28 Feb 2020, 14:25 — 7 min read
Background: Pneumonia like, the then unidentified virus that began in Wuhan, China in January 2020 has since then been hailed as one of the worst epidemics by WHO (World Health Organisation), and has claimed more than 2000 lives, leaving more than 80,000 affected in China and beyond. In their previous article Vakilsearch explained all aspects of the conversion of a Private Limited Company into an LLP. Here they assess the impact of the Coronavirus on the global and Indian economy.
The Coronavirus has brought not just the Chinese economy at a standstill but has been deeply affecting global supply chains. In this post, we highlight the impacts of Coronavirus on the global economy, with a specific focus on how Coronavirus affects the Indian economy.
Many centuries ago, the Kushan and Hunan rulers from China discovered paths to India. Tea, sugar and porcelain crockery were some of the fancy things that made their way into India, so much so, that we now call sugar “Chini” and porcelain in many areas is called “Chini mitti” – or made of Chinese mud. In the 21st century, China’s remarkable growth has been powered by the engine of manufacturing. China is known for its automobile industry, technology, assembling, and spare parts manufacturing industry, at remarkably low costs.
China happens to be India’s third-largest export partner, with major export items being raw materials such as organic chemicals, mineral fuels, cotton etc. However, India has a large trade deficit with China, as we export a bulk of electronic items, plastic materials, key active pharmaceutical components of medicines and a host of spare parts for industries in India. If the shutdown of Chinese cities extends for a long period of time, delay in servicing these orders could have a snowball effect on many industrial segments in India.
Also read: Budget impact on direct taxes
Many automobile enthusiasts in India were revved up about the annual Auto Expo 2020 that was going to record massive participation of Chinese automobile manufacturers displaying innovative car technologies and add-on features such as safety, fuel technology efficiency etc to cars. However, many Chinese automobile companies have backed out from the expo, dampening the spirit in the Indian market. Hyundai, a leading manufacturer of cars in South Korea has shut down its production over lack of availability of spare parts from China. However, since India has a very small percentage of imported cars, the Coronavirus outbreak is not expected to have great ramifications unless the supply of essential spare parts is disrupted.
China is a leading supplier of electronics to the world. Many mobile phones and computers are assembled in China, or have spare parts manufactured there. However, due to extensive disruption in supply chains and order fulfillment, China has slowed down. This is also corroborated by a fall in crude oil prices of about 15%, due to falling demand.
One of the sectors facing a cash crunch already in India, is the diamond cutting, polishing and exporting business. On average, one in every three diamonds in Hong Kong is cut and polished in India. With Hong Kong and China locking their cities, the high hopes of diamond traders in India due to the recently concluded US-China trade treaty (that has reduced tariffs on goods) have come crashing down. An international jewellery conference to be held in Hong Kong next month has been postponed and the consumer demand from China Hong Kong and other neighbouring countries is witnessing a historic low.
In the financial year 2019-20, China accounted for 67.56 per cent of total imports of overall drugs and drug intermediates, in India. It is important to note that China is a key supplier of medicines and active pharmaceutical ingredient that is a raw essential material for many pharmaceutical companies in India. In the last few days, the prices of paracetamol which is the active ingredient for Crocin, a common drug have already increased. If the lockdown doesn’t end soon, other major medicines could also record a hike in prices.
While the Chinese contribute less than 1% of India’s GDP when it comes to tourism, many countries in Europe relied on Chinese tourists to powering their consumption. With most countries restricting travel to China, the aviation segment has also been affected as international flights are no longer landing in China. Most hotels in China are closed down, and those that are open have scanty footfall. Disneyland in Hong Kong is also deserted.
With the Chinese economy’s growth forecasts for the first quarter of 2020 being cut from 6% to 5.4% by Oxford Economics, the effects are already rising. China has brought factories around the country to a standstill and workers have been ordered to stay home. This has caused a ripple effect on not just crippling domestic consumption of Indian products in the Chinese economy, but also outbound consumption. Due to lack of public transport, no workers and cities being locked down, global shipping orders are piling on – leading to massive losses every day. This logistical inefficiency is leading many businesses to shift their production and the raw material is being sourced from alternate sources.
Other important exports to China that are being impacted are seafood and seafood products, Chilli and other spices, rubber, tea and some food products. With WHO declaring Coronavirus a “global public health emergency”, efforts by China and assistance by other major economies are steps forward that can save another global recession staring the world.
Image source: shutterstock.com
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Posted byVakilsearch Staff
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