Is Covid-19 an opportunity in adversity for the Indian economy?

• Over the full year, global growth is projected to drop to zero as a result of Covid-19. Currently, it is just less than 2%.
• A majority of analysts and macroeconomists expect the US economy to shrink by 0.2%, Eurozone GDP to contract by 2.2%, and China to grow by just 1%.
• India’s outlook looks ameliorated with respect to developed economies and China.
• If India is able to defeat COVID 19 as early as possible, then without a doubt India can grab the opportunity to be the next manufacturing hub.

The COVID-19 pandemic is expected to impose a deep recession on the world economy, and many major national economies, during the first half of 2020. Over the full year, global growth is projected to drop to zero, which currently is just less than 2%. In the current ongoing quarter of 2020, most economists anticipate that the global economy would have contracted at a faster pace than during the global financial crisis of 2007-08.

If we see the combined effect of the spread of the coronavirus to more economies, the imposition of social distancing across these economies, plus ongoing financial market turmoil despite heavy central bank intervention, changes in GDP and growth forecasts are extremely hard to predict. For the year, now majority of analysts and macroeconomists expect the US economy to shrink by 0.2%, Eurozone GDP to contract by 2.2%, and China to grow by just 1%.

Even India’s ex-chief statistician has forecasted that the Indian economy will not expand by more than 3% in 2020. On the other hand, Moody’s Investors Service has cut India’s GDP growth forecast for 2020 calendar year to 5.3%, due to Coronavirus implications on the economy. Whatever the scenario is, one thing is cogent, which is, slowing down of the Indian economy.

Source: Compiled from various sources including Oxford Economics and Moody’s Investor Service

How to utilise a good crisis?

Economic devastation is a given, and all focus is presently on firefighting. However, there may be a bright spot for India yet. Comparatively, the country’s outlook looks ameliorated with respect to developed economies and China. Globally, major sectors are getting impacted and having a repercussion effect of COVID 19, which includes manufacturing, automobiles, electronics, pharma, construction and engineering, telecom equipment etc. During the pandemic, these halts and delays in economic activities have created a ripple effect on domestic and overseas Original Equipment Manufacturer (OEMs), which are procrastinating or interrupting production.

This is a heavy blow to an already falling market, causing an additional 2-5% volume decline this year. For instance, electronic component manufacturers are among the heavy industry sectors, which are being directly hit. Apple, which lost more than 15% of its market value in the past week, works with suppliers in more than 40 countries, all of which receive components from contract manufacturers in China. Across industries, the availability of skilled and semi-skilled labor is severely limited, and strict quarantines in key manufacturing hubs economies will continue to take a toll. According to one of the estimates of Chinese think tank, around 60% of China’s 300 million migrant workers are expected to get back by the second quarter of the year for restarting production. This clearly indicates that scenario is yet to become catastrophic. Supply chain balance is going to get enervate & disturbed across world and economic activities under global values chains will shrink.

China is a major supplier both for the final product as well as the raw material used in electronics industry. India’s electronics industry is fearing supply disruptions, production reduction, impact on product prices due to heavy dependence on electronics component supply-directly and indirectly-and local manufacturing. The spread of coronavirus had pushed down the sales of top electronic companies and smart phone makers, which have major supplies to India.

Thin Ray of Hope

Now, here is the ambiguity regarding opportunity for Indian economy. One argument can be made by saying that, China’s loss can be India’s gain. But the ambiguity is whether India will be able grab the opportunity or not, since there is a complete lockdown which may be extended. Thus, it cannot be clearly argued that Indian industry, especially manufacturing, has any opportunity. The only convincing fact India has is its labor size which has wage competitiveness.

One empirical finding by National Bureau of Economic Research (NBER) suggests that, it normally takes nine months to occur a global recession but takes fifty-eight months to come out from it. Following the first wave of disruption to the supply chain from China, further disruptions came from South Korea and Japan. As the surge in COVID-19 cases continue into Europe and America, supply chains will take another hit.

In this scenario, if India is able to defeat COVID 19 as early as possible, then without a doubt, it can grab the opportunity to be the next manufacturing hub. Value chains cannot be established overnight. It takes time and effort to qualify potential suppliers in areas of manufacturing quality, capacity, delivery, cost and their ability to respond to engineering or demand changes. It is quite clear that economies like China, USA, EU, Canada and East Asia will need significant amount of time to rebuilt the platforms to manufacture. Thus, though it is still ambiguous, India does have a ray of hope to accelerate its manufacturing activities and grab more global trade opportunities once it has dealt with COVID 19.