Coronavirus: India Inc will shiver if China can't contain outbreak

Efforts to contain the coronavirus outbreak within next three to four months will be critical as it would determine the fate of many industries around the globe, including in India.

HIGHLIGHTS

• Indian companies may grow slower in 2020-21 due to the coronavirus outbreak
• Many industries fear that the virus outbreak would reduce their revenue during the year
• Experts, however, said it is hard to quantify the economic loss caused by the Covid-19 virus

Growing insecurity over the coronavirus (Covid-19) epidemic in China may have a sharp impact on India's already-strained economy as industries fear that the outbreak could cripple their production activities.

A recent report by Ind-RA said efforts to contain the virus outbreak within next three to four months will be critical as it would determine the fate of many industries around the globe, including in India.

If the virus is contained within the aforesaid time period, the impact on businesses in India and elsewhere will not be overgenerous, the report said.

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But if no positive result comes within a few months, multiple Indian sectors could face major supply-side disturbances, triggering a delay in key manufacturing activities.

The Ind-Ra report goes on to highlight that the economic impact could be worse than what was seen during the SARS outbreak in 2003. At that time, the world was less dependent on China, now considered the biggest world's biggest manufacturing hub with a substantial contribution to the global GDP.

China now contributes to over one-sixth or over 15 per cent of the world's GDP and any deceleration in manufacturing activity could significantly impact worldwide growth.

Read | Coronavirus: Death toll in China nears 1,500, confirmed cases cross 65,000

Commenting on the situation, Sunil Damania, CIO, MarketsMojo.com, said, "For some reason, if China is unable to control it for six months, the impacts would be severe."

"It's very difficult to quantify as there are many moving parts. But it would have a significant impact and has the potential to drag down the world's GDP growth rate by at least 20 basis points for CY2020," he added.

IMPACT ON INDIA

The Indian economy is already battling many headwinds including inflation, slow demand, and lower-income, which resulted in a sharp fall in GDP growth in 2019. Economic woes could amplify as many of the country's key sectors rely heavily on components or parts manufactured in China.

While the government predicted India's growth for the next fiscal at 6.5 per cent, delay in supply of key essential commodities from China for a prolonged period could spill water on that optimistic forecast.

Some sectors such as automobiles, consumer electronics, drugs and pharmaceuticals -- all of which contribute significantly to the country's GDP -- will bear the brunt of the supply curbs. Interlinked sectors will also suffer as a result.

Must read: Will Coronavirus shift global investment from China to India?

"If the outbreak continues for longer than anticipated then the risk will not be restricted to a few sectors, but it can hurt the overall economy," Damania said.

Over the past few weeks, concerned voices from the industry have discussed the issue in detail.

Some industry experts said trade has already been mildly affected in India as supply chain issues start cropping up. The impact will start showing when firms run out of inventory, they said.

LOWER JOBS, INFLATION AND MORE

A delay in the supply of inventory would not only lead to lower production but will also lower sales volume. It could also lead to job cuts and higher inflation.

For instance, many electronic goods and phone manufacturers have already started facing the effects of supply slowdown as companies in China failed to restart key manufacturing activities. Major smartphone sellers like Xiaomi hinted at possible rise in prices as supplies of key components are already facing delays.

A host of Indian smartphone manufacturers, who dearly depend on China for key components, are already indicating that their productions will fall if the supply disruptions continue. It could be a huge blow to India, which is the second-largest smartphone market in the world.

Some analysts are expecting a drop in production and sales of consumer durables and smartphones while others fear that prices could go up in a situation where there is high demand but lack of supply.

Consumer durables like television, washing machines and air conditioners -- all of which need critical components manufactured in China -- may also see a drop in sales due to lack of supply.

What's worse is the fact that it could lead to higher inflationary pressure on India as China vendors have hiked prices of critical components amid the shortage. Higher inflation in times of slow growth could be disastrous for India and could severely disrupt plans to revive the economy.

Like smartphones, automobile manufacturers also import a host of parts and essential components from China. It may be noted that more than 60 per cent of Chinese auto assembly production units have been directly affected by the coronavirus epidemic.

A Boston Consulting Group report said the impact on the Chinese automobile industry will affect many other countries including India. A Fitch report said India's auto production activity could dip by over 8 per cent in 2020 due to the situation.

"China supplies India with between 10-30 per cent of its automotive components and this could be two to three times higher when looking at India's EV segment, which highlights just how exposed India's automobile manufacturing industry is to the slowdown of vehicle Chinese component manufacturing," it said.

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But manufacturers in India have little choice apart from monitoring the situation and hoping for factories in China to fire up their assembly lines. Some Chinese factories reopened this week, but workers are in no position to resume activities with no solution in sight.

Another concern that India could face due to the virus outbreak in China is job cuts. With lower scope of production activities, some companies will be forced to lay off contractual labourers.

This could have a negative effect on India's declining income levels.

Lower manufacturing and production activity due to the virus outbreak could pull down India's Industrial output, which is also not in good shape. To sum it up, a fall in manufacturing output along with ticking inflation and supply constraints could worsen India's growth outlook further.

At the time of writing this article, the death toll from the coronavirus outbreak stood at 1,488 with a sharp jump in the number of confirmed cases at over 65,000.

The situation in China remains critical with 121 news deaths on Friday while Japan registered its first death, the third fatality outside China.