Bracing for impact
Almost two decades ago, when my wife and I were setting up house, we decided to get ourselves one of those new — at least for those days — flat-screen TV sets. Everything that we saw, from the brands we knew and trusted, was way beyond our budget. Until, the friendly salesman pointed to us a Chinese TV set. It cost us just about half of what the big boy brands would have. And, it would have probably lasted forever, had I not, quite by accident, upturned a vase full of water into its circuitry.
Since then, Chinese products have taken over the world, including India. One in every five things that Indian consumers or companies bought, in the first nine months of this fiscal, were imported from China, and it is most likely that Chinese components made up a big chunk of what was imported from the other countries as well. So, when China gets a bad bout of viral fever, it is unlikely that we will stay immune.
For starters, China has tackled coronavirus by shutting down entire cities. While that helped stall the spread of the virus, it has taken a big economic toll. China watchers say that the world’s second largest economy could end up shrinking in the first three months of 2020, compared to the same period last year. A new Nomura report suggests that the best-case scenario is that China’s GDP, in the first quarter, will remain at the same level as last year, and the worst-case scenario is a 1% contraction.
Why should that happen? It’s because China has had to shut down factories, shops, offices and entire transport systems. Its massive transport network has been badly affected. Migrant workers, who had gone to their hometowns for the Lunar New Year, were locked in, and most have still not made it back to the factories that employ them.
Shops are closed, goods are not being shipped. Restaurants and hotels are shut. Many industries and services have run to a standstill. In some places unsold inventories have piled up, while in others, raw materials haven’t arrived, so production lines have halted. That means, companies have had to cut back on workers, even if temporarily. And, the unemployed have cut back on consumption.
What does it mean for India? India’s manufacturing has a significant dependence on Chinese imports, especially in the electronics industry, because we do not have the expertise to produce precision electronic parts at home. In the first nine months of 2019-20, we have imported electrical machinery, electronic components and equipment worth $15.4 billion. In the same period, India has also imported industrial machinery and consumer appliances worth $10.5 billion and organic chemicals worth $6.2 billion. The active ingredient of some key antibiotics is also imported from China.
Most factories keep a 45-day stock of things that they import, and many crucial inputs have stopped coming from China for the past month or so. In another 10-15 days, many companies will run out of key raw materials. They will have to start looking for alternative sources, and negotiate new contracts. One reason China sells so much to the world is that it makes everything available at low prices. So, if Indian companies have to switch to other countries for inputs, costs might shoot up.
This is bad news, especially when our economy is already stuck with a severe demand problem. CMIE data shows that India Inc’s sales — both in terms of money and volumes — have shrunk for two consecutive quarters, in 2019-20. Sales volumes of non-financial companies shrunk by 0.6% in July-September 2019 compared to the same period in 2018, and by 3.6% in October-December 2019 compared to the third quarter of the previous fiscal. So, even though they have cut down prices, sales have dropped.
Now, imagine what would happen if raw material costs go up because China is unable to ship things in time. Companies will face higher costs, but given that there is no demand for their goods, they won’t be able to raise the price at which they sell. The profit squeeze will force many to cut back on production, fire workers and hold back new investments. As people lose jobs, or face pay cuts, they will have to reduce consumption, especially on durables and luxuries. That will make India’s demand crisis even worse.
This is just the China impact on India. We have the coronavirus in India too. It’s just been a few days, but the impact is already being felt by the tourism industry. Bookings for both inbound and outbound travel had already slowed down last month. MICE (Meetings, Incentives, Conferences and Events) travel is also expected to slow down sharply, as companies prepare for an outbreak. Even if the virus doesn’t spread, panic will, and people will avoid malls, restaurants and cinema halls. Discretionary spending will take a hit.
Some experts say, the outbreak could be a big opportunity for India to replace China in the export market. This is wishful thinking. Over the past four decades, China has invested heavily in manufacturing and infrastructure, making it the factory of the world. India has developed no such expertise. To expect that we will suddenly be able to put capacities in place to replace China is naive, especially since there is no guarantee that the world will continue to buy from India, once China’s factories start functioning again.
If the contagion spreads fast in Europe and the US, we might face another global slowdown. Nomura’s worst-case scenario for that suggests global GDP growth for 2020 will drop from an estimated 3.1% to 1.6%. Although India is not that dependent on international trade, and might even gain from a possible slump in oil prices, our stock markets will be badly hit. The coronavirus scare has already caused a big slide in the Sensex from its January peak, a global slowdown could cause a bloodbath on Dalal Street.
The author is a senior economic analyst
