Is Indian Economy heading for Major Shock Due to China’s Coronavirus?

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(Brig (retd) GB Reddi)

Indian economy is heading for major shocks due to the effect of China’s economic slowdown due to Coronavirus, which is already being felt across global supply chains and in commodities markets.

No escape but for India to contain and neutralize the shock headlong by highly imaginative and bold initiatives to exploit opportunities.

Basic facts that are irrefutable include: China is the world’s second-largest economy what with GDP at $14.3 trillion (99 trillion Yuan) in 2019. China’s pledge to doubling of its GDP since 2000 requires sustained growth, which is impossible.

Next, exports to China from India decreased to 105.98 INR Billion in December from 116.23 INR Billion in November of 2019; and, Imports from China to India decreased to 356.77 INR Billion in December from 366.35 INR Billion in November of 2019. Thus, bridging the trade deficit gap remains a major challenge.

Most critical to recognize is that major commodities exported from China to India include: Electronic equipment – Smart phones; Medical and technical equipment; Machines, engines, pumps; Organic chemicals; Fertilizers; Iron and steel; Plastics: Gems, precious metals; Ships, boats, and many others.

De facto, China dominates Lithium ion batteries production what with 73% of global manufacturing capacity. And, number of lithium-ion batteries imported by India imports of lithium batteries quadrupled to 713 million in the last fiscal year, from 175 million in 2016-17. In terms of value, imports more than tripled to $1.23 billion in 2018-19, from $384 million two years earlier.

Add to it, China is the dominant supplier of “Rare Earth Elements” and top supplier that hold key to production of hi-tech devices to include: wind turbines; cordless power tools; smart phone, CD/DVD and iPod, earphones and speakers; energy efficient light bulbs; LCD and plasma screens; Hybrid vehicles and magnets; catalytic converters and cameras; rechargeable batteries; Missile guidance/defense etc.

What is vital to admit is that the assembly of mobile phones in India has emerged as a bright spot for the economy over the past four years – 67 percent of smart phone market. But, India still relies on imported parts from China for the assembly because of the lack of manufacturers as of 2018.

The simple question to appreciate is “Why China cannot easily bounce back quickly?” Reasons are simple. Quarantine measures in numerous cities and towns are in force. International air travel stands disrupted. Numerous airlines have canceled flights to China, with some not planning resumption until April.

Consequently, it has adversely impacted supply chains, tourism and commodity prices that are dampening growth prospects world over. In particular, the virus’s ripple effects are being felt in commodities markets, like crude oil and copper. Prices for oil in New York and London are both down about 15 percent since the outbreak first, which is bad news for oil-dependent economies in Russia, the Middle East, and even the U.S. shale patch.  U.S. farmers and manufacturers who had hopes that the “phase one” trade deal just reached with China are still waiting for orders to materialize.

Add to it, domestic travel restrictions are adversely impacting workplace staffing. The prolonged shutdown over the Lunar New Year holiday has already played havoc with return of migrant laborers to their work places.  Many small and medium-sized enterprises have been disrupted and closed down due to non availability of workers in factories. Even in municipalities that are nominally back at work, such as Beijing, the streets and subways remain empty. The entire production cycle across most industries is likely to be delayed.  As per experts, the impact could last into the third quarter of 2020.

Giant international firms like Apple and Haidilao have temporarily shut offices and production until further notice. Face book, for instance, has warned that it could impact production of its Oculus Quest virtual reality headsets. Nissan manufacturer has closed its factory in Japan. Many other U.S. businesses reliant on Chinese suppliers are facing production and sourcing constraints.

Furthermore, China’s confidence is also rattled by a yearlong trade war with the United States that left lots of hefty tariffs on Chinese exports.

In sum, economic experts believe that a rapid deceleration in growth in the first quarter of 2020 is likely and gradual stabilization may only take place for the rest of the year. It is likely to rebound later in the year only to finish lower than the 6 percent increase in GDP China posted last year.

Viewed in the above backdrop, even a layman with some commonsense will point out that Indian economy too would suffer shocks due to China’s Coronavirus outbreak. As on date, Indian economy is yet to recover from its slowest growth of 4.3 percent in the December 2019 quarter ending.

If Chinese factories extend for a longer period, the flow of high-end imports of technology inputs to India will further slow down manufacturing.

Let me highlight that India’s economy has become highly dependent on China. Trade with the world’s second-largest economy has expanded more than 18 times to $87 billion in 2018-19 since 2002-03. In particular, India depends on China for imports in key sectors to include: Smartphone products; electronic products; pharmaceutical products; and so on

For example, despite the government’s Make in India initiative, nearly 80% of components required for making phones in India come from China. With components available as on date, manufacturers will only be able to clear backlogs; but not in a position to take new orders unless the situation improves, as per industry sources.

So also, the TV manufacturer may not be in position to meet the increasing demand due to short supply of components.

Worst to suffer could be automobile manufacturing due to paucity of electrical and electronic parts such as sensors, power controls, engine control units, motors and batteries that are imported from China. As per industry sources, if the threat goes out of control, then all major automakers and their suppliers worldwide would get affected due to its integrated manufacturing process:  “if the supply of one part stops, the entire vehicle assembly stops.”

Also, as per automobile industry sources, the outbreak could not have come at a worse time as manufacturers are transiting to the stringent Bharat Stage-VI emission norms amid a sales slump. If there is a shortage of parts, manufacturers’ investments and planning to comply with the emission norms from 1 April would be disrupted.

Of course, Indian retailers of consumer goods have started negotiations to source goods locally: an opportunity to exploit. “Our internal mandate is clear that whatever little dependency we have on Chinese imports, we will try and convert it into domestic sourcing,” said J.P. Shukla, co-founder and chief executive of 1-India Family Mart.

One of the biggest concerns from the China lockdown is that it could lead to a shortage of medicines and a spike in prices. In 2018-19, Indian companies imported bulk drugs and intermediates worth about $2.4 billion from China, which was a majority of the total imports. As per Kedar Upadhyay, chief financial officer of Cipla Ltd, “There are reports of specific API (active pharmaceutical ingredient) prices having gone up, but we have sufficient store of ingredients for the next couple of months. We’re hopeful that the situation alleviates and eases out by then. The industry might have to prepare with alternatives otherwise.”

Thus, P Chidambaram & Co must stop attributing the state of Indian economy in the ICU status due to Modi led BJP faulty policies and strategies. Global economic recession or downslide is real as on date and so also it will impact manufacturing of industry that makes nearly 30 per cent contribution to economy; but may not impact services sector that contributes nearly 54 percent and agriculture around 16 percent.

Pseudo economic lawyer-turned-doctor like P Chidambaram, on bail facing corruption charges, and responsible for handing over India’s economy in total mess, may refrain from spreading fraud news with a view to remain political relevant through partisan media.

However, the major challenge faced by Modi-led BJP government is to stabilize the economy at GDP growth rate around 4.5 percent in the first and second quarters and facilitates GDP growth between 5 or 6 percent by third and fourth quarters of 2020.

More bold initiatives are, therefore, an imperative. Large stimulus dose particularly in infrastructure projects, encouragement and acceleration of “Made by India” enterprises, attractive FDI policies, looser monetary policies to stimulate demand, more subsidies and labor law reforms hold the key to sustain GDP growth between 5 and 5.5 percent during 2020.

Can Modi-led BJP bite the bullet? No escape but to opt for bold measures to overcome the shock due to China’s Coronavirus pandemic.

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