India has been identified among the 15 nations most impacted by the Coronavirus epidemic. Globally, more than 3400 people have died of the pandemic and more than 1 lakh are still afflicted. After China, the worst affected are Italy, Iran, South Korea and Japan. Even the US has seen close to 15 deaths. While 50 people have tested positive for the virus in India, there have been no casualties. However, the fear is that with most places crowded to the hilt, the virus could spread very rapidly.
The immediate concern for India is on the economic impact. Even before the virus became a pandemic, the GDP growth in India had already fallen to 4.5%. The virus has only exacerbated the situation with its direct impact on trade, tourism and manufacturing.
Figure 1: Impact of Coronavirus on Q1-2020 GDP growth
Here are five significant ways in which Indian business is being impacted by the Coronavirus pandemic.
Impact on India’s trade with other countries
India still has a relatively lower ratio of trade to GDP compared to countries like China and Germany and to that extent the impact will be limited. According to the estimates put out by the United Nation Conference on Trade and Development (UNCTAD), the overall impact in terms of trade loss would be around $348 million for India. This is much lower than the impact on the EU, which will be as high as $15 billion or Japan where the impact will be closer to $5.3 billion.
Impact on tourism and services
This is likely to be a significant factor for the Indian economy as it derives more than 55% of its revenues from the services sector. To begin with, a host of services have been badly hit by the Coronavirus syndrome. Tourism has been hit at most of the key tourist spots; both domestic and foreign flows. Most people want to avoid crowded places. This has in turn hit a number of other industries like travel, hotels, allied services, etc. Airlines and hotels are running at partial capacity adding to their existing business concerns. With most companies cutting down on business travel and scores of seminars, conferences and trade shows getting cancelled; the service sector is surely taking it on the chin.
Businesses that rely on Chinese demand
JLR is expecting a sharp impact on its EBITDA due to the weak demand in China. For the last 10 years, China has been driving the demand for most high end products ranging from luxury cars to high-end textiles and European fashion products. The direct impact may be limited in the Indian context. However, the indirect impact of weak demand can be huge on India. For example, the Indian auto ancillary sector is already of global scale. This sector has been hit badly due to weak demand in China. Similarly, metals companies have been hit negatively by the weak demand in China and that has impacted prices and their realizations. That explains why there has been a virtual carnage in most of the commodity stocks.
Disruptions to the manufacturing supply chain
The one big impact that India is reeling under post the Coronavirus is the disruptions in the supply chain. For example, sectors like automobiles still depend heavily on China for inputs. For the pharma sector, nearly 70% of the active pharma ingredients (APIs) come from China. In specialized cases, it is as high as 100%. The third major sector impacted is electronics. Here again, the Indian companies have relied heavily on China for supplying the components and the inputs. With the sector running low on inventory, it is only worsening the production slowdown in India.
Coronavirus has impacted capital raising in India
The SBI Cards IPO sailed through on the back of a favorable brand and a large captive audience. However, other IPOs may not be so lucky and most companies are already having second thoughts about their proposed IPOs. The recent crisis in Yes Bank and the write-down on AT1 bonds will further increase the premiums on low quality debt. Above all, the slowdown in China has resulted in a mini-bear market with most of the top global indices losing close to 20% in less than a month. This is likely to increase the cost of capital even as bonds are trading at 12-year low yields in India and 150-year lows in the US.
The real worry for India may not be on the trade front but on the services sector and the supply chain disruption. An early resolution to the Chinese slowdown will be the key to GDP growth picking up in India.