Economic Crisis an Act of God?
In life and death matters such s the COVID-19 pandemic, focus on financial
matters can be seem misplaced. But for the world's poor the financial impacts of
COVID-19 can be devastating and far more immediate.
Economy of India in the year 2020 has been largely disruptive. India's
thickening in the fourth quarter of the financial year 2020 went low to 3.1%
according to Ministry of Statistics. The economic advisor of Government of India
said that the major reason behind the drop is Covid-19(corona-virus) a global
pandemic which has affected many other countries but not as bad as India.
According to the world bank the whole pandemic situation has magnified
pre-existing risks to India's economy outlook. The world bank and rating
agencies had at first redrafted India's growth for the financial year 2021 with
the truncated number India has ever seen in last 3 decades since India's
Economic Liberalization in the 1990's. The finance minister of India Nirmala
Sitharaman said that the economy is facing Act of God like situation.
What is Act of God?It's a part of Law of Tort Act of God is, defined as an overwhelming ,
unpreventable event caused exclusively by the forces of nature such as an
earthquake, flood or tornado. It also cover pandemic and epidemic like H1N1 in
2009 and ebola in 2014. Many courts may find that the occurrence of these prior
global health crisis made covey-19 foreseeable which might put it outside the
scope of a force Majeure Clause. The post- Covid 19 world will be affected by
Areas affected due to economic crisisThe number of unemployment rose from 6.7% on march 15 to 26% on April 19 2020.
By mid-June approximately 140 million people have lost their jobs and others
had a cut from their salaries. 48% household across the country had a drop in
income comparing to previous year. 23.9% i.e. million of people fall below the
Framers of the country growing crops, perishable goods were
affected badly because the country was under a complete lockdown where
travelling intra-district was also not allowed, so the growth rate of
agriculture has been declining. And the farmers are the one who need immediate
action. These are the basic areas.
How is business affected by the current economic crisis?This is a period of temporary economic decline during the trade and industrial
activity is reduced, generally identified as a fall in GDP in two continuous
Impact on the large businessAs sales revenues and profit fall, the hiring department of the company will
freeze hiring new employees or stop hiring new employees totally to cut down
costs, the company stops buying new machinery and equipment. The advertisement
and marketing also is reduced.
Cut on quality goods and servicesThe company has to cut-cost so there is a compromise on the goods and the
product. Example a company named kumar stores who produces the best quality
cotton clothes in the city and due the current situation he has to produce the
product for an on-going business and also needs to cut-cost will the quality be
the same as it use to be. No, it won't.
Benefits given to the employees is deducted or reducedIn such situation people lose their jobs and when they lose there is going to be
less employees or workers and more work which automatically reduces the
privileges and the benefits employees get like holidays, working hours may
increase with the same salary, no bonus, extra wages is cut-down etc.
Deduction of consumer accessIf there is cut in extra expenses, money spent on marketing, advertising is cut
too that bill millions per year will feel squeezed . So, then the rate of
advertising and marketing falls down with this even the consumers confidence
Credit impairment and bankruptcy
During such times the lending in the market gets a compact, lenders act very
selective for lending in the market as its risky and due to this the interest of
the principle amount is more. Large business face difficulty turning over their
debts, which are dependent on ongoing finance operations. Liquidity issues start
occurring in the business and its ups and downs. People who owe money to the
company pay back slowly, sometimes really late. The ability to service the
company's own debt may also be impaired which results in defaults on bonds,
damaging the company's credit rate.
Stocks and dividendCompany shareholders may get upset and with the board of directors, call for new
company leader. This happens because the decline in revenues show up in its
quarterly reports and with it the manufacturers stock price may also fall. When
the stocks of the company fall and the dividend declines, investors who have the
stocks may sell them and reinvest when the stocks are good which again depresses
the company's stock price.
Impact on the small businessDuring the economic crisis small businesses hit the hardest. Some of the
industries affect the most like luxury good producer or luxury service provider.
The crisis makes it close to impossible for the small businesses to survive.
Loss of demandThese kind of business depend on limited or a few customers, for their bulk
revenue could lose a significant amount of income. These business require a lot
of advertisement and marketing and if the market conditions aren't good nobody
buys the products. so, the owner of the business could lose money just by not
being able to sell the goods to anyone.
Reduction of staffLoss in business leads to financial shortage in these businesess which results
in cut in budget. And its easy to lay off some workers than bring in any changes
in the product or quality of it. Which reduces the opportunities to have an
Cash-flowThese business control their cash flows because they don't have any large
resources. Money comes and goes and any customer does not pay on time the whole
cycle is jeopardised. And in the times of crisis the customers tend to pay late.
Less availability of credit makes it impossible for the small business to work.
Types Businesses which were impactedBusinesses like food and sanitations, telecom and communications, medical shops
and pharmaceuticals, industries which cannot be shutdown like iron and steel,
refineries are examples of such industries and businesses which less impacted.
Export demand of meat, fisheries could have an impact for some time.
producers were affected during nation-wide lockdown. Insurance, mutual funds
their sale velocity was improved. Bank focused on lending the corporates and saw
a spike in NPAs. The weaker section of the society has seen sharp impairment on
their earnings and the government have to support through cash.
How has the financial crisis affected globally?The whole covid-19 situation got a third of the world to lockdown to stop the
virus from spreading. And the one sector which has suffered globally the most is
the financial sector. According to the predictions of united nation in April
2020 the global unemployment will wipe out 6.7% of working hours globally in the
second quarter of 2020 i.e. 195 million full-time workers. The collapse of
tourism, hospitality industry saw a sudden declination comparing it to last few
China-United States trade war which started on 2018 to early start of
2020 caused damage globally too. Schools and universities have been closed
worldwide, affecting 72.9% of the world's student population. Russia-Saudi
Arabia oil price war due to reduction in travel it impacted the oil demand,
causing the fall its price.
The global stock market crash started February 2020,
even though the crisis began to materialise in late 2019. Due to the pandemic
global markets, banks and all kinds of business were facing crisis not seen the
Great Depression in 1929.
It is both the act of god as well as some decision taken in wrong time and
situation. But now India as a country and globally we should think how can we
On the monetary side, the repo rate was reduced to a historic low of 4.4% on 27
March 2020. Numerous liquidity-augmenting and regulatory measures have also been
undertaken since then. Liquidity augmenting initiatives include a reduction in
the CRR, targeted long-term repos operations (TLTROs), reduction in the reverse
repo rate, special refinance window for all India financial institutions, and
eased overdraft rules for state governments. The RBI also increased the limit
under ways and means advances (WMAs) for the central and state governments.
Different output sectors may resume activities at different pace as the health
pandemic is gradually brought under control. Sectoral targeting of fiscal
stimulus should be synchronized with the opening up of the relevant sectors.
India's FY21 growth would depend critically on the pace of opening up of the
sectors and the extent of stimulus. And in the end “ we are in this together and
we will get through this, together.”
Written By: Palak Sinha - Ramaiah College of Law
Law Article in India
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