In this article we would discuss about impact of COVID-19 on Valuation of Tangible Assets. COVID-19 has changed our way of living life. As on today (31st August 2020), since more than 5 months have passed after 1st lockdown, we sufficient knowledge and with this gained knowledge we can say that this pandemic would has not only impacted our current lifestyle but it would also leave its very deep scar on our lives in future. It has changed our:
Let’s discuss in detail the impact of COVID-19 on valuation of tangible assets in detail. Before we actually move on to the topic, first let’s discuss some economic indicators in India
We all have been feeling and witnessing many things around us such as job losses, low inflation, less spending on luxury items, entertainment, etc. So I thought of doing a deep diving into various economic indicators first, then let’s discuss their impact.
Most important indicator of any economy is GDP, let’s see the change in GDP(1).
Figure 1 – Change in GDP in last 41 years
As we can see from this adjoining chart, after the structural changes in 1991 and opening of the economy, the Indian economy has been growing between 4% and 9.6% per annum. In next year it is expected that after almost 40 years first time the Indian economy may contract by 5%. Even though it is shown as contraction in the overall economy, few sectors may grow and many sectors may contact. Due to this contractions, the job market in those sector would get impacted which could again lead to lesser spending by the affected persons on luxury items.
Another important indicator in Indian economy is government spending and fiscal deficit.
Figure 2- Fiscal Deficit
As per the information published(1), the tax revenue for the government has declined drastically in first quarter of fiscal year 2020-21 due to lockdown. Due to the above prediction of contracting of economy, in next 9 months the tax collection would be lesser than expected. At the same time to contain COVID-19, the government spending has increased very high and in first quarter itself it is almost reaching to the annual fiscal deficit target (83.2% of annual target). When the government breaches the fiscal deficit limit set in by itself, it would have no option but to order RBI to print more money. This would lead to increase in inflation.
Third important indicator is year-on-year rate of change of deposits / savings in the economy.
Figure 3 – Deposit Increase
Since the start of the lockdown, there is significant increase in the savings rate(2). This could be because of uncertain future people are envisaging and hence they want save the money to take care of their needs if their job goes or if they face any financial issue due to COVID-19 infections (as the COVID-19 treatment costs are very high for common tax paying citizens).
Let’s also see the GDP growth for the world. As we can see from this following chart(3), we can seeing that it is expected that the world economy is set to contract. This would have big impact on the Indian exports to various countries in the world. This would lead to stagnation in those companies and the sectors. Leading to job losses or salary reduction in those companies.
Figure 4 – Gross Domestic Product, Constant Prices
Since there is good monsoon this year, there could be bumper Kharip and Rabbi crops reducing or keeping the prices of agricultural produce same and giving more money to spend in rural area.
From the above for Valuation Of Tangible Assets we can see that due to overall uncertainty, people would keep on saving money till they see stability in the economy and their surroundings. Which means there would be less spending on purchase of luxury items, second homes, purchasing of homes as an investment. As many people may lose their jobs, they may not afford to pay the home loan EMIs (which currently have moratorium). Once the moratorium on home loan EMI is lifted, people who have lost their jobs or have been forced pay-cuts by their companies would try to sell their houses and shift themselves into rented apartment. Many companies are telling people to work from home and it means now the work locations do not matter, people can work from their native places as well and need not come to cities for work. Considering these points, home prices in metropolis, tier 1 and tier 2 cities and may get reduced. Since people would start working from home, may be from their native places, there could be more cash in tier 3 cities, rural area, etc. so the home prices many increase there. As work from home concept would adopted by many companies to save costs, the office space rents and outright sales rates in metropolis, tier 1 and 2 cities would also get reduced.
As regards to the movable assets, people in rural area, tier 1 and tier 2 cities would try to replicate their city lifestyles there and also good farm produce leading to more money in rural area, so items such as car, bike, white goods sales in tier 3 cities and rural area would increase. Overall there won’t be much impact on the demand of these items. In fact now out of fear of COVID-19 many people in city would purchase these items as well. So manufacturing of these items may see increase. So the prices of these items would remain more or less stable.
As regards to the companies, due to COVID-19 situation, many plants are closed for many months and the companies have to pay taxes, incur fixed expenses about employee salary, etc. This would lead to lesser cash available to the companies for capacity expansion, new projects, etc. Also many companies who are producing items which people do not want to purchase (luxury items such as watches, jewelry, expensive cars, etc.) may not sustain this body blow of COVID-19 pandemic which may lead to closing of these companies. So there could be more IBC cases post lifting of lockdown. Making available many capital goods items at cost effective rates. Considering this, there could be reduction in the WPI related to capital goods.
From the above, we can conclude about Valuation of Tangible Assets that the real estate prices in the cities may get reduced, but may increase in upcountry side. The capital goods such as plant and machinery may see reduction in the prices.
Author is a Chartered Engineer or CEng in Mechanical Engineering Field and also a registered valuer with IBBI as well as Government Approved Valuer with Income Tax Department under Wealth Tax Act. Section 34AB
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