The outbreak of Covid-19 in China is expected to have a significant global economic impact:
- Economic slowdown – China’s GDP is expected to decelerate by 1-1.25 percentage point over 2020 due to halting of economic activities in key production centers. As of 14th February, 48 Cities and 4 provinces are in lockdown mode. This will have knock-on impact on global economic growth as China accounts for 19.71% of global GDP at purchasing power parity. It is estimated that global GDP will suffer an impact of -0.5%.
- Trade – China is the world’s largest exporter and second largest importing nation, accounting for 13% of world exports and 11% of world imports. The lockdown affecting 500 million people in the country will deeply impact the consumption of goods.
- Supply chain disruption – With China as the world’s largest manufacturer and exporter, closure of its industries for a significant time period is likely to impact production centers across the world. China is currently the top supplier of goods for over 100 countries.
- Commodities – Oil demand is expected to fall by 30% due to the fall in Chinese consumption and this will also resonate in other commodities.
- Logistics – Shipping rates have already fallen to record lows.
Impact on India
The above factors will impinge on the Indian industry to a large extent. India continues to have a very high import dependence on China. Of the top 20 products (at the two-digit HS code) that India imports from the world, China accounts for a significant share in most of them. Further, of the top 20 products (at the two-digit HS code) that India purchased from China in 2018, the average share of China in India’s total imports of the product is close to 30%.
China accounts for 45% of India’s total electronics imports. One-third of machinery and almost two-fifths of organic chemicals that India purchases from the world comes from China. Automotive parts and fertilizers are other items where China’s share in India’s import is more than 25%. India sources about 65-70% of active pharmaceutical ingredients and close to 90% of certain mobile phone parts from China.
Going deeper into the top 20 products at the 4-digit HS code level that India imports from China, it is found that these comprise two-fifths of its total imports from that country (Table 3 – given in Annexure). These also further add to reliance on China as they account for 43% of the total imports of India from the world of these products.
This extremely high import dependence on China has significant ramifications for the Indian industry due to the current outbreak of Coronavirus in China. As on date, China has reported more than 60,000 cases of the Novel Coronavirus Pneumonia (NCP). Hubei is the worst affected province with more than 49,000 cases, followed by other provinces such as Guangdong, Henan, Zhejiang, Hunan, Anhui, Jiangxi, Jiangsu, Chongqing and Shandong. The epidemic has also spread to 24 other countries, 8 of which are from East Asia and Southeast Asia regions.
In exports, China is India’s 3rd largest export partner and accounts for 5% share. The impact will be felt in key sectors such as organic chemicals, plastics, fish products, cotton, ores, etc.
Most of the Indian companies are situated in the eastern part of China. About 72% of Indian companies in China have their presence in cities like Shanghai and Beijing and in provinces of Guangdong, Jiangsu and Shandong. Further, their business partners are located across China. These companies operate in various sectors such as Industrial Manufacturing, Manufacturing Services, IT & BPO, Logistics, Chemicals, Airlines and Tourism.
As per our analysis, some of the sectors in India that have been impacted are likely to be impacted by coronavirus in China include shipping, pharmaceuticals, automobiles, mobiles, electronics, textiles, etc. Further, supply chain disruptions are expected to affect several associated industries and markets. Overall, hitherto, the impact of Coronavirus on Indian industry has been moderate.
Sector-wise impact on Indian industry
- Auto Industry
The impact on Indian companies in this sector varies depending on the extent of their business with China. The shutdown in China has prohibited the imports of various components affecting both the Indian auto manufacturers and the auto component industry. However, current levels of inventory seem to be sufficient for the Indian industry at the moment. In case the shutdown in China persists, it is expected to result in an 8-10% contraction of Indian auto manufacturing in 2020.
However, for the fledgling EV industry, the impact of Coronavirus may be greater. China is dominant in the battery supply chain as it accounts for around three-quarters of battery manufacturing capacity. The Indian EV industry is dependent on Chinese imports to a large extent especially for lithium chemicals that are used to make cathodes and battery cells as India seeks to build lithium-ion battery manufacturing plants.
