Some Comfort For India As Coronavirus Threatens To Stall Asian Economy

The Indian economy is expected to get impacted, at least indirectly, from the massive outbreak of the novel coronavirus that has killed more than 1,000 people in China. Yet, the extent of impact could be tricky to assess.

China is a key cog in the global economy, a manufacturing hub that contributes nearly 16 percent to the global gross domestic product. The country closing large swathes of its economy to curb the spread of the virus can result in a major supply and demand shock. Besides, a slowdown in China will have a negative effect on Asian exports, production and availability of parts and components.

One way to assess the damage that economists have been using is to compare the impact of the current outbreak to that of the SARS epidemic that originated in China in 2002-03. But that has limitations. “The rest of Asia will not be immune to the spillover effects from China, as it’s economically more deeply integrated with China today than during SARs 17 years ago,” Nomura said in a recent note.

Further, the contagion now is worse than SARS in terms of breadth and the speed of new infections. “At this early stage, when we do not know the depth, breadth or duration of 2019-nCoV, it’s very difficult to quantify the economic impact,” Nomura noted.

It said that if the infections spread outside China with the same 2 percent mortality rate as seen in the mainland, then there would be a “larger, double whammy impact” in addition to the indirect economic spillover effects to Asian countries.

India was the only Asian economy that didn’t witness decline in GDP growth due to the SARS impact in 2003. India’s economic growth expanded by 1.8 percentage points between Q1FY03 and Q2FY03 when the SARS outbreak was most pronounced. Nomura expects a similar trend to play out this time with growth expanding 20 basis points while all other Asian economies contract.

That’s perhaps because India has the least economic exposure to China, according to Nomura. In contrast, Hong Kong is the most vulnerable to the economic effects of the novel Coronavirus outbreak.

India Ratings and Research shares a similar view, and doesn’t expect any material impact on Indian corporates’ supply chain in the near term. That’s provided if the outbreak is contained in the Hubei province which is currently locked down.

“In case the virus is transmitted over the next three to four months, the extent of supply chain disruptions globally could be higher than that during the 2003 SARS outbreak,” India Ratings said in a research note. “The quantum of impact on sectors would be contingent on the nature of business activity and the nature of linkages the rest of the world has with mainland China.”

There are certain sectors which India Ratings feel could be hurt as they are reliant on import of raw materials from China.

“Several Indian industries have a significant direct dependence on supplies from China,” the rating agency said. “Some of these products such as antibiotics, activated pharmaceutical ingredients and fertilisers are critical commodities and any disruption in the supply over the long term could have far-reaching economic consequences for India.”

Textiles and automobiles could also face supply disruptions, the note said. “All this put together could further worsen the recovery in industrial production over the near to medium term. Nonetheless, such a disruption isn’t India Ratings’ base case scenario.”

China is a key driver of the world economy partly because it accounts for nearly 11 percent of the total imports. “China serves not only as one of the largest importers for many commodities but also as a transit hub for various supply chains in South and East Asia,” India Ratings said.

If the outbreak continues unabated, it will take a toll on global commodity prices. And that could be a mixed bag for India Inc.

The corporates that are net users of these commodities are likely to report improvement in their debt protection metrics, while the net producers will be affected, India Ratings said.

Companies producing dyes, pigments, basic chemicals and polyvinyl chloride are expected to benefit the most, according to Rohan Gupta, analyst at Edelweiss Securities. The key players in the segment that are likely to gain are Bodal Chemicals Ltd., Kiri Industry Ltd., Sudarshan Chemicals Ltd. and Akshar Chemicals Ltd., among others.

Gupta said that speciality chemical companies will remain insulated from the events in China. However, firms like Aarti Industry Ltd. and Atul Ltd. may see part of their product portfolio benefit from rising chemical prices.

In contrast, the Indian agrochemicals industry will be hurt the most. Gupta said this industry depends a lot on the bulk raw material imports from China. “And if that happens, we may see some price increase from the Kharif season that starts in April.”

By and large, most assessments don’t see the novel coronavirus as an event that could send the Indian economy into further disarray. But these assessments discount a scenario of the virus spreading faster and farther than expected. In which case, things could be much more different.

“We believe the stability of global growth is at risk, owing to the cross-border spread of nCoV, disruptions to global supply chains and China’s slumping imports of commodities and services, including tourism,” Nomura said.

“Still, with the long incubation period of 2019-nCoV, the danger of it becoming a global pandemic remains, in which case other countries would become directly exposed to local demand and supply shocks, as China is today.”