Implications of the Covid-19 virus on the global & Indian economy.
“The single biggest threat to man’s continued dominance on the planet is the virus”
- Joshua Lederberg (Nobel Laureate)
In an already bleak landscape where negative growth, falling GDP figures, shrinking employment & trade wars were bludgeoning the global economy, the news of a super-virus capable of infecting two thirds of human civilization could be the straw that break’s the camel’s back. With delays by China to inform the world & with countries like the US being flippant with their outlook, fear & panic have already taken a stranglehold over global markets. The Coronavirus, or Covid-19, has very quickly eclipsed its predecessor SAARS in its ferocity & capability to adapt. The virus originated in Wuhan in the Hubei province of central China, which is widely known for its shipping, transportation & industrialization. This has, unfortunately, made China’s 7th most populated city, one of the worst locations by way of its international exposure & reach. Exports out of China, especially high in the automotive, electronics & pharmaceutical sectors, have come to a grinding halt.
China seems to be in the middle of a bruising year, starting with the trade war with the US & now the outbreak of COVID-19. Exports from China play a very large part in the manufacturing sectors of most industrialised nations, effectively forcing a shut down on production by many automotive companies due to the lack of essential goods required to keep the factories working. This would lead to cascading effect of supply not meeting demand. Also, loans taken by corporates globally would go subserviced, leading to much higher non-performing assets for medium to large scale industries.
This week has seen global stock markets take a nosedive after the virus was detected in at least 56 countries. The Dow Jones plummeted 12 %. In Europe, British stocks dropped 11 %, Germany was down 12 %. Asian markets fared no better: 9% in India, 10 % in Japan and 8 % in South Korea. Consequently, companies have begun readjusting their sales & profit forecasts, with a keen eye on how the pandemic is progressing. Economists have begun predicting that the global economy would come to a crawl, with millions around the globe drastically reducing shopping, travel & general consumption. Some are even going as far as to predict a global recession. In the worst-case scenario, if the Coronavirus spreads more rapidly across countries, growth could slow to a near halt in the United States & many other countries for several quarters in 2020. 2019 has seen a sluggishness in growth in stock markets, and the virus has acted as the trigger for a major sell-off.
The deeper issue with the current economic situation in the US is that it differs from the previous recession of 2008-09 which was caused by a lack of demand. Back then, banks were collapsing, the housing sector was imploding & people had lesser money to purchase even necessities. At the other end of the spectrum, the current crisis triggered by the virus is one of lack of supply. China’s industrial output shutting down has backed up the supply chain of goods essential for production across the world. This, along with restrictions on travel, both personal & official, is causing businesses to produce lesser goods than they are capable of producing & selling to meet demand.
Thanks to India’s large domestic market demand & falling oil prices, we have, to some extent, been insulated from the global economic slowdown. But two of India’s largest sectors, automotive & pharmaceutical, rely heavily on Chinese raw materials & are starting to feel the squeeze. This could see prices of various commodities rise sharply in the short-term, causing a rise in inflation in India. In the longer term, we will have to look at de-risking our supply chain, relying lesser on China for a majority of our raw material requirements. On the flip side, this could be an opportunity for domestic companies to provide raw materials as replacement to Chinese imports.
Even before the outbreak of the virus, India had been grappling with contracting factory output & lower consumer spending. Today, political instability & sectarian violence in New Delhi has left dozens dead and cast a shadow over India’s markets.
The silver lining here is that India has, for a long time, wanted to replace China as a value chain producer for industries across the globe. Despite a wasted opportunity during the US-China trade wars, India has been given another chance to grab a place in the supply vacuum created by the shutdown in China. Our government’s push for increased exports, Make in India, could finally get the wind under its wings to capture China’s displaced exports. The hurdles here are a low risk & reward appetite of Indian companies currently along with limited capital to meet the demand in production left by China. What remains to be seen is whether banks & international investments can step up & provide the capital that this push shall undoubtedly require.
- Adwait Venkitachalam