Covid-19 set off once in-a-century crisis; economy may contract: K M Birla

Hindalco Industries Chairman Kumar Mangalam Birla has said Covid-19 and associated lockdowns have triggered a once in-a-century crisis for the society and the economy and the country's GDP may contract in 2020-21.

He mentioned that Covid-19 struck India at a time when the underlying economic conditions were subdued on account of heightened global uncertainty and stress in the domestic financial system.

"It is estimated that about 80 per cent of India's GDP originates from districts which were classified under red and orange zones during the lockdown, where economic activity remained severely constrained. Correspondingly, India's GDP is likely to contract in FY21, which would be the first such instance in over four decades," Birla said in a letter to shareholders.

Given the fog of uncertainty all around, it is hard to be prescient in these times, Birla said. A stringent national lockdown to slow the spread of the pandemic started in the last week of FY2020 and remained active to varying degrees in different geographies through most of the first quarter of 2020-21.

"But there is little doubt on one reality: companies with quality leadership, sound business fundamentals, and a track record of winning in turbulent times, will emerge as champions in the new global order," he said.

This year will see an economic contraction, but this 2020 recession is turning out very different from the past recessions, Birla said.

"It has been too sudden almost off the cliff; its spread has been all-encompassing affecting almost every economy and sector, and the plunge in economic activity levels and employment has been unprecedented," he said.

On the positive side, this recession is likely to be one of the shortest, assuming no second wave of the pandemic recurs. As present lockdowns around the world get lifted, and businesses reopen, economic activity is likely to bounce back fairly quickly, he said.

"Around USD 9-trillion stimulus from different governments globally will help to support this recovery, along with the monetary actions by central banks. These policies will also help to restrict the second-order effects like defaults and bankruptcies," Birla said.

Some scars of the crisis will remain in the form of subdued consumer and business confidence. Some sectors, like airlines and hospitality, will take time to recover fully. And some supply chain disruption effects will linger.

As the world emerges from the current crisis, the next few years are likely to be marked by lack of buoyancy in growth, subdued commodity prices and inflation, a cautious trend in project investments, heightened risks of de-globalisation and political uncertainty; and increased dependence of financial systems on ultra-loose monetary policy conditions, Birla said.

"We will also have to watch out for potential post-Covid changes in consumer behaviour (such as more virtual engagements) and of operating models of organisations (such as work-from-home norms, diversification of supply chain risks, more use of e-commerce)," he said.