will force the business owners to cut every corner possible. Witnessing major lay off in the future shall become normal which will increase unemployment levels to new height. This slow down will not only impact the employees of the industry but also leave a hole in pockets of external consultants serving these industries. In true sense, Covid-19 shall once again make the concept of vicious cycle very clear.

But never the less, whatever might happen, we should not doubt the strength of human minds. Once this pandemic is over, I am sure that we have all the strength and courage to bring businesses back to normal. At this moment nothing is more important than containing the death figures from this deadly virus. Let’s take all precautions and keep ourselves safe.  Nothing is impossible for us !! Good Luck !!

Keshav R Garg

(B.Com, FCA, CS, ISA (ICAI), LLB)

3328, First Floor, Sector 27 D, Chandigarh, INDIA 160019

Phones: +91-172-461-3328, +91-98880-90008

E-mail: keshavgarg@kdai.in