At a time when the global growth appeared to be stabilising, after a prolonged slowdown, it seems that the coronavirus pandemic that is fast spreading across the world may put recovery plans in jeopardy.
Almost 750 million people are under lockdown and production in 18 cities/towns has come to a standstill in China. China’s manufacturing activity fell to its lowest level on record in February with the Purchasing Managers’ Index (PMI) at 35.7 points, well below the 50-point mark that separates growth and contraction every month.
In India, the Sensex crashed 1,448 points on Friday and over 3,000 points during the last week. Apart from the bloodbath in the equity and forex markets, concerns persist on supply disruptions of goods from China. The crisis affected a depreciation in the value of the domestic currency. The Rupee on Friday plunged by 63 paise to settle at a nearly six-month low of 72.24 against the US dollar.
A Care Ratings report shows that India exported a total of $16.7 billion worth of goods and services to China in FY19. The report estimates that the total export loss due to the pandemic could be in the region of $13.4 billion. Analysts say that traders usually keep an inventory of 45 days, and with protracted supply interruption, they could be headed for some pain with only 10-12 days of inventory left.
India’s dependence on China for supplies spans across sectors and sub-sectors and the present situation indicates that the trade normalisation could take up to six months, says Motilal Oswal in a report on the impact of the virus on Indo-China trade.
Sectoral concerns
Pharma: India depends on China Automotive heavily for the import of key APIs and key starting materials (KSMs), and there is apprehension that in the wake of COVID-19, supplies from China might be disrupted, resulting in a shortage of medicines in the country.
To combat these fears, the drug price regulator National Pharmaceutical Pricing Authority (NPPA) has asked states and Union territories to keep a close watch on the availability of key raw materials which are imported from China and used in the production of all kinds of medicines.
In a letter, the NPPA Chairman Shubhra Singh asked the state officials to keep a close tab on the situation in order to prevent the hoarding of such items.
“The key drug industry associations have assured the government that there is enough stock of Active Pharmaceutical Ingredients (APIs) and formulations in the country,” Singh said in the letter.
“However, as a measure of public health preparedness in respect of APIs/Intermediates/KSMs which are imported from China, it is requested that State Governments and UTs may closely monitor the production and availability of APIs and their formulations to prevent black marketing and hoarding,” the letter said.
Automotive: The automobile industry is likely to be impacted less by the crisis, the Motilal Oswal report says. Some analysts feel that this would be on the account of demand and production in the sector bottoming out in India in the run-up to the transition to BS-VI fuel. However, Aditya Makharia & Mansi Lall, analysts at HDFC Securities expect auto sales to be lacklustre in the upcoming quarters on the account of the transition and the virus impact.
This assessment is similar to Fitch Solutions that expects a contraction of 8.3% in vehicle production in India due to coronavirus outbreak. This, the agency states is on account of automotive manufacturers halting production. It said, “We see India adopting similar policies if the virus spreads throughout the country.”
China accounts for 27% of India’s automotive component imports and this year, vehicle demand in the country is projected to decline by 8.3%. “The problem is further aggravated by the Chinese government’s suspension of shipments by sea until further notice and allowing air-only shipments that are not suitable for Auto Components and forging industries, therefore the Indian OEMs are unable to plan production beyond the inventory as currently available to them,” S Muralishankar, President, Association of Indian Forging Industry said.
The Government of India has issued a notification mandating the decontamination of containers at the port prior to release to the Indian Customs. However, the guidelines/procedures to be followed for decontamination have not been notified, therefore it is not possible for the Indian importers to clear consignments that have already reached Indian Shores on time, he added.
IT: Analysts tracking the information technology sector are of the opinion that there is no major impact on the IT sector at the moment. “Though we don’t see any material impact on Indian IT companies, there could be some near-term impact on companies offering services to larger US IT firms. These companies generate around 15% of their total revenues from the Greater China region,” said Sanjeev Hota, head of research, Sharekhan by BNP Paribas.
Software amounting to $9 billion was exported to East Asia from India, according to the Reserve Bank of India data. India is expected to lose about $2-3 billion worth orders assuming China contributes a 20-30% share in this basket, suggests the Care Ratings report.
Textiles: On an average, India exports 20-25 million kg of cotton yarn a month to China. Cotton yarn prices have fallen by 3-4% in the domestic market as traders anticipate a curtailed demand from China due to the prevailing situation, according to a statement issued by CMAI. With the epidemic, Chinese textile factories have halted operations since the Chinese New Year. India imports $460 million worth of synthetic yarn and $360 million worth of synthetic fabric from China annually. If the outbreak continues, Indian garment manufacturers will need to look at other alternatives, including local sourcing, which in turn may increase the cost of the finished goods by 3-5%.
Global economy
The pandemic has turned global with the virus now present in at least 53 countries, impacting more than 83,000 people, as per the World Health Organisation (WHO) data. In fact, the number of fresh cases in a day recorded outside China has increased compared to cases within Mainland China.
Analysts feel that disruptions to international travel and supply chains, school closures and cancellations of major events have blackened the outlook for a world economy that was already struggling with the fallout from the US-China trade war.
The outbreak could mean that the International Monetary Fund (IMF) projections on an uptick in global growth from 2.9% in 2019 to 3.3% in 2020 could be negatively impacted.
Key indicators
The virus sent shockwaves in global equity markets last week. Global stocks saw a meltdown during the week especially on Friday, with an index of global stocks setting its largest weekly fall since the 2008 global financial crisis, and a whopping $5 trillion wiped from the global market value this week.
Stock indices did not react much to the spread of the virus initially. However, as the month went by there seems to have been distinct signs of panic as the spread became global.
Interest rates as indicated by US 10-year Treasury bonds have started moving downwards quite sharply from the region of 1.84% in December to 1.30%. Meanwhile, crude oil prices have seen a sharp decline, even in the midst of expectations of an output cut by the OPEC countries, Care Ratings report said.
On Friday, while West Texas Intermediate crude settled down 4.9%, to $44.76 per barrel. US crude has fallen about 16% last week, the biggest weekly decline since December 2008. The most active Brent crude contract for May was down 3.2%, at $50.749 a barrel, a 14-month low.
“Gold, on the other hand, has been the biggest gainer as funds are getting transferred to bullion, as stock markets get more volatile and growth projections are being revised downwards. The dollar continues to be a strong currency which means that others would tend to weaken over time.” the report added.
Even as the spread continues unabated, a clearer picture of the impact of the pandemic on the global and Indian economy may take a few more months to be registered. What the future has in store, only time and further data reports will tell.