The bug and the bite

Economic impact of coronavirus on India may be restricted to current financial year

HEALTH-CORONAVIRUS/CHINA-FACTORIES Slow recovery: Factory production in china has restarted in a quarantined manner | Reuters

With around 90,000 Covid-19 cases confirmed globally as on March 2, there would be a substantial impact on global supply chains. As China accounts for 16 per cent of global exports, overall trade will be affected in the next few months. In a base case scenario, it would be restricted up to March 31, because as the temperature starts rising in China, the impact of the virus could wane. In a quarantined manner, factory production in China has restarted, though dispatches from ports have not resumed as yet. There is a strong case that stabilisation will begin in April.

Sectors like consumer durables and electronics have inventory lined up till March 31. beyond that, it will start reflecting in the sales.

So, the impact on India is restricted to the closure of the financial year 2020. We have looked at it through four quadrants:

1. Where we are importing raw materials; it will impact production levels in India

2. Where we are importing final products that are competing with domestically manufactured products. There can be some benefits for domestic industry

3. Where we are exporting globally and China is competing with us; there is an opportunity if we can scale up and fill the gap

4. Where we have exports to China. Although lower than imports, it is worth $29 billion and it will get impacted

One big impact is supply chain disruption. We did an assessment across 15 key sectors in India and found that in sectors like auto components, pesticides and fertilisers, solar panels, pharma bulk drugs, and consumer durables and electronics (including mobile handsets), a large proportion of the raw material comes from China. For example, 18 per cent of our auto component imports and 30 per cent of tyre imports come from China. About 45 per cent of the completely built units of consumer durables and about 67 per cent of electronic components come from China.

In pharma bulk drugs, India imports a lot of intermediaries. About 70 per cent of total imported intermediaries come from China. India imports a lot of technicals, which are an input for manufacturing pesticides, and about 50 per cent of these come from China. About 10 per cent of the urea that is consumed in India is imported from China.

Sectors like consumer durables and electronics have some inventory lined up till March 31. But, beyond that, if nothing is supplied in the next two months, it will start reflecting in the sales volumes, especially in segments like air conditioning that are entering a peak sales cycle.

Similarly, about 67 per cent of the components in the electronics and mobile handsets segment are imported from China, as India is more into assembling than into manufacturing. We will see a disruption in terms of supply chain getting impacted for the next two quarters for sure.

In the case of telecom equipment, a large portion of imports comes from China, which means if the government was planning to conduct 5G trials, there will be a delay. We are already late because of the financial tumult in the telecom sector.

As India imports 70 per cent of the solar modules from China (globally China accounts for 80 per cent of the capacity), substituting it with some other partner might not be easy. We will see a commissioning delay of four to six months in projects.

A few automobile players have already said that they were covered till March for supplier-specific components. If supplies do not resume, we might face issues in the manufacturing of BSVI vehicles, especially at a time inventories have been significantly optimised to phase out BSIV vehicles.

Pesticides and urea are a very important part of the value chain imports from China. As rabi procurement season for pesticides is over, and stocking for kharif begins only in April, we may not see a major disruption in the market.

In the case of pharma bulk drugs, companies have created buffer stocks of raw materials for 2-3 months as there was a holiday season in China. As a result, they are well cushioned until April.

In the case of imports of finished products, India has an exposure worth $85 billion to China. This is about 20 per cent of India’s total imports, and includes ceramics, paper, plastics and steel. In ceramics, about 37 per cent of India’s imports come from China and at a substantially lower price than what domestic players offer. Lower imports will help domestic manufacturers better utilise capacity and improve their pricing power.

About 17 per cent of India’s paper imports come from China. Any reduction in this will provide Indian players the opportunity to improve their pricing and sales, especially in the paperboard segment. Similar is the case with plastics. You will also see domestic steel manufacturers benefit from import substitution. Our exports will benefit to an extent, as there is a void in the global market after the virus outbreak.

As far as exports are concerned, in readymade garments, you will see a positive impact because China accounts for only 1 per cent of India’s exports, and in other export markets, especially in the US, India competes with China. The current situation will give the Indian players some pricing power and some uptick in sales.

The southern textile manufacturing cluster does have the capacity to service additional exports if required, and it can provide an upside at a time when the Chinese players are not able to ramp up. On the other hand, about 27 per cent of India’s cotton yarn exports are to China. Here, we will see a decrease, and it will put further pressure on yarn prices and lead to lower margins for yarn players.

While international travel is going to be impacted, airlines are going to utilise those additional planes to have inbound domestic travel. A lot of tourists will also get diverted to India. But since the number of confirmed cases in India is also rising, domestic travel could also get impacted. We were expecting a double digit growth for airline companies, but it should definitely come down.

Ideally, by summer the spread of the virus should subside. If that happens and there is no increase in cases after March 31, then a recovery in FY21 should not be an issue for India Inc. As of now, we are expecting a revenue growth of 5-7 per cent for India Inc in FY21, after factoring in the virus impact. If the virus subsides by March 31, we can expect up to 7 per cent growth.

The fall in crude oil price will have an impact on trade deficit and on the revenue growth rate as all commodity prices will start moving downwards. We will see a benefit in margins as we will have lower raw material prices.

Gandhi is director, CRISIL Research.

As told to Nachiket Kelkar.