2. Chemicals Industry
Local dyestuff units in India are heavily dependent on imports of several raw materials including chemicals and intermediates, from China. Delayed shipments from China and a spike in raw material prices are affecting the dyes and dyestuff industry, especially in Gujarat. It was found that nearly 20% of the production has been impacted due to the disruption in raw material supply.
China is a major supplier of specialty chemicals for textiles especially Indigo which is required for denim. The business in India is likely to get affected and people are securing their supplies. However, it is also an opportunity since US and EU will try and diversify their markets and mitigate the China risk. Some of this business can be diverted to India if taken advantage of.
3. Electronics Industry
China is a major supplier both for the final product as well as the raw material used in electronics industry. India’s electronics industry is fearing supply disruptions, production reduction, and impact on product prices due to heavy dependence on electronics component supply – directly & indirectly – and local manufacturing.
The spread of coronavirus could have pushed down the sales of top electronic companies and smartphone makers which have major supplies to India. However, most vendors had already made provisions for inventory due to the Chinese Lunar New Year holiday hence; there may not be an immediate impact in the current quarter. Though factories in China have not yet opened, there could be a significant drop in supplies affecting the production in India, if the problem persists beyond 3 weeks. Disruptions beyond the end of February will have a serious impact on the entire electronics industry.
Semiconductors and active components cannot, unfortunately, be substituted so quickly. Equipment not using actives too are beginning to face shortages of passive and PCBs. A few alternatives for components are available in Japan, South Korea and in some cases in Germany, France & Italy. These companies are of course now experiencing a surge in demand.
With regard to the mobile handsets industry, only about 10 – 12% of the components are sourced locally in India and the remaining 88% are still dependent on countries outside India, with China being a key exporter. The mobile phone industry in India has started running out of stocks and if the situation does not normalize by next week, then serious disruptions are expected for the industry. It is expected that smartphone sales may fall 10-15% in the January-March quarter, but a sharper impact is expected in the April-June period, and four to five-week delays in new launches.
Delay in the supply of components, non-availability of flights and shipment for transportation of material/components and short supply might cause some negative pressure on prices of the components and eventually, products may stop coming in time. Local manufacturing of components is being considered. Indian industry can take the opportunity of inviting companies from Japan, Korea, Taiwan, Europe and US that are presently in the supply chain, to set up alternative plants in India.
Material supplies from China are significantly impacting Indian industry due to following supply chain factors at the Chinese end:
- Restrictions faced by transport operators
- Hometown of the driver as a crucial factor for entry
- City entrance control – for people/transportation etc.
- Strict mobility measures – drivers need to observe 14 days quarantine before & after making delivery to other notified provinces.
- Submission of health certificates – Either long term health certificate (to be applied 48 hours in advance) or temporary certificate (to be applied for same-day use) is mandatory.
2. Transportation control – Challenges
- Some cities have closed tollgates making it difficult to deliver to customers in that city.
- Lack of uniformity in city traffic control policies.
- Lack of efficiency, as only emergency supplies for virus control, are being allowed to be transported.
3. Shipping lines schedule disruptions
- No loading or unloading at Chinese ports are being allowed.
- Vessels are being re-routed to avoid Chinese ports, and blank sailing issues are being faced.
- Vessels from other importing countries are not plying on the China-India route due to lack of full load of the containers.
- The above-stated shipping line and vessel issues are also causing delay in imports from other countries like Thailand to India.
Recommendations for Policy
The Covid outbreak is likely to continue for a few weeks before it tapers off. The Chinese Government has prioritized the resumption of economic activity in phases. However, the timeline for normalization is likely to be protracted over at least two quarters.
China is facing a quarantine-like situation with movement of goods and people to and from the country facing a lockdown. While the situation for human impact is very serious, the economic impact will cascade into loss of employment, markets, and small enterprises. For India as well as other countries, strategies for minimizing risks and managing the situation are required. At the same time, for India, the current scenario also offers it a chance to position itself as a viable alternative to sourcing from China, and unless quick action is taken, the benefits may pass on to competitor nations such as Vietnam, Thailand, Malaysia and Bangladesh.
