Editorial

The viral threat to India Inc

| Updated on February 18, 2020 Published on February 18, 2020

The fallout of the COVID-19 outbreak exposes chinks in the Make in India armour and calls for a shift in sourcing strategies

Even as China and other nations scramble to contain the spiralling human costs from COVID-19 infections with travel restrictions and lockdowns, it is becoming increasingly evident that this outbreak is likely to extract a more severe toll on the global economy than the SARS outbreak. Global forecasters, earlier predicting a single-quarter blip in China’s growth and a V-shaped recovery, are now beginning to examine worst-case scenarios where the economy could contract and recover sluggishly thereafter. Current expectations are for the outbreak to trim global GDP growth by 0.2-0.3 percentage points, but that’s predicated on key Chinese business hubs restarting operations this month. While the COVID-19 attack coinciding with the Chinese Lunar New Year has prolonged its impact, China’s growing clout in the world has magnified it. Between the SARS outbreak and now, China has increased its contribution to global GDP to 16 per cent, grabbed 13 per cent of merchandise exports, and demands a third of the global output of cars, computers and luxury goods. First-order impacts from Chinese tourist cancellations are already being felt by the global airline and hospitality industries. Second-order impacts are harder to gauge, given that China is a critical cog in the global supply chain, functioning both as a manufacturing hub for Western consumer giants and a transit point for Eastern export powerhouses.

India Inc, after initially exulting over export opportunities opening up due to China’s shutdown, is now beginning to fret about production-line disruptions should the shutdown continue. A leading car-maker has warned that the shortage of auto parts could impede the BS-VI transition, while a two-wheeler maker has indicated a 10 per cent production cut. The shut-down has exposed a major chink in the armour of Make in India: the high China dependence of India’s electronics manufacturing, which is said to import over 60 per cent of its components from China. Tirupur’s MSME garment exporters are worried about disrupted supplies of blended fabric and accessories while pharma firms, depending on China for 70 per cent of their active ingredients, have seen shortages spark price spirals in widely used drugs. One bright spot for India Inc lies in the 10-15 per cent decline in global oil and metal prices since the outbreak, but cost savings will provide cold comfort if supply disruptions force production cuts.

For Indian policymakers, the immediate imperative is to contain the consumer impact of this disruption on essential goods such as medicines, through proactive interventions that line up alternative supplies and curb profiteering. The Centre, which has been pointing to green shoots in IIP and services, may need to recognise that COVID-19 can prolong the slowdown. It also needs to take stock of India’s import basket to identify key items with excessive single-origin dependence, to diversify the sources of supply. For India Inc, this calamity is an object lesson that cutting corners on local value addition and over-relying on supplies from a single source based on cost considerations alone, is no way to de-risk operations against Black Swan events.

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Published on February 18, 2020
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