COVID19 PANDEMIC IMPACT ON INDIA & CHINA ECONOMY

COVID-19 pandemic may be "GOOD" news for India’s economy or  may be "BAD" for China

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Due to the adoption of free-market principles in China, it has become emerging market economy and one of the world’s most hyped investment locations due to promising opportunity to many companies and investors.

Today, in China, the epicenter of the COVID-19 pandemic, it appears that its economy is to be going down. In the first two months of this year, its economy was already damaged due to pandemic and now number of foreign investors and foreign companies are stepping out from the China and looking to Invest in other Asian countries and India can grab these opportunities.

An overview on China Economy:

“In 2019, Chinese companies signed 6,944 newly foreign contracted projects in 62 countries including ‘Belt and Road Routes’ at a value of $154.89 Billion.”

China is the second largest economy in the world with GDP of $14.4 Trillion (2019). But, in 1950s, it was counted among the poor society and from 1978, under the leadership of Chinese leader Deng Xiaoping (China’s Economic Reformer) and Chinese government decided to break with its Soviet style economic policies by gradually reforming the economy according to free-market principles. And opening up trade and investment with the West, in the hope that this would significantly increase economic growth and raise living standards keep focus on Heavy Industries for the economy growth. And today, China is the world leader in manufacturing and also produces almost half of the world’s crude steel (World 1,869.9 Mt and China 996.3 Mt in 2019).

Due to the Covid-19 outbreak in China, in the first quarter (Q1) of 2020, Foreign direct investment (FDI) fell to 10.8 percent Year-over-Year (YOY) to $31.2 Billion (216.19 Billion Yuan), where as in previous year 2019 of first quarter, FDI in China grew 5.8 per cent from a YOY to $ 136.71Billion (941.5 Billion Yuan). Though Outbound Investment Declined (OID) to 8.2 percent YOY to $110.6 Billion and amid continuing capital controls.

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In 2019, Chinese companies signed 6,944 newly foreign contracted projects in 62 countries including “Belt and Road Routes” at a value of $154.89 Billion. And, also invested $15.04 Billion in Non-Financial Direct Investment (Non-FDI) in nearly 56 countries along the “Belt and Road Routes”, a YOY fall of 3.8%, which is total accountable for 13.6% in 2019. Info graph shows the historical data of China’s Inward and Outward Direct investments, these 30 years data shows china Outward FDI was growing from year 2004 and Inward FDI was growing from year 1992.

These sharp increases in China’s global FDI outflows in recent years appears to be largely driven by a number of factors, including government policies and initiatives of that country to encourage firms to “Go-Global.” The Chinese government wants to use FDI to gain access to Intellectual Property Rights (IPR), Technology, famous brands, etc., in order to move Chinese firms up the value-added chain in manufacturing and services, boost domestic innovation and development of Chinese brands, and help Chinese State-Owned Enterprise (SOEs) to become major global competitors.

After the COVID19 pandemic, Chinese Government is encouraging to re-open Factories, Business, Shops, Dinning and transport but it seems that still china economy slowdown. The problem facing China now is that it’s mostly back in business, but the global shutdown has caused clients and orders to disappear.

An overview of China’s Import and Export:

“China has 24 Free Trade Agreements (FTAs) under construction, among which 16 Agreements have been signed and already implemented.”

 

China’s factories are resuming production, but pandemic-triggered recessions around the world have manufacturers pessimistic about export demand. China’s official index of manufacturing purchasing managers slipped to 50.8 in April. That is down from 52.0 in March, when it bounced back strongly from February’s dismal 35.7.

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But, on the other hand, the exports of China in past 2 months of year 2020 has been recorded in month of February was $292.45 Billion and March was $185.15 Billion, whereas the import has been recorded month of February $299.54 Billion and March was $165.25 Billion. Info-graphic shows the China’s import and export from Jan-2017 to March-2020.

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Currently, China has 24 Free Trade Agreements (FTAs) under construction, among which 16 Agreements have been signed and already implemented. FTA is an effective approach to integrate into global economy and strengthen economic cooperation with other economies, as well as particularly an important supplement to Multilateral Trading Agreements between among three or more nations.