India needs to activate a three-pronged strategy:
- Import side – Minimize risks to key sectors arising from supply chain disruptions
- Export side – Leverage opportunities to be an alternative destination
- Domestic manufacturing – Keep the supply chains running and leverage excess capacity.
With India being strongly dependent on China for certain products, it is important to segregate essential and non-essential imports from China.
Essential imports would cover those which have strong impact on health, employment and small businesses or are widely used intermediates required by several sectors.
Non-essential imports would be those goods where temporary higher prices and non-availability of supplies can be absorbed by customers.
Under essential imports, the sectors to be covered would include:
- Pharmaceuticals, including antibiotics
- Auto parts
- Medical devices
- Inorganic chemicals
These are categories where at the 4-digit HS Code level, India’s imports from China are more than $1 billion. The pharma sector is particularly vulnerable as it is a matter of health of Indian citizens as also has an unduly high dependency on China.
These sectors require special support from the Government on an urgent basis. Further, tourism, shipping and aviation are two other sectors where considerable impact could disrupt livelihoods.
Among products that can be addressed with less urgency are the following:
- Mobile phones
- Integrated circuits and micro-assemblies
- Other electronic parts
Utilization of excess capacity
Currently, Indian manufacturing companies are operating at low capacity utilization. They are unable to ramp up their production due to subdued demand conditions in the country. Restrictions on imports from China offer a chance to build up production to 100% and beyond capacity. However, companies are fearful that this would change as soon as production returns to normal in China, if sooner than expected.
The Government may offer a buy-back guarantee of purchase of additional production of the items that are currently being sourced from China. This would be particularly relevant in the case of APIs which can be produced in India.
Reducing import duties
Indian companies are importing majorly from China due to lower price points offered by the country. The Indian Government has imposed higher customs duties on a number of items in the recent past. These have also raised landed cost of such goods being imported from other countries. Given that the world will now be looking at alternatives to China, global prices of these products are likely to go up.
There is a strong case for removing the higher customs duties imposed on certain products that primarily are sourced from China but may need to be sourced from other countries now. The Government may reconsider recent imposition of higher duties.
Addressing capital requirements
There are companies which might be able to quickly install production facilities for enhanced production of goods coming from China. However, these would require additional machinery and equipment as well as intermediates and raw materials which might be more expensive to procure in India. Setting up production facilities will also immediately require additional funds.
The Government may offer credit with a backstop facility of guarantee for companies which have the capability to start immediate production of items that can feed into domestic consumption.
Alternative sources of imports
While domestic production can be one way to mitigate the impact of import restrictions from China, the other way would be to look at overseas suppliers. Overseas suppliers are known to Indian companies as imports from China account for about 30% of their global imports of top 20 products imported from China. There is a need to identify other countries that can provide the same products.
Due to higher costs of these other suppliers which are likely to go up in the current situation, the Government may consider a subsidy on imports of these products.
Since many of the identified products have US as the second or third-largest exporter, a trade deal could be beneficial.
In order to avail of the unprecedented opportunity to position itself as a production hub for the world and an alternative to China, policy actions need to be instituted urgently, once the domestic supply situation is more amenable.
- The Government should establish an inter-ministerial task force with industry participation to create awareness on India as a sourcing destination.
- Encourage collaboration in component industry by creating forum where industry can come together to buy components.
- Encourage Chinese companies to set up in India so they are not vulnerable to these supply chain challenges.
- Enhance export credit and insurance schemes for exporters.
- Ensure higher incentives to exporters that are certified for quality products
- Provide support for attaining quality certifications.
- Release all pending dues and refunds on an urgent basis to ensure fund availability to exporters.
- Leverage Indian missions overseas to support marketing of Indian products and undertake intensive branding promotion and set up dedicated export promotion agencies in key markets.
- Encourage state governments to collaborate for arranging special export missions overseas and to contribute to national branding.
- Build up competencies in trade facilitation and transport/logistics to Chinese standards.
The present coronavirus outbreak is a serious pandemic of unforeseen proportions. As of now, there is no end in sight despite strong efforts being made by the Chinese Government. With some support from the Government, Indian enterprises will be strengthened in facing the multiple adverse impacts of this outbreak.