V Pattabhi Ram & Sabyasachee Dash
The post-COVID scenario will hurt India’s economy in major ways, but not as a scale as nations like the US would be hit. The US, like India, heavily imports low-cost goods from China. China is America’s third-largest export market. China is the most prominent financier of the US’s budget deficits by subscribing to US T-bills. For sure, if China sneezes, the US catches a cold. And China has more than sneezed now. The impact here could be less.
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Business-wise, India and China don’t have as much contact with each other, as America has with China. To that extent, our economy may be insulated. Also, there is less of passenger travel between the two countries. Yet, India has its trouble spots. Electronics, consumer durables, chemicals, and pharmaceuticals, which we import from China, can witness supply shortfalls. In fact, 67 per cent of the electronic components and 45 per cent of consumer durables are imported from China. Finally, the Elephant exports 34 per cent of its petrochemicals to the Dragon.
Around one-third of machinery and almost two-fifths of organic chemicals that India purchases come from China. For automotive parts and fertilizers, China’s share in India’s imports is 25 per cent. Around 70 per cent of active pharmaceutical ingredients and 90 per cent of individual mobile phones come from China to India. In exports, China is India’s 3rd largest partner and accounts for a 5 per cent share. The impact may be felt in organic chemicals, plastics, fish products, cotton, ores, etc. Also, most of the Indian companies are located in eastern China. A good 72 per cent of Indian companies in China are located in Shanghai, Beijing, Guangdong, Jiangsu, and Shandong. These companies work in various sectors, including industrial manufacturing, manufacturing services, IT and BPO, logistics, chemicals, airlines, and tourism. Some segments of India have been impacted by the outbreak of coronavirus in China, including shipping, pharmaceuticals, automobiles, mobiles, electronics, textiles, etc.
Now, let us look at the sector-wise impact on Indian industry.
Chemical: Some chemical plants have been shut down in China. So there will be restrictions on shipment. Twenty per cent of the production has been impacted due to disruption in raw material supply. Problematic as this is, this is also an opportunity. Both the US and EU will try and diversify their markets. Some of the businesses can be diverted to India.
Shipping: COVID has impacted of cargo movement service providers. As per the sources, per day per vessel trade has declined by more than 75 per cent in dry bulk trade. Auto: Current levels of the inventory seem to be sufficient for the Indian industry. If the shutdown in China continues, it is expected to result in an 8-10 per cent contraction of Indian auto manufacturing in 2020. Pharmaceuticals: Despite being one of the top drug exporters in the world, India’s pharmaceutical industry relies heavily on the import of bulk drugs. This will be impacted.
Textiles: Several textile factories in China have halted operations, which in turn affects the exports of fabric, yarn, and other raw materials from India. Solar Power: Indian developers may face some shortfall of raw materials needed in solar panels and limited stocks from China. Electronics: our primary supplier is China, and we may face supply disruptions due to heavy dependence on electronics component supply directly or otherwise. IT: The New Year holidays in China were extended due to the coronavirus outbreak that adversely impacted the revenue and growth of Indian IT companies. Tourism and Aviation: The inflow of tourists from China and from other East-Asian regions to India will see a sharp drop. Reduction in the urban transaction can lead to a steep fall in the consumption of non-essential goods.
In India, the three major contributors to GDP, namely private consumption, investment, and external trade, will all get affected. Due to weak domestic use and consumer sentiment, there can be a delay in investment.
Post-COVID-19, some economies will adopt de-risking strategies and shift their manufacturing bases from China; may be, to India. Notwithstanding the unfavorable predictions on Indian growth story, for the Indian equity investor, the lesson is that your portfolio can get hit from any side, anytime. Unfortunately, some risks just cannot be wished away.
Moral: Invest; take due care; and trust God.
