Post the spread of coronavirus (COVID-19) in China, India is receiving queries from the European Union (EU) and the US for textiles, homeware, ceramic tiles, engineering goods, and furniture, seeking to replace China as a supplier. However, India Inc is constrained by regulatory mechanism, limited production capacity as well as fierce competition, especially from Vietnam and Cambodia. In addition, the impact from the COVID-19 virus is likely to be higher than what was witnessed during SARS 2003 as the number of people effected is higher and China is more closely linked to the global supply chain compared to 2003, says a research note from HDFC Bank.
According to the report, in relative terms, India seems insulated from the virus and could emerge as an alternative global sourcing base for a number of items.
However, India needs to develop an ecosystem to complete manufacturing rather than just assembly, make the country a manufacturing destination for global companies and accelerate the 'Make in India' initiative, says the report prepared by HDFC Bank's treasure economic research team lead by its chief economist Abheek Barua.
Sharing an example of leather sector, HDFC Bank says, domestic footwear companies are heavily dependent on components such as soles on China and thus would be affected due to the coronavirus spread in that country.
China is the third largest market for domestic merchandise goods, accounting for 5.1% of India’s exports in FY2019. "Slowdown in economic activity in China likely to weigh on exports from India. China’s economic growth is likely to moderate to below 6% in 2020. Export of commodities like ores (India exports 72% of its total ores to China), organic chemicals, and cotton is like to get hit should the disruption from the coronavirus continues for an extended period," the report says.
During the severe acute respiratory syndrome (SARS) outbreak, India’s trade relations with China were not affected as total trade with that country stood at a mere $4.8 billion in FY2003, accounting for 4.2% of India’s total trade. Both exports and imports share from China increased after the SARS outbreak.
At present or in FY2019, China is India’s second biggest trading partner, accounting for $87.1 billion in total trade or 10.3% share in India’s total trade.China is the biggest importing partner, accounting for 14% of total imports in India. China is also third largest market for domestic merchandise goods, accounting for 5.1% of India’s exports.
According to HDFC Bank, the loss for China could be gain for other countries.Due to the US-China trade war, global supply chains have been shifting to other emerging markets (EMs) like Vietnam, Bangladesh and Thailand. The supply disruption in China due to the coronavirus could provide an opportunity for some of its EM competitors to gain further, it added.
The decline in new cases reported in China signal that the impact from the virus could now be peaking and the situation could start improving over the coming weeks.
However, workers’ returning to work in China after extended shutdown will be closely tracked. China's state media reported last month that more than 80% of its central state-owned enterprises’ roughly 20,000 manufacturing subsidiaries have resumed work as of 18 February 2020. "However, quarantine restrictions, uncertainties over government approvals, logistics issues and insufficient staff to run at full capacity mean that recovery is likely to be slow. Only 30-50% of production have resumed by that time," the report says.
Due to COVID-19, global supply chain disruptions are hitting production in other countries as well, HDFC Bank says, adding while Apple had cut its sales forecast, hit to global auto industry is likely to impact Japan, South Korea and Germany.
Within China, mining, travel, construction and retail are expected to take a hit, it added.
