An economic meltdown is an unexpected event that can occur at any point and has no standard cycle. It can occur due to financial deregulation, like the 2008 great recession, or an unexpected crisis, like the Covid-19 pandemic.
The last meltdown in 2008 is well known as the Great Recession. It was the worst global recession since World War II and was caused by deregulation in the financial industry. In fact, the economic slump began when the U.S. housing market went from boom to bust, and large amounts of mortgage-backed securities and derivatives lost significant value. The global recession that followed resulted in a sharp drop in international trade, rising unemployment and falling commodity prices.
Today, the world is experiencing a coronavirus pandemic that has infected about 4.8 million people, resulting in about 318,000 deaths. India alone has about 96,000 cases and about 3,000 people have died. The only way to contain this virus is through social distancing and proper hygiene. To break the contagious cycle, many governments around the world have enforced a complete lockdown, bringing almost all activities to a standstill. Such a scenario has never occurred in history where the economy of the entire world is halted, leading to a recession.
Then and now
The Great Recession of 2008 was systemic and first took hold of the financial system. The recession of 2020 is a cyclical crisis, caused because the economy was stopped by a health crisis. In contrast, the 2008 global financial crisis that hit the Indian financial sector and affected real demand did not bring production to a halt. In the current scenario, production has been stopped and has caused a major impact on the supply chain. While there is a lot of uncertainty about economic growth, some experts believe we could experience a much shorter and quicker V-shaped recovery compared to the 2008 recession.
In 2008, despite the global crisis, the healthcare industry in India was deemed recession-proof. The industry was at its peak not only in the healthcare delivery, research and development, but also in the field of medical tourism, pharmaceuticals, health insurance, medical transcription and clinical trials.
India’s healthcare sector in 2008 was valued at about $45 billion U.S. dollars, and in 2020 was expected to reach $280 billion. So we can see the exponential growth the industry has witnessed over a period of time.
But no matter what the economic or market conditions are, healthcare is a sector that can truly stand the test of time and recessions. It fared well during the global meltdown of 2008 and will do so even today. A large part of India’s economic growth has focused on “outsourcing” or “off shore” business. In fact, 80 per cent of medical devices and consumables in India are imported. Most of the Personal Protective Equipment (PPE) masks, ventilators, and diagnostic kits are imported from China, and this over-dependence on China for supplies has created problems in the medical supply industry. Hopefully, the Indian government will now reconsider using Indian manufacturers to produce many of these products in India.
Another market that has been heavily affected by the travel restrictions surrounding the pandemic is medical tourism. Every year, one million people travel to India for medical care, generating over $3 billion in U.S. dollars. This market is growing at 22 percent in the compound annual growth rate, and was expected to reach $6 billion by the end of 2022, generating valuable large-scale employment and profitability for India’s healthcare sector. However, the Covid-19 pandemic and travel ban have eroded about 10 percent to 40 percent of their revenues.
Recession and recovery
Experts believe there will be a negative impact on consumer spending in health care because of fear of infection, but only related to elective services like cosmetic and allied surgeries rather than necessary procedures like cardiac or neurological disease treatment. Meanwhile, other procedures would be deferred.
A lack of liquidity may affect the market for medical devices because hospitals may not wish to commit large funds which could be better utilized in creating patient-pull.
Typically, the healthcare industry will spend smart. In the current situation when the liquidity is less, hospitals will maintain their capital expenditures and look at ways to reduce costs. Hospitals will be extremely cost-cautious and will be focusing on efficiencies.
With the costs of imports going up, experts believe that a number of domestic companies will evolve. This is evident from the large number of innovations that have been spurred while managing Covid-19 patients. From low-cost devices and equipment, the PPE industry is trying to reinvent and provide for the situation.
Experts also believe there could be a consolidation of smaller players through acquisition by larger players with strong sales, distribution and support networks. Multinational corporations would also look to acquire smaller niche companies to gain more product diversification and lower pricing advantages.
As Raghuram Rajan, a former governor of the Reserve Bank of India, said: “India reforms only in crisis.” Hopefully, India will learn its lesson and we may see a larger investment in the healthcare sector not only in creating infrastructure, but also capacity through people and equipment.