Once Asia’s fastest-growing major economy, India’s recent downturn has seen the government hit the fiscal panic button. Will the coronavirus kill off its rescue effort?
As of February 17, India had only three confirmed cases of COVID-19, the official name for the new coronavirus that originated in Wuhan, China. That’s negligible compared to the more than 72,000 infections reported in China. However, the economic impacts of the coronavirus crisis could further chill growth in India’s already troubled economy.
In a February 13 report, ANZ Research said India had only a relatively small percentage of Chinese tourists (2.7 percent of total inbound tourists in 2018) and China accounted for only 5.1 percent of its total exports in fiscal 2019, including chemicals and fuels. Consequently, the adverse impact on Indian GDP via these channels is estimated at just 0.04 percent of gross domestic product (GDP), “the lowest among Asian economies.”
However, before New Delhi breathes a sigh of relief, the Australian bank’s economists said some 14 percent of India’s imports come from China, making it the nation’s biggest import partner.
“The risks from extended shutdowns [in China] or weaker-than-expected Chinese growth (we have revised lower our China GDP growth forecasts) will affect sectors which rely heavily on Chinese imports the most,” the economists said.
“These include ‘electrical and telecom machinery,’ ‘organic chemicals,’ ‘nuclear reactors,’ ‘plastics’ and ‘pharmaceuticals.’ The first four of these five groups also make up India’s top imports in [fiscal] 2019.”
Other sectors such as pharmaceuticals and fertilizers also depend heavily on imported raw materials from China.
A key supplier of generic drugs to the global market, Indian companies procure almost 70 percent of their active pharmaceutical ingredients for their medicines from China, according to Reuters. An extended outbreak that restricts Chinese output could lead to drug shortages and rising prices, according to rating agency Moody’s.
According to ANZ Research, Indian sectors heavily dependent on Chinese imports such as electronic components have only one or two month’s supply of inventory, making them particularly vulnerable to further disruptions.
“There’s some breathing time as manufacturing units had stocked up for the [Chinese New Year]. But that will give a buffer of just three to six weeks,” George Paul, chief executive of India’s Manufacturers Association for Information Technology, told India’s Economic Times.
Already, local drug prices have started rising and further supply constraints could cause an inflation spike, putting pressure on the central bank to tighten monetary policy.
With core inflation hitting a five-month high in January of 4.16 percent and headline inflation topping 7.5 percent, the Reserve Bank of India has little room to move.
Nevertheless, India’s chief economic advisor, Krishnamurthy Subramanian, and other analysts have pointed to the opportunity for India to expand its exports as a result of the crisis.
Helped by foreign investment, India has “slightly” reduced its dependence on China over the past five years, although complexities in its manufacturing system make it difficult for Asia’s third-largest economy to quickly take advantage, according to the Indian daily.
“Chinese investments in India have increased [by] five to six times in the last few years. The current crisis could accelerate ‘Make in India,’” EY India partner Ankur Pahwa said.
However, the nation’s high cost of capital, expensive land, and other barriers have left it trailing competitors such as Taiwan and Vietnam in attracting foreign investment.
Highlighting the problems, the Indian government moved to curb exports of medical masks in the wake of the crisis, even while countries such as France ramped up production in response to increased Chinese demand.
Unfortunately for India’s corporate sector, the coronavirus outbreak is set to damage some of its most indebted businesses.
The telecoms sector is the most financially at risk, with an estimated $30 billion worth of bad loans, followed by steel and infrastructure (around $15 billion each), energy ($12 billion), and textiles (around $10 billion), according to Japan’s Nikkei.
Overall, nonperforming loans accounted for nearly 9 percent of total bank lending in India last year – well ahead of other major economies including China (nearly 2 percent) and Japan (1 percent).
With its own forecasts projecting GDP growth of just 5 percent – the weakest rate since the global financial crisis — the Modi government has sought to boost spending with a fiscal stimulus, including tax cuts and infrastructure projects, in its latest budget.
Yet after the budget failed to revive confidence, analysts have warned that a slowing economy could further increase the pile of bad debts.
With the coronavirus spreading worldwide, New Delhi will be sweating that it is brought under control before lasting damage is inflicted on the world’s second-most populated nation.