As China is busy fighting the deadly coronavirus, it is speculated that the Lunar New Year holiday might be extended, at least in certain provinces, till February 17 from February 10. The news of a possible extend of shutdown is sending shivers across the world as these provinces have a greater share in China's and, in effect, the global economy, including India.
For instance, the 11 Chinese provinces which have announced an extended holiday period are normally responsible for over two-thirds of vehicle production in China, with projected crisis-induced first-quarter production loss of around 350,000 units if they are idled until February 10, 2020. If the situation lingers into mid-March, and plants in adjacent provinces are also idled, the China-wide supply chain disruption caused by parts shortages from Hubei, a major component hub, could have a wide-reaching impact.
India largely sources electronics, engineering goods, and chemicals from China. Non-availability of such products from China would mean related parties in India will have to scout for alternative markets, which can mean higher costs.
This will undoubtedly have far-reaching consequences for India's automobile sector as well. Already battling one of the worst slowdowns in over two decades, the virus attack would mean further doom for India's auto sector. According to Maruti Chairman R.C. Bhargava, many Maruti vendors in India rely on supplies of components and raw materials from China. "Most of them have inventories of up to 30 days. Total imports are small, but the point is that for a car, even if one component is not there, I can’t put the car on the road," he told CNBC recently.
The shortage will force manufacturers and vendors to scout for alternative sources of supply, which will probably add to the cost of making a car.
Travel and tourism
Another sector that might reel under the coronavirus attack is travel and tourism. In 2019, the Chinese accounted for 3.12 per cent of the total foreign tourist arrivals in India. The arrival of tourists from China have increased over the years in India. However, that might see a reversal this year, at least in the first.
The travel advisory against China will also dampen the aviation industry. IndiGo, which operated three routes from India to China, have temporarily suspended service on two routes. Air India, too, has halted operations to China.
China is India's biggest trading partner. The country accounted for 14 per cent of Indian imports in 2018-19. The Communist party-led country also accounted for 5 per cent of India’s exports in the same year, making it the third-largest market for domestic goods. “The disruption caused, if prolonged, could have a bearing on India’s imports from the country which is critical for domestic economic activity. Finding substitutes for imports from China in the near term could be a challenge,” noted credit agency CARE Ratings in a recent report. “Further, a slowdown in economic activity in China could impact exports from India.”
"On the flip side, the real economic impact of what is happening in China is for real. We are seeing it across sectors. The diamond market is expecting a huge loss. M&M made a statement that some of their models could get impacted. The raw material cost for common drugs like paracetamol cost have doubled in 10 days. Solar power developers are looking to declare force majeure because those things might not come in. The real economic impact will be seen over the next two, three, four months," stock market expert Sandip Sabharwal told ET.
In addition, the supply chain of the leather industry, which depends on China for components such as soles, and ornaments is likely to get hit.
Even as the threat looms large, China's economic shutdown opens various doors for India. As per a recent report in the Economic Times, global buyers are seeing India as China's replacement to source ceramics, homeware, fashion and lifestyle goods, textiles, engineering goods and furniture. Reportedly, Indian manufacturers and exporters have seen a rising number of interests from the western market.
Mainland China is now the second-largest importer in the world, accounting for 10.4 per cent of the world's goods imports, compared with 4 per cent of the world's imports in 2002. “With local production being affected (due to the coronavirus outbreak), there could be an increase in China’s imports from other countries which can provide an opportunity for Indian manufacturers,” the CARE report observed. India mainly exports chemicals, petroleum, agriculture, engineering goods, cotton yarn and plastics to China.
(This story first appeared in The Week)