Woman in face mask

View from India: Coronavirus and what it means to the Indian economy

Image credit: Dreamstime

The deadly novel coronavirus (n-CoV) epidemic is taking thousands of lives and has now become a global emergency. What does the virus outbreak mean for India's economy?

China, especially the province of Hubei and the eastern parts, are worst hit, being the epicentre of the outbreak. The virus, which broke out in Wuhan, China, in December 2019, has now spread to over 50 countries across six continents. The global death toll has exceeded 3,000 and the numbers are growing. The World Health Organisation (WHO) declared the coronavirus (COVID-19) outbreak a global health emergency on January 30.

Shanghai and Beijing are home to Indian IT and BPO companies. Their key concern areas include artificial intelligence (AI); the internet of things (IoT), and big data. Many companies are already encouraging their employees to work from home. Along with this, there have been restrictions on travel as well. The big picture points to the fact that many of them have been unable to complete existing projects. The reverse case is that of Chinese firms in India. Many of their teams work in collaboration with their Chinese counterparts. It has been found that some of these companies have had to face delays while launching new products, as many offices have fully or partially shut down in China. Coming to the Indian startup ecosystem, those startups in talks with Chinese investors are likely to get a lukewarm response.

The stock market’s crash has brought down the net worth of many IT companies. IT stocks have fallen as there’s a fear of global recession caused by coronavirus. The ones to be worst hit are Shiv Nadar of HCL and Azim Premji of Wipro. Each one has lost almost $1.5bn. Billions of dollars from leading Indian companies have been wiped out due to coronavirus. Chairman of the Reliance Industries Mukesh Ambani has lost over $5bn of his wealth this year to date in notional terms. According to media reports, the Organisation for Economic Cooperation and Development (OECD) has estimated that the world economic growth will slow to 2.4 per cent for 2020, compared to 2.9 per cent in 2019. Overall, the Sensex has crashed on Monday. Newspaper reports reveal that it has seesawed almost 1,300 points intraday, before closing 153 points lower when the trade closed.

A February 2020 CRISIL 'Impact Note', ‘The n-CoV fallout,’ stated that n-CoV will prove to be a mixed bag across sectors in the fourth quarter of this fiscal year. If it persists in its intensity, Indian industry is heading for serious disruption.

Sectors such as auto components, pharma bulk drugs and agro chemicals can survive the n-CoV headwinds to some extent in the near term, given inventory stocks of two months. However, as inventories run down, industries will face significant pressures. Overall, that would eventually result in more sectors being negatively impacted, outweighing the positives.

The credit profiles of firms in select sectors could also be impacted if the supply disruption continues beyond March 2020, such as in automotive components and renewable (solar). The automotive component sector has already witnessed sluggishness in demand for over a year. The auto sector is on the cusp of adopting BS VI regulations, effective April 1 2020, leading to higher cost of components and hence also of finished vehicles.

As indicated in the CRISIL note, 18 per cent of automobile component imports comprising drive transmission, steering, electricals, interiors, engine components, and alloy wheels - along with 30 per cent of tyre imports - comes from China. Inventories are sufficient to manage in the short term, but the lack of single critical components can hurt the original equipment manufacturers (OEMs). Local Indian auto-component manufacturers cannot immediately capitalise on the void created by China as it takes time for OEMs to recalibrate their supply chains.

China is the world's biggest manufacturing hub and connects with global supply chains. Raw materials are sourced from China and this will adversely affect the manufacturing process of consumer electronics goods. About 67 per cent of India’s electronic components are imported from China. Though India has progressed from assembling to manufacturing of low-end electronic components, the import dependency remains high especially in the case of critical components.

White-label goods such as televisions, smartphones and refrigerators are sold online. Products and tech accessories that have been customarily shipped to India will instead reach us via airfreight. With this, the price of the product can escalate. Already consumers are beginning to feel the heat, as anticipated promotional offers and discounts on many such products will inevitably be reined in. 

It may not be practically viable to replace China with Vietnam because Vietnam also relies on China for many of its electronic components. Hence a long-term perspective is to promote the domestic manufacturing industry, in sync with Make in India, the future vision promoted by Prime Minister Narendra Modi. 

In an attempt to boost the domestic production of mobile phones, the Government of India (GoI) has announced a scheme which is a production linked incentive (PLI) to the tune of Rs 42,000 crore. This will be for mobile companies that manufacture in India. These homegrown brands will be given a benefit of 4-6 per cent on incremental sales on goods manufactured locally for five years. The scheme, which is slated to begin on August 1 2020, is expected to generate two lakh jobs. The ambition is to establish India as an electronics and hardware manufacturing hub.

The CRISIL note states that India imports 69 per cent of its total pharma bulk drugs intermediates from China. India is a net importer of pharma bulk drugs from China. Indian players have already sourced their raw materials and created sufficient inventory for two to three months in view of the holiday period in China. However, a few pharma players have seen price escalation in some imported bulk drugs and intermediates of late. Hence, the impact is expected to be moderate this quarter.

As for agriculture, it seems to be negligibly impacted as imports for rabi (crops sown in winter and harvested in the spring) is almost over. Yet, we need to take into account that India imports 50 per cent of its raw material (technical) pesticides requirement from China. For crop year 2019-20, most of the procurement has already taken place by November-December.

Though India imports 10 per cent of fertilisers such as urea from China, it is produced in the Middle East and traded by China. That’s how n-CoV is unlikely to have such a significant effect that the chemical plants would need to shut down in the fourth quarter of this fiscal. However, if the outbreak is not contained beyond that, imports for the next season will bear the brunt.

In case of crops such as soybean, India depends on China by way of export of soy meal. Since a large part of the commodity has been harvested and already sold, the virus outbreak is not expected to impact farmers much. Some downward pressure on margins of soy millers might be seen in the near term, though, due to lower soy meal exports.

With the supply of solar panels also disrupted, big solar projects are heading towards dark days: India imports 70 per cent of solar modules from China. Supply disruption of solar panels (80 per cent capacity globally is controlled by China) for projects commissioned in India for the next six months could lead to delay in project completion and possible invocation of force majeure clauses to avoid penalties by solar developers.

When we look at the shipping and Logistics scenario, over 90 per cent of the global trade is transported over the seas. China is key consumption centre for bulk drugs and containers. It accounts for 70-75 per cent of iron ore trade, 20-25 per cent of coal trade and 25-30 per cent for crude oil across globally. The virus outbreak is expected to keep the demand and freight rates low in the short term. There has been a drop in the cross border e-commerce supply chains from China.

An extended outbreak of the coronavirus could spell big trouble for India Inc.

Sign up to the E&T News e-mail to get great stories like this delivered to your inbox every day.

Recent articles