The outbreak of the novel Coronavirus, or COVID-19, is a wake up call for nations and MNCs who are excessively dependent on the global value chain manufacturing, concentrating in a particular country. In the last two decades China has become centre stage for the global value chain. It has become important not as the biggest global manufacturer and exporter, but also as a supplier of intermediate inputs for manufacturing elsewhere.
As a result, any disruption in China has a ripple effect in the economies, that are dependent on China’s value chain production. It is the global hub for value supply chain production. As of today, 20 percent of global trade in manufacturing intermediates originate in China, according to UNTACD. Eventually, disruption in China will not only affect China’s manufacturing, but also undermine the output elsewhere.
China faced a similar epidemic before – such as SARS (Severe Acute Respiratory Syndrome) in 2003, but it did not impact the global economy in a big way. This was because at that time China’s importance in the global economy was insignificant. In 2003, China constituted 4 percent of global GDP; that share has increased to 17 percent now. This means, any setback in China causes vulnerability in the global economy.
The IMF downgraded the growth forecast for China at 5.6 percent in 2020 – the lowest since 1990. This suggests that the Coronavirus damage is more cataclysmic than SARS. Chinese GDP growth plummeted from 11.1 percent in first quarter of 2003 to 9.1 percent in the following quarters. Even then, the growth bounced back. But, this left China’s economic parameters vulnerable. Eventually, it failed to insulate from the Leyman shock in 2008. The growth plummeted year after year during the last decade. It resulted Chinese banks to hold large non-performing assets – a source of major economic crisis.
There are two way effects of the disruption in Chinese manufacturing. One, it is the commodity exporters who rely on China as a big customer. And second, the nations whose output is largely based on imports from China, such as intermediates, components and parts. The first one will affect the nations like Australia, most of Africa nations , Latin America and middle east and the second one includes nations like European nations, USA, Japan, S. Korea, Taiwan, UK and Vietnam.
According to UNTACD’s estimation, the slowdown in manufacturing in China will result a global export loss of US $ 50 billion across global chain. The study revealed that the most affected sectors would be precision instruments, electronics, automobiles and communication equipment.
And the most affected areas with trade loss would be European Unions (US $15.6 billion), USA (US$ 5.8 billion) Japan (US$ 5.2 billion) South Korea (US $ 3.8 billion) , Taiwan (US$ 2.6 billion) and Vietnam (US $ 2.3 billion). This means most of these nations were largely dependent on China as an workshop in value chain manufacturing.
As compared to these, the trade impact on India is much less. UNTACD estimated the impact on trade loss for India would be at US $348 million. Though the impact is minuscule in terms of total trade, the fear psychosis is not eroded since there is no sign of ebbing the virus in near term
Given the concern over slow progress of Make in India, government pitched for a new look to it. In Economic Survey 2019-20 – a pre-budget survey and an important policy advisory document for the economy – government advocated value chain as a part of Make in India. It rechristened Make in India campaign as “Assemble in India “ as a part of Make in India. This called for greater participation in assembly operation, which will increase foreign value-added stakes in exports, the survey said.
The survey lamented the low stake of NP (Network Products) in India’s exports. NP are produced under value chain. Against this, NP has became the major trigger for surge in exports from China and South East countries. For example, in between 2000 to 2018, the shares of NP in export baskets for China increased from 34 percent to 52 percent and for Vietnam, increased from 6 per cent to 17 percent. In case of India, it increased from 5 percent to 10 percent.
There are three ways that the Coronavirus can impact Indian industries. One, supply chain disruption, which will affect industries like pharmaceuticals, electronics, automobile, and renewable energy where import dependency on China is substantial. Second, demand disruption , which will impact exports from India. They include diamond, textiles and seafood industries.
China accounts for 27 percent of India’s auto-component imports. The substantial dependence on auto-component imports from China heralds a major threat to automobile industry, given the fact that inventories are drying up and sign of ebbing of the virus is not visible.
The drug industry reached a volatile situation. Its dependency on imports is 60 percent for API requirement. Of these, China accounts for 65-70 percent. The government has already abandoned exports of critical medicinal products as a counter measure.
Similarly, high dependency on imports of electrical and electric components and parts from China deepened the crisis in domestic manufacturing as well as exports. China accounts for 40-41 percent of India’s imports of these products .
Solar energy is another area which is highly import sensitive to China. India imports approximately 70 percent of its requirement or photovoltaic (PV) modules from China.
In summing up, even though the impact is not as grave as other affected areas, the outbreak of Coronavirus should lob second thoughts on Assemble in India. With China deepening in disruption, trust in the global value chain is fading. The malaise may act an headwind to the progress of Assemble in India. The consideration behind “Assemble In India” was to pitch India as replacement to China after it lost cost competitiveness in the exchange war with the US.