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Tata Capital > Blog > Wealth Services > Will Coronavirus Exacerbate India’s Economic Slowdown?

Wealth Services

Will Coronavirus Exacerbate India’s Economic Slowdown?

Will Coronavirus Exacerbate India’s Economic Slowdown?

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.

Economic Slowdown Coronavirus India

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.

Additional Read:- What are the Steps Taken by the Government to Fight Coronavirus in India?

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