As the Reserve Bank of India Governor Shakti Kanta Das tries to assuage the fears of Covid-19’s negative impact on the Indian economy, the Sensex on Thursday lost 1300 points and Rs 5 lakh crore of investor wealth in a matter of hours. Oxford Economics warned that the spread of the virus to regions outside Asia would knock 1.3 per cent off global economic growth this year, the equivalent of $1.1tn in lost income
The consultancy firm said its global economic model showed the virus was already having a “chilling effect” as factory closures in China spilled over to neighbouring countries and major companies struggled to source components and finished goods from the Far East.
The world is in the grips of the dreaded coronavirus attack. The Covid-19 virus has slowly turned into a pandemic and impacted almost all aspects of human life. The world economy is under tremendous duress because of the uninhibited spread of the disease. According to several economists, due to the spread of Covid-19 the threat of recession has intensified the world over.
The Covid-19 virus, which originated in the Wuhan province of China, has so far claimed 2,814 lives and infected a further 82,585 people. The virus has spread over 50 countries including Japan, Singapore and Italy. It has been wreaking havoc on the global economy.
Covid-19 has hurt the tourism sector the most. Around 90 per cent bookings for various tour packages to Italy for the next month have been cancelled. The USA, which received three million Chinese tourists last year, expects a fraction of that number this year. Chinese tourists are one of the highest spenders in the world. And due to the spread of the disease Chinese business and leisure travel have practically ceased.
The international economy is being further battered as China is also the biggest manufacturing hub in the world. Most of the factories have shut down hitting the supply chain real bad. The Chinese shutdown of its manufacturing units has immediately impacted Apple, Nike and General Motors among others.
China is the second largest economy in the world after the US. Hence, if China gets affected, the ripples are bound to reach far and wide. Oxford Economics said it expected China’s GDP growth to fall from six per cent last year to 5.4 per cent in 2020 following the spread of the virus. But if it spreads more widely in Asia, world GDP would fall by $400bn in 2020, or 0.5 per cent.
During the time when SARS broke out, China was the sixth-largest economy and accounted for only 4.2 per cent of the world’s GDP. The Asian giant is now the world’s second-largest economy, accounting for 16.3 per cent of the global GDP, therefore, any slowdown in the Chinese economy would impact globally.
The Reserve Bank of India’s Governor, Mr Shaktikanta Das, recently held a press conference to address the Covid-19 outbreak. Like his usual self, Mr Das kept spouting contradictory statements about the economy. He said that the coronavirus disease will have a limited effect on India while mentioning the fact that China is our second largest trading partner. Experts could not figure out how India will not be impacted when its second largest trading partner’s economy is in doldrums.
Moreover, India’s pharmaceutical industry, automotive sector and the electronic sector are heavily dependent on Chinese supplies. As we already know that the Indian economy is going through a very lean patch, it will be impossible to avoid further negative effects emanating from China.
It should be noted that India imports electronics, consumer durables and auto components as well as bulk pharmaceutical drugs from China. About 18 per cent of India’s merchandise is being imported from China. India is also highly dependent on China for electronic components and consumer durables. According to government data, around 67 per cent of electronic components and 45 per cent of consumer durables are imported from China.
According to Dun & Bradstreet’s Economy Observer report, manufacturing companies could face production disruptions if the length of the outbreak gets prolonged and their supply chain is not restored to normalcy.
According to the report weak demands along with high inflationary pressures and geopolitical issues are likely to keep the Indian Index of Industrial Production (IIP) subdued.
The research firm expects IIP to remain in the range of 0.1-0.5 per cent during January 2020. India’s industrial production growth had turned negative in December, contracting by 0.3 per cent, mainly on account of a decline in manufacturing sector output.
According to economists, the coronavirus may devastate the international economy on a scale not seen since the 2008 financial crisis.
On Thursday, financial markets across the world plunged afresh as countries stepped up efforts to contain the virus by banning travel, closing schools and postponing major sporting events and business conferences.
The FTSE 100 slumped by 3.5 per cent, extending a losing streak that puts the blue-chip share index on course for its worst week since the eurozone debt crisis in 2011. The Indian Sensex lost 1300 points.
The sports industry expects a huge jolt as uncertainties over the holding of Tokyo Olympics as Japan gets more and more embroiled in coronavirus.
On Wall Street on Thursday, the Dow Jones at one point shed more than 700 points. By mid-afternoon it was down 590. The Dow had already lost more than 2,000 points in the first three days of this week.
A host of big names were added to the lengthening list of companies reporting serious impact on their finances and warning of further pain ahead if the outbreak’s progress cannot be halted soon.
- Multinationals Microsoft, PayPal and Standard Chartered forecast disappointing profits.
- Social media giant Facebook shelved its annual developer conference in California where the company usually unveils new products.
- Goldman Sachs forewarned that coronavirus could wipe out profit growth at US companies in 2020.
- Carmaker Aston Martin predicted falling sales and cautioned of disruption to its supply chain.
- Real estate firms pulled out of the industry’s annual Mipim conference, due to be held in Cannes next month.
- Budweiser beer owner ABInBev reported a $170m hit to profits.
- Advertiser WPP quarantined its staff returning from various Asian countries.
- Cosmetics giant L’Oréal banned its 86,000 staff members from travelling.
- Shoemaker Crocs said Asian disruption would cut its revenues by up to $30m.
Apple, McDonalds and Starbucks have already announced that their revenues are going to be hit badly due to Covid-19.
Against this backdrop it will be highly optimistic to expect that the Indian economy will revive any time soon. While international agencies like the IMF and World Bank have slashed their forecast of our GDP growth to less than five per cent for the current year, the Covid-19 is expected to further dent the figures.
Article by – Arijit nag
Arijit Nag is a freelance journalist who writes on various aspects of the economy and current affairs.
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