As the coronavirus outbreak has led to a disruption in global supply chains for several industries from China, India could emerge as an alternative global sourcing base for a number of items. According to a report by HDFC Bank on the impact of coronavirus, India has been receiving queries from the European Union and the US for textiles, homeware, ceramic tiles, engineering goods, furniture, etc. seeking to replace China as a supplier.
However, India’s regulatory mechanism, limited production capacity and tough competition from Vietnam and Cambodia could act as a constraint to this opportunity.
The HDFC Bank report says that China’s GDP in the first quarter could fall by 1.4-1.5% because of coronavirus.
“We expect growth to recover gradually from Q2 if the impact of the virus is contained over the coming weeks. China growth for 2020 is expected to be below 6%. Monetary and fiscal stimulus to limit the downside to growth,” the report states.
Countries that are expected to be most hit are emerging markets such as Vietnam, Malaysia, India, Thailand, South Korea and Indonesia. And most of these countries are dependent on China for import of textiles, electronic devices, electrical machinery among others.
The impact of coronavirus is likely to be higher than SARS in 2003.
“India’s trade relations with China were not affected during SARS outbreak as total trade with China stood at a mere $4.8 bn in FY03 (accounting for 4.2% of India’s total trade). However, as of FY19, China is India’s second biggest trading partner, accounting for USD 87.1 bn in total trade (10.3% share in India’s total trade trade),” the report states.
India imports 48% of its electronic devices requirements from China, 35% of its textile requirements, 26% of rubber and plastic and 25% of chemicals.
Impact of the coronavirus on India’s imports
India gets 14% of total imports from China, with industries such as pharma, electronics, power, consumer durables having a large dependence.
According to the HDFC Bank report, Indian companies imported around 68% of active pharmaceutical ingredients (API) from China in FY19.
About 40% of India’s electrical machinery and equipment is imported from China, 80% of solar cells and modules which absorb sunlight to generate electricity are imported from China based manufacturers, around 45% of consumer durables are imported from China.
“Anecdotal evidence suggests that the companies typically maintain inventory for 2-3 months. Hence, the impact of the virus outbreak could be felt from Mar-Apr 20. There could be an upward pressure on the prices, going forward,” the report states.
In the automobiles industry, 10-30% of automotive components are supplied by Chinese firms.
“Empirical evidence suggest that manufacturers maintain inventory for a couple of months. However, if the disruptions last longer (factories do not resume activity in China), it could further impact an already struggling auto sector as supply disruption of even one component could halt the assembly line,” HDFC Bank report notes.
Impact on exports
Not just imports, China accounted for 5.1% of India’s exports in FY19 and slowdown in economic activity in China likely to weigh on exports from India.
India exports 72% of its total ores to China. Apart from this, organic chemicals, cotton, etc are likely to get hit should the disruption from the coronavirus continues for an extended period.