Coronavirus: Contagion now threatens the health of Indian economy

Overdependence on Chinese market further slows down the economy, hits travel, auto and pharma industries; stokes fears of the global recession  

If further proof was ever needed that the world indeed is a small place, this is it. The impact of the coronavirus (COVID-19) outbreak in China’s Wuhan city is such that the world is now on notice. This is a contagion in ways more than one.

The reasons are not difficult to fathom. China, the factory to the world, accounts for 16 per cent of the global GDP and most high-impact economies depend on it for supplies. China has doubled the trade with the rest of the world than it had in 2003 when the SARS epidemic hit the region.

Though one has to acknowledge the COVID-19 impact far outstrips that of previous outbreaks, be it SARS in China, Hong Kong, and Canada in 2003, MERS in South Korea in 2015, or for that matter the Avian Flu in the US way in 1957, the lack of preparedness across nations is surprising.

Clearly it is regions with fungible borders like Europe that have been the hardest hit apart from establishments and businesses with highly mobile workforces, like in the Indian tech industry.

“From an economic perspective, what started as a temporary regional shock now seems at risk of transforming into a more protracted global phenomenon—with possible effects on public confidence and supply chains well beyond the worst affected areas,” Goldman Sachs analysts said in a note on the impact of COVID-19 last week.

Recession ahead?

Getting into the New Year, the global economy seemed to be primed to emerge from the sluggish phase it faced through 2019, thanks to trade wars and geopolitical tensions, not to speak of the uncertainties in the run-up to the US elections later this year. But, coronavirus and the mood over the past one week have clearly revived fears of a recession.

The same Goldman Sachs’ analysts quoted above dubbed COVID-19 as 2020’s Black Swan moment and predicted a contraction in global economic growth at 5 per cent and 2 per cent in Q1 and Q2 of 2020 respectively. Though they stopped short of predicting a recession, this is in sharp contrast to the confidence shown by them late last year of a revival in global growth at 3.4 per cent in 2020.

Multilateral bodies are more direct in predicting dire times ahead.

The Organisation of Economic Cooperation and Development (OECD) estimated a sharp slowdown in the world economy in the first half of 2020, dragging the full-year growth to 1.5 per cent, half of what it had projected before the virus outbreak. The intensity of the impact would be felt more by northern advanced economies hit by confidence, travel and spending.

The United Nations Conference on Trade and Development (UNCTAD) on Wednesday (March 4) said global trade had taken a $50 billion-plus hit in February alone on account of the factory shutdowns there. India, with a $348 million hit on its trade, would be among the top 15 countries to be negatively impacted by COVID-19.

Further, worries of a global recession strengthened on Tuesday (March 3) when the US Federal Reserve, in a surprise move, executed a half a percentage point cut in interest rates to put more money into the US economy and encourage spending. This was the first time since the financial crisis of 2008 that the US Fed resorted to such an emergency cut. But fears continue to stalk the markets.

Travel bans

The first and most visible casualty of COVID-19 has been the global travel and tourism sector with most regions of China going into lockdown while many nations curtailed contacts with affected countries. A spate of meeting cancellations have also plagued the global MICE industry.

The global airline industry had been under pressure through 2019. COVID-19 turned the screws deeper. The first to bite the dust was UK’s Flybe, a struggling airline that was talking to the UK government for a bailout package since January. The regional airline announced on Thursday it would go into liquidation.

This prompted the International Air Transport Authority (IATA) to warn that airlines stand to lose $113 billion in sales if COVID-19 continues to spread around the world. The commercial airlines industry revenues in 2019 were pegged at $838 billion. Just two weeks ago, IATA had said that lost sales would be in the range of $30 billion. In comparison, the SARS outbreak in 2002-2003 had resulted in a 45 per cent drop in passenger demand and a revenue hit of $10 billion to the industry.

Over 70 international airlines cancelled all their flights to and from China on news of the virus while immigration and quarantine restrictions in over 60 countries took their toll on the industry.  It may not be long before other weak airlines, including in India, spiral to the bottom. Shipping lines are going through similar rough waters with global freight and container traffic taking a hit.

Skidding wheels

China is the world’s biggest carmaker and market accounting for 23 per cent of global sales. Wuhan in Hubei Province, the epicentre of the coronavirus outbreak, is known as the car city, thanks to its huge factories. It is also the biggest supplier of car components to factories across the world. Chinese car sales in February plummeted 92 per cent after the coronavirus outbreak.

Hyundai and Kia reportedly had to stop production lines in Korea while Nissan said it would stop production at its Japanese lines. Likewise, automakers in other regions said production would be curtailed. Indian automakers import 10-30 per cent of components from China. As a result, ratings agency Fitch Solutions said it expected Indian auto production to contract by 8.3 per cent in 2020 on account of COVID-19. Just about revering from a bad 2019, when growth contracted 13.2 per cent, the sector will be under tremendous pressure.

Pill chill

China also accounts for a majority of the global drug ingredients supplies to most major medicines manufacturers across the world including Indian drug makers. So much so that Indian import of Active Pharmaceutical Ingredients (APIs) that go into the manufacture of many critical antibiotics have been on a steady rise over the years and today account for almost 70-85 per cent in consumption value.

This makes India highly vulnerable to price fluctuations and increases the risk from the shutdown of Chinese outfits. Bulk drugs and drug intermediaries from China in fact account for almost 3 per cent of India’s total imports. It is no surprise then that Chinese suppliers jacked up their prices within days of COVID-19, making Indian importers pay almost twice the price earlier. What is more worrisome is the fear of stocks running out by end of this month with many of the supplier units, particularly in Hubei, not expected to open till mid-April.

Apex industry body the Confederation of Indian Industries (CII), flagged India’s high dependence on Chinese APIs. There is a need to de-risk and set up or utilise existing API manufacturing units within India for a larger share of the API supplies, it said in a note to the government of India late last month in the wake of the COVID-19.

Tech blowout

The COVID-19 impact on the tech sector has been the most pronounced.  Apple Inc. was the first to flag the downside saying it was not expecting to meet its second-quarter financial guidance due to the outbreak. Apart from sourcing most of the components for iPhones and other products from there, Apple also generates 15 per cent of its sales from China.  Microsoft and Nvidia followed suit, adding that they too expected to miss guidance this quarter.

Where the Indian electronics sector is concerned, a similar story is playing out as in bulk drugs.

Some component importers across the board said they expect five-week delays in supplies reaching from Chinese factories. India has emerged the second-largest mobile phone manufacturer after China, value addition is still minimal and most components are still sourced from outside. Likewise, supplies of printer parts to PC components and printed circuit boards are at risk if factories in China do not open soon. India imported electrical and electronic equipment worth US$23.24 billion in 2018 from China.

The silver lining

The pall of gloom notwithstanding, there is a silver lining. Every economic incident has led to innovations and rear-guard action against disruptions. For instance, the 2003 SARS crisis saw the emergence of e-commerce in a big way paving the way for the success of the likes of Alibaba. Now with nearly 300 million students out of school due to COVID-19, perhaps a beneficiary from the current episode could be the e-learning industry. And then companies will be forced to reassess their global supply chain strategies to reduce overdependence on Chinese companies and revisit their management practices as in the case of the Indian pharma sector and electronics components manufacture.

Clearly this is too good a crisis to waste. Not to learn from it would be unpardonable.

(The writer is a Hyderabad-based journalist and has covered business and technology trends for the last three decades)

This analysis first appeared on Federal