As China continues to reel under the impact of Coronavirus -- confirmed cases are climbing towards 60,000, according to Bloomberg -- its economy has taken a massive hit.
Retail car sales fell 22% to 1.71 million units, the biggest-ever drop for the month of January, Bloomberg reported, adding that according to the China Passenger Car Association, February sales could drop 30%.
The epidemic has unleashed a massive disruption of economic activity. Hubei province, which according to Bloomberg is equal to the size of Sweden's economy, has been facing a shutdown for more than three weeks now. How will these developments impact India?
One way to look at it is to see the importance of China in India's foreign trade. China has been India's largest source of imports since 2004-05, shows data from the Centre for Monitoring Indian Economy (CMIE) database. In 2018-19, the latest period for which annual data is available, it had a share of 13.7% in India's total imports. Any major disruption in the Chinese economy can disrupt these imports and hence both production processes and supply of consumer goods in India.
However, the headline numbers do not tell us about the importance of Chinese imports in various categories of goods. An analysis of the World Bank's World Integrated Trade Solution (WITS) database provides some insights into these. Chinese imports had an average share of almost 40% in India's total capital goods imports, one-fifth of consumer goods imports; and 15% of intermediate goods imports, according to an analysis of import data from 2014 to 2018. This means that any major disruption in production in China will adversely impact investment, supply chains as well as manufacturing and supply of consumer goods. This can lead to both short-term and long-term problems in the economy.
The Chinese economy is also an important export market for India. CMIE data shows that China was India's third largest export market, after the US and the United Arab Emirates in 2018-19. In the case of exports, raw material producers would be the worst hit if the Chinese economy does not recover from the Coronavirus disruption soon. A five-year average of India's exports to China shows that China had a 10.03% share of total raw material exports from India.
Tim Nicolle, Founder and CEO, PrimaDollar, said: "Many businesses will find ways to work remotely or virtually if they can - it is the manufacturing enterprises that require large workforces to be present in one location that will be affected seriously. So this means that India will suffer - not just because health care system might get overloaded, but also because efforts to contain the virus will be very disruptive."
"Can this lead to a rise in prices? Yes, this is the most likely result of interruptions in supply. Moreover, it will also lead to rising interest rates because the policy response to supply-shortage inflation is to dampen demand. Again, let us hope we are wrong, but the data points so far suggest this is direction of travel," he added.