Coronavirus and its impact on Global Economy

International Affairs

Topic: General Studies 2:

• Effect of policies and politics of developed and developing countries on India’s interests 

Coronavirus and its impact on Global Economy

Context: The Coronavirus, which began as an epidemic across China, has affected more than 92,000 people out of which 80,000 confirmed cases are in mainland China alone, with the death toll reaching 3,130 people.

The situation is a public health emergency and also an increasing fear that the pandemic will spread across other regions. 

Chinese Slowdown due to Coronavirus

• China is the second-biggest economy in the world. 
• China is not only the world’s factory but also a huge marke
• The Slowdown in China would impact world growth through trade routes and the shock to the global value chain i.e.
• China’s share in world trade is around 12.5 per cent — 
  • Its imports are $2.1 trillion (11.7% of global imports) and 
  • Its exports $2.4 trillion (13.4% of global exports)

• Almost 45% of China’s exports comprise of electrical machinery and equipment, including computers.

• Any slip in its growth — the conservative estimate is 0.5 per cent as of now — would affect the global economy. The OECD has forecast growth of just 2.4% in 2020, down from 2.9% in November 2019

Australia, Singapore and South East Asian countries

• These will be the worst affected, given the economic and market exposure to China. 
• Australia and Singapore could face not just disruptions in the flow of goods and services but also a loss in reveneue from tourists and students from China.

Oil Producing Countries: Due to falling demand from China and also from across the globe due to ripple effect caused by Chinese slowdown, crude oil prices is down by 15 per cent

Commodity driven countries like Peru, Chile and Indonesia – are also going to face slowdown China is the biggest consumer of these products like Copper, Aluminium etc

Impact on India

• China is India’s largest trading partner, accounting for 5% of the country’s exports and 14 % of imports. 
• India is dependent on Chinese imports in 
  • Healthcare and pharmaceuticals (active pharma ingredients)
  • Smartphones and accessories 
  • Solar cells modules – India’s solar power plants import about 80 per cent of components from China
• A supply crunch in components and finished products from China will increase the cost of production and general price level. 
• This comes at a time when the Indian economy is sluggish.
• Indian exports to China will also be hit significantly in organic chemicals (17%), yarn (21%), metal ores (68%), building material (31%).
• India accounts for nearly 16% of China’s cotton imports and 13% of its construction material imports.

Critical Analysis of India’s Situation

• There is a belief that this episode provides an opportunity for India to replace Chinese exports, similar to the argument that India would benefit from the tariff war between the US and China
• However, it’s not easy to improve export competitiveness and manufacturing in a short time
• Many small businesses in India have been impacted due to their dependence on Chinese imports and also because they export components to Chinese factories
• At present, the Indian economy, which is grappling with high inflation, would get an immediate respite from the falling crude prices.

Conclusion

• India has been grappling with demand-side problems and corona is a supply-side shock

Connecting the dots

• Comparison of Corona Virus outbreak to SARS epidemic in 2003 – Changes in China’s overall economic significance in Global Economy