An Economic Coronary – The Big Story News

Just as the war clouds in West Asia seemed to be receding, with the US toning down its tirade against Iran, calamity appeared on the horizon. As of March 11, the novel coronavirus — COVID-19 — had infected 121,312 people in 120 nations and territories, with over 4,379 deaths reported worldwide. China, which saw 80,788 infected and 3,158 fatalities since the outbreak began in December 2019, has begun to see a lull in the incidence of the disease. But elsewhere, it is still on the rise. Korea has seen 7,755 cases, Italy 10,149, Germany 1,622, the US 1,016 and the UK, 383. India has seen 62 cases with no casualties reported yet. While the disease and deaths pose a huge social challenge to governments worldwide, the economic costs are already significant. On March 4, the United Nations Conference on Trade and Development (UNCTAD) said the slowdown in manufacturing in China owing to the COVID-19 outbreak would cause a $50 billion disruption in trade. It estimated the impact on India alone at $348 million (Rs 2,575 crore)-an enormous sum, but dwarfed by the $15.5 billion impact on the EU and the $5.7 billion hit on the US. However, Union finance minister Nirmala Sitharaman has said there is no need to panic about the economy, with PTI quoting her as saying that coronavirus will be a challenge for India only if the situation is not resolved within three weeks.

THE BUSINESS FOOTPRINT: The impact so far is mainly from supply-chain disruptions in China

It used to be said that if America sneezed, the rest of the world caught a cold. It now seems to be the same with China. From 8 per cent in 2002, China’s share of the global economy has gone up to 19 per cent. Following the outbreak, the country saw an 80 per cent loss in production in February, according to the Indian Cellular and Electronics Association, which improved to 60 per cent in March, a loss of a month and a half of production, or 12.5 per cent of the total annual manufacturing output. This has had a multiplier effect on transport, warehousing, manufacturing, sales, marketing and advertising, distributors, retailers and core sectors such as coal and power. Airlines could lose as much as $113 billion in global passenger revenues if the virus continues to spread, says the International Air Transport Association.

India imported $70.4 billion worth of goods from China in 2018-19 and exported $16.8 billion to it. A disruption in trade will leave consumer durables, electronics and solar panels the worst hit, as these depend heavily on Chinese imports, as per a Crisil report in February. “About 90 per cent of the components of mobile and electronics are imported, largely from China,” says N.K. Goyal, chairman emeritus of the Telecom Equipment Manufacturers Association of India. “Coronavirus is likely to affect the supply chain. The orders are placed 2-3 months in advance. The shortage will be felt in the coming days.” It will likely result in production of telecom equipment being scaled down, leading to potential job losses, he adds. India also impor­ted auto components worth $4.6 billion (Rs 34,040 crore) from China in fiscal 2019. “The outbreak will affect the economy overall, though it hasn’t been much of an issue for our company yet,” says R.C. Bhargava, chairman of Maruti Suzuki. S. Muralishankar, president of the Association of Indian Forging Industry, a major supplier of auto parts, says that although some areas where auto components are manufactured have returned to normal, shipments will resume only from March 15. “It will take 4-5 weeks for [the shipments to arrive]. There are also reports of huge pile-ups at ports, causing further delays,” he says.

Pharmaceuticals is another import-heavy sector for India-about $4.5 billion (Rs 33,300 crore) worth. Of that, $2.5 billion (Rs 18,500 crore) worth are ‘active pharmaceutical ingredients’, or APIs, from China. Udaya Bhaskar, director-general of the Pharmaceuticals Export Promotion Council, says if the disruption in China continues for 3-4 months, it could derail businesses here. “Most exporters have an inventory of two months or more,” he says. However, he adds, except for Wuhan, manufacturing units in most other provinces have restarted shipme­nts. “In the coming week, 25 per cent of inventory will be dispatched.”

G.V. Prasad, co-chairman and CEO of the Hyderabad-based Dr Reddy’s Laboratories, acknowledges the disruption in the pharma supply chain. “As of now, our company is reasonably covered in terms of raw material thanks to the buffer inventory. However, if manufacturing does not resume in China in the next four weeks, we will see supply disruptions. Our business in China is impacted too-we are unable to ship products,” he says.

China also supplies 80 per cent of the solar cells India needs. Despite Chinese solar panel makers resuming production, Indian players are not sure if supplies will resume in the next 2-3 quarters. Indian solar firms are thus at risk of missing deadlines and facing fines and penalties. Sunil Jain, CEO of the New Delhi-based Hero Future Energies, says companies will require financial support for working capital and interest payments due to these delays. Reports from China suggest that many solar panel factories are running at 60 per cent capacity. The outbreak has disrupted the logistics sector as well. Cargo movement from factories to ports — which earlier took about 36 hours-now takes over eight days. Fewer truck drivers, more checkpoints, shortages at Chinese ports — it’s all adding up. Equipment suppliers have defaulted on long-term shipping commitments, forcing shipping firms to look for spot bookings. “This requires cash payments. The suppliers are not in a position to pay in cash, neither are we,” explains a solar firm CEO. Shipping costs have gone through the roof; air cargo services, too, have come to a halt in China.

