The coronavirus crisis should nudge the world towards some quick thinking to de-risk and diversify its bets, writes India Inc. Founder & CEO Manoj Ladwa.
It's official: the coronavirus outbreak in China is the world's first “global health emergency” in this new era of major power rivalry. Besides the obvious cost in terms of human suffering and lives, it is already extracting a major economic cost across the world and is likely to have a major impact on the Indian economy as well.
We don't yet know the extent of the impact but it has already undermined much of the global optimism engendered by the trade deal reached between the US and China and quickly replaced it with predictions of a slower than expected global economic recovery in a best-case scenario and a full-blown slowdown at worst. I hope the crisis blows over as quickly as possible. If it doesn't, and it does continue for a month or more, it could shave off anywhere between 0.5 percentage points and 1.5 percentage points from China's growth rate, according to the Economist Intelligence Unit, which, in turn, will slow down global growth by 0.2-0.3 percentage points. Other reports have said Chinese growth rate this year could fall to a multi-decade low of 4 per cent.
As of now, the impact of the coronavirus outbreak on India is still very limited. But this can change very quickly if it lingers for more than a month. The impact of the virus outbreak will be particularly hard on India unless it is contained very soon. Bilateral trade between the countries is at $87 billion. It is India's third-largest export destination and any slowdown in offtake by Chinese companies will hit more than $17 billion worth of exports and adversely affect the top and bottom lines of Indian companies in sectors such as organic chemicals, mineral fuels, plastic materials, cotton and ores. India also imported goods worth about $70 billion, many of which are critical for the Indian economy. Since it is almost impossible to find alternative sources of supply at such short notice, any disruption on this count will seriously hinder the Indian government's efforts at reviving the economy.
It will also heavily impact India's fledgling mobile phone and electronics sector, which imports almost 75 per cent of all components from China. Companies such as Foxconn (which assembles Apple products), Samsung as well as Chinese firms such as Huawei, Vivo, Xiaomi and others, import large volumes of critical components from China for their assembly operations in India.
Since these companies typically operate with only a few days inventory of parts, any prolonged shutdown in China's Hubei province and its capital Wuhan, the epicentre of the virus outbreak as well as the heart of China's mobile phone industry, will bring operations at India's mobile phone factories to a halt. Other sectors that will take a hit are tourism, aviation, automobiles, films and infrastructure. This could delay India's recovery cycle by several quarters.
The disruption of global supply chains in a wide range of goods is a direct fallout of the world's overdependence on Chinese factories to produce them. This crisis will nudge the world once again to de-risk itself and diversify its bets. Many of them will, doubtless, consider India as an alternative destination for their factories - attracted by corporate tax rates that are among the lowest in the world and the country's rise up the ranks of the World Bank's Ease of Doing Business Index.
Every one of India's peers will roll out the red carpet for companies looking for alternatives to China. I'm sure India will also do the same. As global supply chains become more widely dispersed, the countries that use this opportunity best will benefit the most. The Indian government and Indian businesses will have to work together to ensure this.