India’s Services Economy Braces For A Hit From Local Spread Of Coronavirus

The rapid spread of the novel coronavirus globally had already raised the prospects of a hit to the Indian economy via weaker exports and disrupted imports. Rising instances of locally detected cases have added to those concerns, with economists fearing a hit to key services sectors, starting from travel and tourism to hospitality and aviation.

On Wednesday, the government issued an advisory discouraging inbound international travel and restricting existing visas. It also said that travellers from seven countries, including China, Italy, Iran, South Korea, Spain, France and Germany, would need to be quarantined for 14 days before entering the country.

The restrictions came after the number of locally detected cases of the virus rose to 60.

First Impact: Travel And Tourism

The travel and tourism industry is already seen a sharp slowdown, which could worsen in the coming weeks.

In recent days, the industry has seen a flurry of international and domestic cancellations, said Pronab Sarkar, president of the Indian Association of Tour Operators. “Foreign tourist arrivals are down by about 67 percent annually in the January-March quarter, while domestic tourists are fewer by about 40 percent,” Sarkar told BloombergQuint.

While several state governments are wary of all foreign tourists, domestic travellers are also turning cautious and reluctant to travel, he said.

Madhavan Menon, chairman and managing director of Thomas Cook, said there’s still demand for domestic travel. Hoping to temper some of the impact of reduced overseas travel, the company has introduced products to replicate foreign destinations, he said, adding that there is demand for travel to some parts of the country, including Jammu & Kashmir. While foreign travel entails high unit value, domestic travel is able to offset this at least in part, he said.

Airlines, however, have started to warn of lower traffic. In exchange filings, InterGlobe Aviation Ltd., the parent of India’s largest airline IndiGo, said traffic numbers have started to fall. “Over the past few days, however, week-on-week, we have seen a 15-20 percent decline in our daily bookings,” the airline said, warning of a material impact to the company’s earnings.

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The hospitality sector will also bear the brunt of reduced travel.

According to a March 6 note from Edelweiss Securities, both occupancies and tariffs would be impacted in March 2020 and the April-June 2020 quarter. “While domestic tourism might see an improvement on limited outbound travel, the recent cases in India would limit that opportunity as well,” said the note.

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Assessing The Size Of The Hit

Economists remain wary of putting a number to the extent of impact on the economy but some broad estimates are starting to emerge.

Travel and tourism alone accounted for 9.2 percent of India’s GDP in 2018, according to a report by industry body FICCI released in April 2019. The tourism sector generated 26.7 million jobs in 2018, the report added.

If the scenario fails to change by May, which is when domestic travel is at its peak because of the summer vacations, employment may then become a concern, said Sameer Narang, chief economist at Bank of Baroda.

Standard Chartered Bank pared its growth estimate for 2020-21 from 5.6 percent to 5 percent fearing a hit from the global and local spread of the virus.

“We see a larger loss of economic activity in FY21, as the virus has now spread widely outside China, and the experience of other countries indicates a high possibility of a further spread in India,” wrote Anubhuti Sahay, head of South Asia research at the bank. Sahay expects the April-June quarter growth to fall to 5.4 percent due to weaker global growth, supply-chain disruptions, and loss of domestic demand.

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“This would be one-fifth of that seen during the demonetisation quarter (October-December 2016), on social distancing in response to the coronavirus outbreak,” Sahay said.

Rahul Bajoria, the chief India economist at Barclays, said the biggest growth risk would be from preventive measures such as mass quarantine or movement restrictions and the related pullback in consumer spending, investment, and services activity. “Together, these could shave almost 200 basis points from headline GDP, with investment potentially taking the biggest hit. We remain vigilant of non-linear impacts from a wider outbreak,” Bajoria wrote while adding that several factors such as lower oil prices along with fiscal and monetary support could help act as a buffer for the Indian economy.

JPMorgan currently expects much of the economic hit to flow via weaker exports. However, it, like others, cautions about the impact of a local spread of the virus on the services sector. Discretionary, non-government services in India constitute about 33 percent of GDP. These have been growing at 8 percent a year. If one assumes that growth rate for this second halves, it could shave off 130 basis points from full-year growth in FY21, it estimated.