The disruption in supply chains will have a direct bearing on manufacturing in India. Depleting inventories have forced production cuts. And as if the outbreak in China were not enough, fresh COVID-19 cases in the US, Europe and elsewhere have dealt a severe blow to several businesses, from automotive to garments to gems, jewell­ery, even coffee. Cancelled business meeti­ngs, travel plans and events have hit the airline and hospitality sectors. The impact is also being felt on Dalal Street-on February 28, Rs 5 lakh crore of investor wealth was wiped out as markets crashed on coronavirus concerns. Plunging oil prices, coupled with the disease scare, led to more market mayhem on March 9, when the Sensex plunged over 2,300 points, its greatest-ever single day fall.

NEW NORMAL The ubiquitous protection mask that won’t serve. (Photo: Chandradeep Kumar)

More pain in sight

The spread of the virus will mean a difficult two quarters for the Indian economy, already in a slump, with GDP growth at just 4.7 per cent in the third quarter of this fiscal. “India’s problem is much bigger because we are already in a slowdown and there is a recession in exports and manufacturing. Trade, transport, hotels and tourism have all been feeling the impact,” says N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy in Delhi. For Jayant Sinha, chair of the standing committee on finance, it is not just the short-term impact of major supply shocks. “We have to consider the dramatic decline in demand of all kinds of goods and services.” “The impact on the Indian economy will be substantial, since value chains are intimately linked to China,” says Biswajit Dhar, professor at Jawaharlal Nehru University. This crisis, he says, is revealing the fragilities of globalisation. “There are some sectors in which India should not be dependent on global markets. We took that decision with foodgrains, but we have not done it in healthcare. Our pharma industry depends completely on China.”

China is also among India’s biggest markets for products like cotton yarn, sea food, petrochemicals, gems and jewellery. The coronavirus crisis has left exporters reeling. “If the situation continues, the fisheries sector may incur a loss of more than Rs 1,300 crore,” says Charles George, president of the Kerala Fishermen United Front. India exported Rs 5,673 crore worth of marine products to China in 2018-19. Similarly, gems and jewellery exporters in Jaipur say the cancellation of four major trade events between February and April caused an estimated loss of Rs 8,000-10,000 crore in terms of business opportunity.

WHAT NEXT?

To grapple with the crisis in the electronics and telecom equipment space, Reliance Jio is now considering a multi-vendor strategy. Its current 4G vendor, Samsung, may not be able to ensure supplies, with the virus spreading to South Korea too. The challenge is greater for Airtel and Vodafone, who buy most of their equipment from Chinese majors Huawei and ZTE. They could switch to European suppliers Ericsson, Siemens and Nokia, but that could be expensive.

The problem is even worse for smaller players. In the past few years, Noida’s industrial areas have become home to many small electronics manufacturers who import equipment in semi or completely knocked down form from China. The dependence on China has precipitated a crisis across the value chain, even leading to the electronics and IT ministry off­ering to airlift the required components from factories in Guangzhou and Shanghai. Manufacturers had a three-month inventory due to the Chinese Lunar New Year festivities ending mid-February. The delay thereafter could push up prices from April. “The disruption is real. We don’t know how long it will take to return to the pre-coro­navirus situation. This is the time for Indian players to step in and fill the gap,” says Sunil Misra, director-general of IEEMA, an industry lobby for Indian electrical and electronics makers manufacturers.

Opportunity in crisis?

What has aided China’s growth as a global manufacturing hub is the way it has promoted its institutions and value chains, developed skills and fostered partnerships between industries and the government. India, meanwhile, is still struggling with shopfloor skills. “In everything needed to propel industry — from human to physical capital — we seem to be lagging years behind China,” says Dhar. However, the current crisis is forcing Indian companies to diversify their supply chains. Sources in the electronics and IT ministry say India is also receiving interest from several large electronics makers looking to expand. “They are working on a scheme meant specifically to attract more component manufacturing. We are looking to meet 70-80 per cent of the demand in the component market locally and export in the next 2-3 years,” the sources say.

What options does the government have to soften the impact? It could frontload expenditure, accelerate the disinvestment process, implement the proposed scrappage policy for the auto sector; bring in tax cuts for aviation and hospitality sectors, and cut GST rates for restaurants. It could give a tax holiday to sectors likely to be worst hit by the pandemic.

Anand Mahindra, chairman of the Mahindra Group, wants India to treat the situation as an opportunity. ‘Step up sanitisation and the Swachh Bharat movement, which will make India more appealing to tourists looking for alternatives to China,’ he tweeted on March 9. Now may be the time to jumpstart the ‘Make in India’ initiative that has been in a lull. Desperate times call for desperate measures.

(-with Amarnath K. Menon, Rohit Parihar and Jeemon Jacob)

Source INDIA TODAY

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