Current Indian Economy:

“Foreign Direct Investment in India averaged $1412.87 Million from 1995 until 2020. Although, During COVID-19 pandemic, FDI in India increased by $2873Million in February of 2020 and could be expected to 4000 Million by the end of this quarter.”

The economy will suffer in FY 2020, which started in April, due to containment measures and weaker external demand and growth projection for India to 1.9% from 5.8% projected in January, holding that the ‘Extension of Lockdown’ to combat the covid-19 outbreak will throw the world economy into the worst recession since the great Depression in 1930s. More positively, however, fiscal stimulus should cushion the economic blow, as should the supply of funds be expanded and easily accessible to Industries and entrepreneur to encourage economic growth (Loose Monetary Policy).

India’s Manufacturing PMI fell to 27.4 in April 2020 from 51.8 in the previous month and far below market consensus of 42 and India’s Services PMI fall to 5.4 in April 2020 from 49.3, and far below market expectations of 40.0. The latest reading pointed to the second straight month of contraction in the sector, due to the impact COVID19 pandemic, amid restrictions on the movement of citizens and business shutdowns. But, In the second quarter, Indian economy could pick up as industries restart their operations with the streamlining of supply chains.

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There are 231 operational Special Economic Zone (SEZ) and around 355 SEZ that are notified in India. COVID-19 pandemic may be good news for Indian competitiveness and capital inflows as long as the government can match after the second quarter of 2020 recovery by providing incentives and other advantages for foreign investors that complement their business plans in India. Ultimately, however, the benefits of India’s SEZ policy have been substantial as it is one of the reasons why there is an increase in the number of foreign firms operating in India.

Foreign Direct Investment in India averaged $1412.87 Million from 1995 until 2020. Although, During COVID-19 pandemic, FDI in India increased by $2873Million in February of 2020 and could be expected to 4000 Million by the end of this quarter.

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An overview of Indian Industries:

"Nearly 75 Million enterprises are in India and about 45% contribute to manufacturing output."

 

The Indian Micro, Small, and Medium Enterprises (MSMEs) sector is the backbone of the national economic structure. In India approximately 97 percent of the industries fall under the category of MSMEs and the strongest drivers of economic development, innovation, employment, and also contributes 31% of India’s Gross Domestic Product (GDP). Nearly 75 Million enterprises are in India and about 45% contribute to manufacturing output, more than 45% contribute to Indian exports and creating about 114 million employments. Some Indian enterprises are engaged directly in exports and most of the MSMEs are indirectly engaged in the export’s ecosystem through intermediate goods manufacturing for larger industries as well as engaged in exports to international partners.

Due to the COVID19 lockdown from March 24, 2020 in India, this has badly impacted MSMEs and the contribution of 31% of Indian GDP already gone down. Nearly 25 per cent of firms are on the way to permanently shut down, and more than 60% firm not have funds to pay salary.

“Make in India” initiative has the potential to turn the Indian economy upside, all for better reasons. With the investment in the manufacturing sector and the advancement of technology, employment opportunities can also be generated. Such an initiative requires a well-coordinated effort from the Ministry of Commerce and Industry as well as the state governments.

India’s Import and Export:

"India has 42 Trade Agreements (Including PTAs), where 13 are in effect, 16 are under negotiation, 12 are proposed/under negotiation/study and 1 is signed but not yet implemented."

The share of MSME products to total Indian export is countable is 49.81 percentage 2019-2020 (Apr -Dec 2019), followed by 48.10% (2019-2018), 48.56% (2018-2017), 49.69% (2017-2016).

Currently, there are 70 million traders and the majority of them are MSME in India. These MSMEs are also depended on Chinese raw, semi-finished and Finished products, Like, Electronic Goods, Cellphones and its parts, Electric Machineries, Pharmaceutical API, Iron and Steel, Raw Material, Auto Parts and others. Due to the COVID19, the exports from China to India has been suddenly dropped, this hit to Indian MSMEs. India needs focus on Products manufacturing under the Make in India Programme and slowly eliminate the dependency on China Imports.

