We must brace for the economic fallout of coronavirus
On the deadliest day of the coronavirus outbreak, with more than 1,000 people dead so far, it sounds cruel to speculate on its long-term impact on Indian business. Yet it must be done, especially after the World Health Organization’s warning that what we are seeing of cases outside China may just be the tip of the iceberg.
Sadly, in the face of what threatens to be a global disruption of gargantuan proportions, Indian business leaders have maintained a studied silence all this while. Hopefully, that is merely an attempt to maintain calm in public, while internally there is more awareness of the perils ahead and emergency plans are being drawn up.
If, however, the hope is that the storm will pass, there could be a huge price to pay because China today is a bigger contributor to global growth than the US, Europe and Japan added together. It is a given that the lockdown in Hubei province will have a significant impact on the $13.6 trillion Chinese economy that is today the fulcrum around which global trade growth turns. The impact on China’s financial markets has been immediate and the erosion of market value will cast a shadow over investor sentiment. The beleaguered Chinese banking system is also likely to take a hit, which will affect credit. The real impact will start showing only later in the year as consumption slows down. In a worst-case scenario, if the virus cannot be contained by the end of 2020, China’s gross domestic product (GDP) rate of growth could fall below 4.5%.
The knock-on effect of that on Indian industry will be enormous. Of the $87 billion of India-China bilateral trade, a vast majority is imports into India largely in the form of goods related to capital equipment, machinery and electricals, as well as intermediate and consumer goods such as smartphones where Chinese companies account for more than half of India’s vast growing market.
Crucially, Chinese imports are powering India’s pharma industry and the vast solar power revolution underway. Mint reported last week that solar power project developers in India which are dependent on Chinese supplies for 80% of their solar cell and module requirements, which in turn account for nearly 60% of a solar project’s total cost, could declare force majeure on meeting project completion deadlines because of supply disruptions. Given India’s ambitious target of upping solar generation capacity to 100 gigawatts by 2022, that would be a serious setback. Blazing red signs are flashing in pharma, too. With about 85% of active pharmaceutical ingredients used by Indian pharma companies coming from China, the sector’s exposure to a disruption of raw material supplies is painfully evident now.
So far, the physical threat of the virus in India seems to have been contained and the government is confident of handling the outbreak. There is, however, a huge difference between managing the health aspect of the virus and handling the economic fallout of a massive dislocation of global trade.
Past outbreaks of such epidemics are not enough of an indicator for two reasons. The Chinese economy is now a much larger part of the global economy than ever before, and India, too, is integrated into global supply chains in a way that makes the splendid isolation of the past impossible. Chinese researchers Wuqi Qiu, Cordia Chu, Ayan Mao and Jing Wu in a paper titled The Impacts On Health, Society, And Economy Of SARS And H7N9 Outbreaks In China estimated that the global macroeconomic impact of SARS was $30-100 billion and an estimated decrease of 1% of China’s GDP. This was at a time when its GDP was galloping at 10%. Today, it is down to 6.1%, though on a much higher base, of course.
Much would depend on how bad the outbreak is. While China has since become much better prepared to handle such situations, given the number of fatalities and ease with which the virus seems to be travelling, it is going to be extremely difficult for other countries to decide when it is safe to travel to the mainland and resume normal interactions.
In a March 2016 paper titled The Inclusive Cost Of Pandemic Influenza Risk, Victoria Y. Fan, Dean T. Jamison and Lawrence H. Summers wrote: “A small likelihood exists that the world will again suffer a very severe flu pandemic akin to the one of 1918. Even a moderately severe pandemic, of which at least 6 have occurred since 1700, could lead to 2 million or more excess deaths. World Bank and other work has assessed the probable income loss from a severe pandemic at 4-5% of global GNI.” The 1918 Spanish influenza outbreak led to the death of nearly 50 million people. Better health infrastructure and the Chinese ability to quarantine an entire province will surely ensure that the number of deaths are not anywhere near those scary numbers.
However, the impact on the global economy will be worse. Already, we are seeing effects on the shorter supply chains, as companies such as Hyundai in South Korea and Nissan in Japan have been forced to suspend production in the absence of crucial components from China. According to DHL Resilience360, a supply chain risk management software platform that helps businesses predict, assess and mitigate the risk of supply chain disruptions, China’s worst affected provinces and cities are considered vital to global technology, apart from the auto, energy, chemicals and pharma industries.
All these sectors are crucial to India. It is time to draw up contingency plans.