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Maharashtra’s lockdown announcements are a blow to business and to investors. While no other state has taken similar measures, limiting its impact, if other states see a similar spike in cases then the Maharashtra model could find wider adoption. That could have a much bigger impact on the economy and that fear among investors may be reflecting in the drop in equity indices. Despite politicians' loud proclamations that a lockdown was not an option, the virus clearly has other ideas.
In Maharashtra, weekends will see a complete lockdown with people staying indoors except if they have to buy medicines and groceries. On week days, this restriction applies between 8pm and 7am. All food, dairy and medical shops have been classified as essential services, so that people don’t rush to stock up. But all other shops, malls, gyms, private offices (with some exceptions such as banks), cinema halls, dine-in restaurants, and schools/colleges will be closed. Public transport will remain open as will agriculture and e-commerce. Industries will operate as usual.
The main purpose is to allow as much economic activity as feasible but prevent crowding by restricting people movement. While that will succeed in lowering the infection rate eventually, it will deal a body blow to the state’s economy and that of the country too. Already, the restrictions due to the increase in cases are reflecting in the PMI survey, read Chart of the Day | Second wave pulls business sentiment in manufacturing to 7-month low.
The restrictions are to continue for a month. Interestingly, the government has asked all workers in the places that have been shut to get vaccinated, if they are eligible or have a RT-PCR test done showing that they have tested negative for COVID-19. The business owner is being made responsible. This opens the window for opening up establishments but with the employees having been vaccinated or being tested at regular intervals. That could then lead to a reopening of businesses, possibly in May or even earlier, as it should certainly be cheaper to get employees tested or vaccinated if eligible than keep the business shut for months.
What about the impact on companies? The effect on the services’ businesses will be severe on modern trade companies and cinema halls to the extent they do business in Maharashtra. Retailers with an online presence should manage better. There may be no stocking-up bump in sales this time as shops selling essentials remain open. Small businesses will be hurt the most. There is a risk of labour migrating back to avoid getting locked down like earlier. FMCG companies will again find their consumers moving away from urban areas, affecting demand. Worse, the closure of offices and dining-in will hit their out-of-home businesses again.
Still, all these effects are restricted to a state, an important one at that for most companies. The fear is what happens if the growing number of cases in other major states leads them also to impose a similar lockdown. While white collar workers can survive working from home, industries can operate and consumers can buy essentials, we have seen how the informal economy wilts in such circumstances. While investors will find some silver linings, the worry is for the larger economy. For now, the hope is that once people have a Covid-free certificate or are vaccinated, the lockdown will be removed or at least, relaxed considerably.
Our research team has analysed the developing situation and here are their insights on how investors should react to the correction in equity markets. They see the correction as an opportunity for long-term investors. Also, read our analysis on how the lockdown changes the equation for the MPC as it reviews monetary policy here.
More investing insights from our research team:
JSW Energy: Strong earnings visibility, offers good value
CDMO leader ready to straddle entire pharma value chain
What else are we reading today:
Who really won in the Tata-Mistry battle?
GST — Ride on the glee to fix the glitches
Here's what can go wrong in an arbitrage trade
Will HAL’s recovery sustain in post COVID-19 world?
Twitchy resilience becomes norm in equity markets (republished from the FT)
Technical picks: Hindustan Copper, Bank Nifty, Tata Chemicals and Shriram Transport
(These are published every trading day before markets open and can be read on the app)
Ravi Ananthanarayanan
Moneycontrol Pro
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