For India, China is the biggest trading partner, India imports $480 Billion valued product from around the world, in which $68.16 Billion valued of products from China, where India exports $322.786 Billion valued product to the world and exports to China $16.96 Billion valued products in 2019.

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In Asia, India is one among top countries withholding maximum number of Free Trade Agreement (FTAs) and Preferential Trade Agreements (PTAs) either in operation or under negotiation or proposed and most of them existing with Asian countries which are quite different from each other in terms of the level of their economic development.

According to the Asian Development Bank Institute, India has 42 Trade Agreements (Including PTAs), where 13 are in effect, 16 are under negotiation, 12 are proposed/under negotiation/study and 1 is signed but not yet implemented.

India still needs to focus on more trade agreements to boost the bilateral trade, Although, Trade agreements are an effective approach to integrate into global economy and strengthen economic cooperation with other economies.

👉 Click here to read on The Financial Express
 
Article by Sandeep Wasnik | Latin America & the Caribbean Countries Affairs and Market Expert
Contact : latinosbiz@gmail.com

Major challenges for India and the LAC region Post COVID-19

The region will feel it deeply because their economies are dependent on investment and trade from the United States, Europe and China.

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For the Latin America and the Caribbean (LAC) region with soaring poverty rates, high population density and lagging health care, COVID-19 poses a tremendous risk. The region will feel it deeply because their economies are dependent on investment and trade from the United States, Europe and China. However, these are currently home to hot-spots for the COVID19. The economies of LAC region depend heavily on foreign investment and demand for primary commodities such as oil, copper, and zinc.

It is expected that GDP will contract over 2 per cent across the LAC region and 3 percent in Colombia, Brazil and Mexico. Governments have taken some measures to protect their citizens from the economic fallout due to COVID19 which is expected to cause the biggest single-quarter decline since the big recession from 2008-2009.

Countries like Chile as well as El Salvador have adopted certain measures to provide immediate relief to their citizens. For instance Chile announced a $12 billion economic plan that equals roughly 4.7 percent of the country’s GDP with three main objectives: strengthening the Health systems budget, protect family income, and protect jobs and employers.

On the other hand, El Salvador, President NayibBukele suspended utility, mortgage and credit card payments for three months for all Salvadorans, and will provide a $300 stimulus payment to approximately 1.5 million households affected by the virus.

PESSIMISTIC SCENARIO :

In LAC region debt levels are higher than they were at the outset of the financial crisis, social safety nets remain very weak, tourism has evaporated, and a number of countries such as Argentina, Brazil, and Mexico are already mired in a weak patch economically, while Venezuela faced an outright crisis before the COVID19 arrived.

The drop in oil prices will severely worsen the economic impact of the pandemic for oil exporting countries and commodity prices, exports, tourism, remittances and foreign direct investment are all on the cards and will pummel regional economies.

 INDIA – LAC REGION COMMODITY TRADE BUSINESS :
India has exported nearly $ 13.56 Billion value products to LAC region in financial year 2018-19. Info-graph shows LAC Region import from the India and the top most 5 Products (Two Digit HS CODE) which India is exporting are:

1. HS CODE 87 – Vehicles other than railway or tramway rolling stock, and parts and accessories thereof – Value: $ 3296.17 Million.
2. HS CODE 29 – Organic chemicals – Value: $1218.85 Million.
3. HS CODE 30 – Pharmaceutical products – Value: $923.88 Million.
4. HS CODE 38 – Miscellaneous chemical products – Value: $917.55 Million
5. HS CODE 84 – Machinery, mechanical appliances, nuclear reactors, boilers; parts thereof – Value: $736.24 Million.

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For more understanding we need to focus on Indian state wise trade for the region. Maharashtra is in the top position with an export value of $3812.11 Million followed by Gujarat $3127.82, Tamil Nadu $1713.13, Haryana $687.37 and so on.

Info-graph shows the State wise exports to Latin America and the Caribbean countries in Financial Year 2018-19.

