India’s GDP growth has slowed down in the last 8 months. In fact,
experts would argue that this number has been dropping since the middle of
2018. GDP growth in
October-December 19 quarter slowed to a near 7-year low of 4.7%. In the same
quarter of the prior year, the growth was 6.6%. Amid this slowing
economic growth, the world has just been hit with the COVID-19 pandemic.
COVID-19 has already affected the
Indian stock market by causing severe losses in investor funds. On 28th
February, the day on which news about COVID-19 turned into a pandemic, there was a 3.5%
drop in Indian Sensex, the second-biggest drop in the history of the index.
However, India’s drop in indices is much milder compared to that of the US Dow
Jones, which went 15% under its market highs of the previous month as COVID-19 spread to the
U.S.
The US market reacted more viscerally to COVID-19 than India due to the
overwhelmingly higher number of confirmed US cases in (755) compared to the 6
Indian cases. However, there is another reason that India’s market seems to be
less reactive. This is also the argument for why COVID-19 is expected to barely affect its
economic slowdown. According to experts, India has very little economic
exposure to China compared to other countries. In fact, according to Bloomberg
Quint, India is the least likely Asian country to be economically impacted by COVID-19.
Source: Bloomberg Quint (Nomura)
This has been estimated with the assumption that India will
emulate its economic reaction to SARS in 2003. The 2003 SARS epidemic in China
claimed fewer lives but was more lethal than COVID-19. India was the only Asian country whose
economy did not fall but actually grew during the fiscal quarters when SARS was
rampant. x
The economic dependence India has on China can be summed in two
ways.
1. China’s Supply Chains to
India
These supply chains deliver critical commodities like raw
materials, activated pharmaceutical ingredients, antibiotics, and fertilizers
to India from China. India is directly dependent on China for such items.
According to the percentage of imports that China is responsible for, certain
Indian industries will be more affected by others. For instance, the Indian
Auto industry has an extremely high risk of being negatively impacted by COVID-19. This is because
India’s import-dependence for auto-manufacturing raw materials from China is
high.
However, most other Indian industries are labeled as ‘moderate
risk’ in terms of COVID-19’s
impact on them. These industries include pharmaceuticals, capital goods,
telecom, electronics, fertilizers, agro products, and textiles. The dependence
India has on China for the supply for these industries is moderate. Therefore,
without the incoming supply chain, India may still be able to secure these
commodities from other sources. Hence, the economic risk for these sectors is
also classified as moderate.
2. China’s Share in the Global
Import of Commodities
Different sectors depend on different commodities to profit. If
the prices of the commodities drop, then the sector is negatively impacted.
China has different shares on different commodities. For instance, its global
share in base metals and ores is an overwhelming 42%. Hence, the metal sector
is predicted to have a negative impact while all transportation to and from China
remains shut due to COVID-19.
Depending on India’s share in such commodities, the outcome could be a mixed
bag, with net users being affected the most.
For example, there is expected to be a positive influence on
certain Indian sectors due to COVID-19. Companies producing pigments, dyes, and basic
chemicals like polyvinyl chloride are expected to benefit while the pandemic
spreads. This is because India and China are the major global suppliers of dye
intermediates. While China’s supply chain to other countries is compromised due
to COVID-19, the
demand may shift more towards India who is now solely responsible for major
global supply. Specialty chemical sectors in India are expected to incur the
same benefit.
In conclusion, while the GDP slows down, the Indian government attempts to counteract its impact by slashed tax rates and providing extra capital to banks for lending. We can expect that the economic impact of COVID-19 will vary for different Indian sectors but experts are not too worried that it will exacerbate the currently lagging economy. This is dependent upon how quickly the spread of the virus is contained.
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20 April 2020
4 mins read
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