How govt can protect India Inc from catching the China virus

By Chandrajit Banerjee

As global GDP estimates are being downgraded by multilateral institutions because of coronavirus, India, too, will have to evaluate the impact on its economy, especially with the country’s high dependence on Chinese imports.

China accounted for almost 14% of India’s imports in 2018-19, and an even higher share when one looks at India’s top imports. CII data estimates China accounting for 45% of India’s electronics imports, one-third of machinery imports, and almost two-fifths of organic chemicals.

Given the coronavirus outbreak in China, the immediate requirement is to look for alternate sources of these products. Take essential products such as pharmaceuticals where India sources 65-70% of active pharmaceutical ingredients (APIs) from China. While there are enough stocks available for now, a longer disruption may lead to a shortage.

This needs to be avoided by either expanding domestic capacity, or importing from alternate sources. As both options will be more expensive, some support from GoI in the form of a loan, subsidy or interest rate subvention would be welcome.

China is also a key export market for Indian industry and accounts for 5% of India’s exports. Many firms would suffer revenue losses and MSMEs will need support to diversify to other regions.

Key products exported to China include cotton, ores, organic chemicals and frozen fish. Since many of these products are raw materials or intermediate inputs, this may provide an opportunity to encourage higher value addition within the country. Capital support is required for businesses trying to do so, while marketing support is required for exporting the finished product to new markets.

A government-industry task force should be set up to create a strategy to handle the situation and avoid industry closures, job losses and price increases.

Different strategies may be required to address the challenges in different sectors and a nuanced approach is called for. In a sector such as electronics, where most components are imported, it may be the right time to attract investments so that more components are manufactured locally. The implementation of key industrial parks and logistics hubs must be fast-tracked.

On the macroeconomic front, the implication of the virus outbreak will be visible in the short term as slowdown in growth and hike in prices. At a time when a revival in growth is expected, a recalibration of such expectations may be required. Supply disruptions and price increases may lead to some setback in the next couple of quarters.

However, with government and industry putting together the right strategy for risk mitigation, a revival in the near to medium term is possible. Some benefits may also accrue on account of the likely moderation in the price of crude oil and other commodities, as China demand remains soft.

With a number of factors impacting the demand-supply scenario across sectors, the macroeconomic picture will become difficult to anticipate. Prices of many items may rise due to shortfall in supply from China. RBI will need to look through the shortterm price disruptions while setting monetary policy.

GoI needs to roll back some of the duty increases it had announced in the budget. The intention had been to encourage domestic manufacturing. But with possible price increase, this would only add to the cost of production within the country and is best avoided. In fact, reimbursement of state levies to exporters, as promised by GoI, must be expedited.

As normalcy returns to China, a situation will emerge where Chinese producers will try to liquidate their inventories at a low cost. The government-industry task force must be alive to such developments and advise strategies such as quality standards be imposed on such imports. A comprehensive set of measures for the near to medium term needs to be formulated to combat the impact of the coronavirus.

GoI and RBI must be ready to tweak policies wherever required to help tide over the exigencies created by the virus. Constant monitoring is required for the next few months.

The writer is director general, Confederation of Indian Industry (CII)

Views expressed are author's own