COVID-19 could hit the economy hard

China is the biggest source of intermediate products for India that is worth $30 billion a year.

 |  4-minute read |   23-02-2020
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A higher degree of uncertainty surfacing from rising incidence of deaths and people infected by the novel coronavirus (COVID19) across mainland China and rest of the world, is attracting widespread attention and is a subject of grave concern for China-dependent nations.

Health emergency

The presence of a centralised, closed technocratic political system in China has been largely responsible in raising serious doubts on its ability to remain transparent about its efforts to address a public health emergency of such growing magnitude (even though its public healthcare system remains one of the best in the developing world), or even provide credible information on how long it might take for the country to reduce the incidence of virus-affected people or, subsequently, restore already shut down economic activity and ensure freer movement of people. So far, as per the numbers reported by the Chinese government, there have been more than 2,000 deaths, all but six of them in mainland China.

More than 75,000 have been infected with the virus, with over 1,000 cases outside China. What are the economic ramifications of this unforeseen disaster that has already choked global manufacturing supply chains for big multinational companies (including the likes of Apple) inside China, while other countries continue to exercise temporal isolation in terms of allowing lesser mobility of goods and people to/from China? The relative degree of economic impact caused on the global manufacturing and trade landscape from COVID-19 needs to be viewed in comparison with the outbreak of Severe acute respiratory syndrome (SARS) around 2002-03.

The global impact of SARS that also emerged from China was limited. Back then, China was contributing around 4 per cent towards the global GDP and was the fifth largest economy. Now, it contributes an output that is equivalent to 16 per cent of global GDP and is almost the second largest economy in the world. The economic impact of COVID-19 pandemic is therefore likely to be far more detrimental compared to the situation seen during (or ex-post) outbreak of SARS. For worse, with the depth, breadth or duration of COVID-19 not very clear, growing uncertainty will continue to negatively impact trade and export mobility in and across China. Countries within the south-east Asian region, vastly dependent on Chinese products - including intermediary goods and component parts required for further production - may suffer for a longer period of time.

Tangled supply chain

At an international level, it is also important to recognise how China, apart from being a major exporter and importer of goods, remains a vital transit point for many developed nations in facilitating movement of ships, cargo and trade logistics across nations in both South and Southeast Asia. How will India, which is already experiencing a slowdown of its own, be affected by the crisis? The answer to this question culminates more as a mixed response, depending on how long the virus spreads and the disruptive effects on China's trade and inventory logistical networks last.

For now, there are explicit (negative) costs to some critical Indian sectors (pharmaceuticals, agrochemicals, electronic equipment, automotive components, etc), while also offering a thin silver lining of opportunities to some sectors (textiles, garments, etc.) to boost production and replace broken parts of supply chain networks emerging from China's isolation. In terms of a direct impact on India's terms of trade (and imports from China), certain sectors are already taking a hit. India's exposure to Chinese imports has drastically increased in recent years. In 2018 alone, China exported goods worth $90.4 billion to India and accounted for around 14.63 per cent of the exports (CII). China is the biggest source of intermediate products for India that is worth $30 billion a year.

Effects on economy

According to Trade Promotion Council of India, approximately 85 per cent of active pharmaceutical ingredients (APIs) imported by Indian companies are from China. India's agro-chemical industry too has been badly hurt and a longer disruption in supply of Chinese imports (for fertilisers) can substantively lead to price rise once the Kharif season starts in June. At the same time, if Indian companies producing dyes, pigments, basic chemicals such as polyvinyl chloride can boost production in weeks to come, they can benefit by contributing to the void induced in domestic industrial demand.

In consumer durables, Indian manufacturers use 75 per cent Chinese components for items like TVs, and almost 85 per cent Chinese components for smartphones. Important components such as mobile displays, open cell TV panels, open circuit boards, memory and LED chips are all imported from China. It is difficult to substitute intermediary imports in a short span of time. Moreover, at a time when India's consumption demand and (domestic) private investor sentiment is extremely weak, an exogenous shock from a pandemic like this, can further dampen industrial production levels. To offset short-term cost effects, the Indian government can consider cutting down import duties imposed on some of mentioned products (especially for intermediate goods like electrical equipment, automotive components, etc).

This will help producers to save costs in the short term. Simultaneously, offering a few lines of credit with a backstop facility of guarantee for companies, which have the capability to start immediate production of substitutable items can feed into domestic consumption, and help maximise productivity gains.

(Courtesy of Mail Today)

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Writer

Deepanshu Mohan Deepanshu Mohan @prats1810

Assistant Professor of Economics, OP Jindal University; Director, Centre for New Economics Studies; Visiting Professor, Department of Economics, Carleton University

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