Major crisis in China is ominous for India too
Sushma Ramachandran
Senior Financial Journalist
The novel coronavirus crisis in China has become a global challenge as it has metamorphosed from a health issue to an economic predicament. Like other countries, India too is facing the fallout of the deepening calamity in its northern neighbour. The situation has been made worse by the fact that the two countries are now closely linked in terms of economic ties. Though political and diplomatic relations may be on the frosty side due to sensitivities on border issues and China’s support of Pakistan in the global arena, the situation is vastly different in the areas of trade and investment. Trade ties are flourishing.
This is despite imports being vastly higher than exports, leading to a huge trade deficit. Bilateral investment flows are not just buoyant but growing by the day. China has taken the lead here too, having pushed substantial funding into the start-up ecosystem as well as manufacture and assembly of appliances and smartphones. Not only that, recently India has allowed China’s telecom giant, Huawei to participate in the 5G spectrum trials despite pressure from the US to ban it on security grounds.
There is, thus, an inextricable linkage of economic interests. So, the closure of industrial units all over China and the resultant loss of production will affect India significantly, as they will a host of other countries. Media reports are already appearing about the impact of component supplies being halted to numerous automobile, electronics, consumer goods and pharmaceutical factories in this country. Inventories have apparently been built up to meet the seasonal shortfall due to the Chinese New Year holidays, but this will not meet the requirements in case production remains shut for a longer period. In some areas like solar modules for power projects, there has been a complete stoppage of work since supplies have slowed down. Even if work resumes in the next few days, it will take a while for the output to get back to regular levels. Exporters dealing in steel, coal and iron ore are equally concerned as China is one of the biggest markets.
Much depends now on the pace of industrial units starting work again. Some provincial governments and companies have announced the closure of factories till the end of this month. There are reports of resentment among Chinese workers about the shortage of face masks in their workplaces. So, industrial production is not likely to return to normal levels anytime soon.
The current crisis, however, provides a timely reminder of the growing closeness of the two economies. Apart from Indian companies importing components, roughly 800 Chinese companies are located here, though a much smaller number actually have manufacturing facilities. Chinese companies have also become big venture capital players, putting their might behind some of the biggest Indian unicorns. Alibaba,TenCent, Fuson, Didi Chuxing and China Lodging Group are among those active in the start-up ecosystem. Household names in this country and unicorns like Paytm, Zomato, Swiggy, Ola, Oyo, Big Basket and Byju’s are among the ventures that have been supported by these companies. Chinese investments are reported to have grown from $668 million in 2016 to $5.6 billion in 2018, according to data from Traxcn, a global start-up tracking agency.
Bilateral trade is also rising rapidly between the two countries despite a slight decline last year, owing to the economic slowdown having taken a toll. Two-way trade fell from $89.71 billion in 2017-18 to $87.07 billion in 2018-19. This reduced the huge trade deficit of $63 billion marginally to $53.6 billion for India. Even so, China remains one of this country’s top trading partners along with the US.
Given the scale of imports, it is evident the hike in customs duties recently in the Budget was aimed mainly at Chinese goods in a misguided bid to protect the domestic industry. But as far as imports of components are concerned, this has enabled India to become part of the vast global value chains that are now an accepted part of international trade flows. In these global value chains, different countries manufacture either raw materials or specific components for a product which is then assembled in yet another location. India has relied on this concept to expand its smartphone manufacturing facilities in a big way. This may be a reason for the temporary shorfall in components, but is just a short-term blip which should be resolved shortly.
Even in the telecom sector, India has resisted US pressure and allowed Huawei to participate in the 5G trials. As a result, Vodafone and Airtel have sought to work with the Chinese company along with other European network equipment vendors. The Telecom Ministry has clarified that this decision only applies to the trials and a decision will be taken later on final deployment. What is significant, however, is that a decision has been taken in the larger national interest to ensure that the country gets the best equipment in the next phase of technology in the telecom sector.
The impact of the slowing down of the Chinese economy due to the novel coronavirus will affect India as it will the rest of the world. The fact is that China now accounts for 16 per cent of the world’s GDP as compared to only three per cent when the SARS epidemic took place in the 2003. The Chinese and Indian economies have also become more intertwined since then in terms of both investment and trade flows.
Thus, the crisis in China is ominous for this country which is already facing a slump in growth. If industrial output is curtailed in some sectors due to shortfall in both imports and exports from China, it could affect the prospects for economic revival. However, it is not just on the economic front but also on humanitarian grounds that one must hope for the virus to be controlled quickly and with as little loss of lives as possible.
