How COVID-19 Impacts the Future Economics
The trade impact of the coronavirus epidemic for India is estimated to be about US $348 million and the country figures among the top 15 economies most affected as the slowdown of manufacturing in China disrupts world trade, according to a UN report. Whereas according to Asian Development Bank (ADB) the Covid-19 outbreak could cost the Indian economy between $387 million and $29.9 billion in personal consumption losses.
Estimates published by United Nations Conference on Trade and Development (UNCTAD) said that for India, the trade impact is estimated to be the most for the chemicals sector at US $129 million, textiles and apparel at US $64 million, automotive sector at US $34 million, electrical machinery at US $12 million, leather products at US $13 million, metals and metal products at US $27 million and wood products and furniture at US $15 million.
China has seen a dramatic reduction in its manufacturing Purchasing Manager’s Index (PMI) to 37.5, it's lowest reading since 2004. This drop implies a 2% reduction in output on an annual basis. This has come as a direct consequence of the spread of coronavirus (COVID-19).
When we see China’s Share in total import to India, India’s total electronic imports account for 45% of China. Around 1/3rd of machinery and almost 2/5th of organic chemicals that India purchases from the world come from China. For automotive parts and fertilizers, China’s share in India’s import is more than 25%. Around 65 to 70% of active pharmaceutical ingredients and around 90% of certain mobile phones come from China to India.
Sector-Wise Impact on Indian Industry according to UNCTAD report published on 4th March
1. Chemical Industry: Some chemical plants have been shut down in China. So, there will be restrictions on shipments/logistics. It was found that 20% of the production has been impacted due to the disruption in raw material supply. China is a major supplier of Indigo that is required for denim. Business in India is likely to get affected therefore people securing their supplies. However, this can also be an opportunity because now US and EU will try and diversify their production centers to India.
2. Real Estate Industry: The industry was hoping to recover from this prolonged slowdown in 2020. The health contagion of COVID-19 disease, however, has the potential to put some brakes on India’s real estate market, given the anticipated slump in demand. The outbreak of coronavirus has not had a major impact on the domestic real-estate market so far. However, a prolonged impact of the coronavirus may not have a favorable impact on the prospects of the real estate industry. The sector is taking all possible measures to mitigate the impact of COVID-19 on business such as deferring the house registrations, moderating sales targets in alignment with the current realities etc.
3. Auto Industry: China accounts for 27% of India's automotive part imports and major global auto part makers such as Robert Bosch GmbH, Valeo AS and ZF Friedrichshafen AG have factories located in the Hubei province. Owing to the closure of the factories of these companies, there has reportedly been a delay in the production and delivery of vehicles like Bharat Stage Four (BS-IV) compliant models. Moreover, the situation has become more precarious after the decision of the Chinese government to limit all shipments by sea until further notice. Since air shipments are not suitable for Auto Components and forging industries, the Indian OEMs are finding it difficult to plan production beyond the available inventory.
4. Aviation Industry: Aviation is amongst the worst affected sector amidst the Covid-19 crisis that has taken the scale of a pandemic. According to the International Air Transport Association, airlines globally can lose in passenger revenues of up to US $113 billion due to this crisis. Airfares have also come under pressure due to nearly 30% drop in bookings to virus affected destinations. As a result, airfares to such destinations have fallen by 20-30%. Domestic traffic growth is also gradually being affected with domestic travelers postponing or cancelling their travel plans. Some companies have reported more than 30% drop in domestic travel this summer compared with last year. Airfare in the popular domestic routes have been reduced by 20-25% and airfares are expected to remain subdued for the summer season as well.
5. Electronics Industry: The major supplier is China in electronics being a final product or raw material used in the electronic industry. India’s electronic industry may face supply disruptions, production, reduction impact on product prices due to heavy dependence on electronics component supply directly or indirectly and local manufacturing.
6. Foreign Trade: China has been India’s largest source of imports since 2004-05, shows data from the Centre for Monitoring Indian Economy (CMIE) database. In 2018-19, the latest period for which annual data is available, China had a share of 13.7% in India’s total imports. Any major disruption in the Chinese economy can disrupt those imports and hence both production processes and supply of consumer goods in India.
7. Agriculture and Food Processing: Agriculture and allied activities sector is likely to be adversely hit by the Coronavirus scare. In fact, the poultry sector is already being affected severely. The poultry sector which is the fastest growing subsector of India agriculture eco-system and where the country has created a foothold at the global level (India is the third largest producer of eggs and fifth largest producer of broilers) is already facing losses to the tune of 150-200 crore each day. The social media has been spreading misinformation by correlating Coronavirus infection to consumption of meat and poultry products. This has caused enormous destruction in demand for poultry products and the prices realized by farmers have crashed to Rs 10-15 per kg – whilst the production cost of about Rs 70 - 80 per kg.
It is imperative that society preserve both lives and livelihoods. To do so, India is considering a concerted set of fiscal, monetary, and structural measures and explore ways to return from the lockdown that reflect its situation and respect that most important of tenets: the sanctity of human life.
Please feel free to reach out to any member of the G&A Team in case you require any clarifications on the above.
Gandhi & Associates