Coronavirus: What it means for Indian Economy

The third confirmed case of coronavirus was reported in India a few days ago. All three cases have been reported in Kerala. Till yesterday 5123 people in India were under home surveillance as a precautionary measure for coronavirus. We are confident that it will be contained in India and it carries no spreading fear.  Nevertheless, what we are not confident of is the economic impact of this deadly virus emanating from China. If this continues for a quarter, it will adversely impact the global economy as well as the Indian economy.

Impact of SARS on the Chinese economy

A lot has changed in the last 17 years when we saw the outbreak of SARS virus in China in 2002-2003 that caused the death of nearly 350 people. The death toll due to coronavirus is already above 600 with confirmed cases now well above 28,000. Hence the magnitude of coronavirus is much higher than SARS.

Nevertheless, what happened when SARS virus outbreak will give us a sense of what we can expect going ahead. The impact of SARS was most acute in the second and third quarters of the year 2003, which resulted in the fall of GDP growth by almost two per cent in nominal terms. Chinese economy slowed down from 13.4 per cent in the second quarter to 11.5 per cent in the third quarter. The impact of coronavirus will not be less, as the economy will be hit hard due to travel restrictions, both domestically and internationally. Moreover, this virus has hit at a time when the economic activity in the country is supposed to be at its peak due to the Chinese New Year. Hence, the restriction put by the Chinese government will hit harder the economy that we saw in 2002-03 due to SARS.

Impact of Coronavirus on Chinese economy

According to a report by Citigroup, Chinese economy will grow at 4.8 per cent in the first quarter and at six per cent growth in the fourth quarter of 2020. The bank has also cut its forecast for growth in 2020 to 5.5 per cent from 5.8 per cent. China already cut its official growth target to 6 per cent for 2020 in December. The target for 2019 was 6 per cent to 6.5 per cent. The 6.1 per cent growth in 2019 was the lowest in nearly 19 years. About two-thirds of China’s provinces, regions, and municipalities have cut their 2020 growth targets from last year, despite Part one trade deal with the United States. China’s central bank took swift action to cushion the economy and plunging markets from the blow of a spreading new virus. They announced measures to provide short-term funding to banks and cutting the interest rate it charges for the money.

The cash injection was part of a raft of supportive measures announced to soften a market sell-off and help firms affected by the disease outbreak and extended holiday.

The swift response by the PBOC suggests it is very keen to support the economy by lowering the overall cost of funding

Impact on India

On a positive note, fall in the economic activity in our neighbouring country will impact the demand for crude oil, which happens to be the world’s biggest importer. Oil demand in China has dropped by around three million barrels a day, according to people with inside knowledge of China’s energy industry. This has resulted in a sharp drop in crude oil prices. The price of crude oil has already witnessed a sharp decline and is trading below USD 50 per barrel. 

Any fall in the prices of crude oil is positive news for India and Indian economy, as it imports most of its needs and remains one of the biggest importers. Besides, it will also help the government to mend its finance.

China being a strong linkage to the global supply chain is going to adversely impact some of the sectors in India that depend upon Chinese import. Some sectors such as electronics and pharmaceutical industries that carry short inventories and depend heavily on China for their crucial raw material such as bulk drugs can see some supply disruption if they have no other alternatives.

China is among the top 10 destinations for engineering exports from India and hence, they will also get impacted if the situation continues for long.

It has been seen earlier that economy re-bounces with greater force after such event subsides and hence, we may see this as a temporary blip.