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Some of the Indian states/Districts/Cities are the Hot-Spot of COVID19, which gives clear idea that trade business with Latin America will be affected even after the lockdown is lifted. As, not all industries will be not open due to social distancing but there can be a working model for Essential Goods Manufacturing Industries.

ESSENTIAL GOODS MANUFACTURING INDUSTRIES – QUARANTINE MODEL (EGMI-QM):
Essential good manufacturing industries are those industries who manufacture essential products, like Food Processing, Pharmaceuticals, Health Care, Agriculture Products, Packaging and others.

An industry can run on minimum man power, however, the company needs to provide accommodation/camps, food and essential services in factory area, this factory area will be quarantined so that industry will keep rolling and make economy keep role. These Minimum Man power will have to go for health check-up before entering the quarantine factory area. This model can be adopted in India, Latin America and any part of the world.

Info-graph gives basic model visualization.

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IT AND ITeS INDUSTRIES:
The IT industry has been India’s crown jewel in our country’s economic growth for the past two decades. An industry has provided global recognition for Indian youth’s technology and entrepreneurial capabilities and immensely contributed in improving India’s international image. Info-Graphs shows Indian IT and ITeS sector business.

IT and ITeS sector can play important role during lockdown/post-lockdown and are also favourable for social distancing (Work from Home). Indian IT and ITeS sectors can focus on Latin America Sectors for Banking Process, Company Financial& Audit Process, E-Commerce industries process, Telecommunication industries, development of online applications, Agritech and others. Customers may accelerate their journey towards Cloud and Digital adoption to minimize human touch points. And, this should create huge business opportunities for Indian IT companies and push for increased onshore and local presence.

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WHICH SECTORS NEED TO FOCUS BETWEEN INDIA AND LATIN AMERICA:
As we have seen time and time again, both economic boom and economic slowdown eventually come to an end. Three months ago, we were in a bull market, meaning all aspects of the financial market, stocks, bonds, real estate, currencies, commodities, etc. were on the rise or were expected to rise and then the virus emerged. Though the stock market has plummeted and many businesses and institutions are closing their doors, there may be hope in the V-Shaped economy rise. Annual GDP Growth Rate in India is expected to be 3.20 percent by the end of this quarter. Looking forward, estimate Annual GDP Growth Rate in India to stand at 1.50 in 12 months’ time. In the long-term, the India GDP Annual Growth Rate is projected to trend around 2.50 percent in 2021 and 4.00 percent in 2022.

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Recently, during lockdown due to COVID19 , E-Commerce industries, Videoconferencing applications, Internet or Telecom industries, Entertainment Sector, Food Processing Industries, Fund Transactions, Agriculture and Agritech, Health Care and Insurance, Pharmaceuticals Sector, Packaging Industries, Logistics Services, IT and ITeS sector and others have been the focus areas and it will continue growing. These are the sectors which will contribute to the economy and economy will rise by V-Shaped.

INDIAN PHARMACEUTICALS:
Hydroxychloroquine is one of the oldest and best-known anti-malarial drugs with lesser side effects. It can be bought over the counter in India and is fairly inexpensive. But its purchase and use has been severely restricted as it is being selectively used for Covid-19 treatment due to its antiviral properties.India, the world’s largest producer of hydroxychloroquine (HCQ), exported $51 million worth of the drug in FY19. This was a minuscule portion of the country’s $19-billion pharma exports. Indian Pharmaceuticals industries are ready to ramp up the production to meet domestic as well as export requirements. India manufactures 70 percent of the world’s supply of hydroxychloroquine (HCQ).

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India exported hydroxychloroquine API worth USD 1.22 billion in April-January 2019-20. During the same period exports of formulations made from hydroxychloroquine was at USD 5.50 billion. India currently has an annual installed capacity of around 40 tons of active pharmaceutical ingredients (APIs) of hydroxychloroquine, with this capacity, can make around 200 million tablets of 200 mg.

👉 Click here to read on The Financial Express
 
Article by Sandeep Wasnik | Latin America & the Caribbean Market Expert
Contact : latinosbiz@gmail.com