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Business News›News›Economy›Policy›A haunting China Covid situation that India
may dread before Budget



THE ECONOMIC TIMES DAILY NEWSPAPER IS AVAILABLE ONLINE NOW.

Read Today's Paper


A HAUNTING CHINA COVID SITUATION THAT INDIA MAY DREAD BEFORE BUDGET

SECTIONS
A haunting China Covid situation that India may dread before Budget
By
Gourab Das

, ET OnlineLast Updated: Dec 23, 2022, 11:10 AM IST
Synopsis


CHINA IS THE WORLD’S SECOND LARGEST ECONOMY AND THERE’S NO DENYING ITS DOMINANCE
IN SWINGING ECONOMIES OR EVEN CRIPPLING THE SMALLER ONES. THE CORONAVIRUS, THAT
FIRST ORIGINATED IN CHINA, HAD WIPED OFF ONE-FOURTH OF INDIA’S ECONOMY IN APRIL
TO JUNE 2020 AND DRAGGED INDIA TO A CONTRACTION IN FISCAL 2021. INDIA'S FISCAL
MEASURES BLOATED THE GOVERNMENT'S EXPENDITURE WHILE INCOME DROPPED TO A TRICKLE,
WIDENING THE FISCAL DEFICIT TO A RECORD 9.2% IN FISCAL 2021.

ReutersCovid fears are back to likely disrupt the order, thanks again to China
Packed crematoriums and hospitals, deserted roads, millions losing jobs, and
one-fourth of economic output eroded. Sounds familiar? Yes, India had to live
this nightmare when it saw the worst phase of the coronavirus pandemic in 2021.
Along with the deadly virus attack on citizens, also came the many miseries for
the government and central bank to avert deeper wounds for the economy.

India has relatively covered the pandemic-inflicted tatters well now and the
nascent economic recovery promises to outshine the world. But, Covid fears are
back to likely disrupt the order, thanks again to China.
“At this point, it seems unlikely that new Covid variants arising out of the
Chinese wave of infections could impact India, but the government's wariness
indicates that this remains a possibility, however remote, that authorities and
corporations should watch out for,” said Swarup Gupta, financial services lead
and head, ESG ratings service, at Economist Intelligence Unit



The China Covid Situation

Eric Feigl-Ding, an epidemiologist and health economist, recently forecast that
more than 60% of China and 10% of the world population may get the infection in
the next three months. The deadly virus may kill millions, he said. China has
often reported zero deaths, but the epidemiologist, the cremation in Beijing is
nonstop and morgues are overloaded. According to Airfinity, a London-based
research firm, China is likely seeing one million Covid infections and 5,000
deaths every day, with the prophecy of the situation getting worse in days to
come.

India has so far reported four cases of BF.7, a sub lineage of Omicron- which is
driving the current surge in China. The good news is that no "unusual pattern"
or "clustering" is seen in the country, a senior health ministry official had
told ET.



Nonetheless, taking the liberty to say so, the Galwan clash in June 2020, when
the pandemic had already set in, and the recent border fight between Chinese and
Indian troops, probably are not bigger headaches than the pains the larger
neighbour may inflict upon India if the Covid situation gets worse. All of this
now when Russia’s invasion of Ukraine has already done severe damages to supply
chains and made inflation hit the roof.





No matter what, China is important

“If China slows down, if China closes down over the course of the next two,
three-four months, that means the momentum of recovery in the global economy
will be significantly impaired in the near term,” Siddharth Sanyal, chief
economist at Bandhan Bank, told ET Now.

China is the world’s second largest economy and there’s no denying its dominance
in swinging economies or even crippling the smaller ones. In fact, the rippling
effects may be more profound now given that the global economy has yet to be out
of the woods and India is still far from its heydays.

China's zero tolerance for Covid and the disruptive measures to contain
infections had already pushed the country towards a slowdown, economists said.
With the opening up, the situation looks all the more grim. Apart from growth
slowdown, China’s unemployment situation remains fragile and it has a wobbly
property market that puts banks’ loan books at severe risks.

Why should India care?

“India certainly has cause for concern from the wave of Covid infections raging
through China currently, and likely to continue over the next three months,”
Economist’s Swarup Gupta said.

He said, China's manufacturing hubs are likely to be affected, since they can no
longer implement closed-loop systems following recent protests, particularly at
iPhone-maker Foxconn. Also, the country's manufacturing capacity is likely to be
repurposed towards satisfying the sudden rush for Covid-related supplies.

India is heavily dependent on intermediate goods and capital goods, such as
power and telecom equipment imported from China, which are crucial to
maintaining a healthy pace of growth. This flow of goods could drop away if the
Covid situation worsens in China while a decline in demand could impact Indian
exports to China which are only now nudging upward, Gupta said.

India and China’s merchandise trade surged 34% to $115.83 billion in the 12
months to March 2022, while it stood at $69.04 billion between April and
October. While India has been pushing for local manufacturing and cutting
reliance on China, the neighbour remains New Delhi’s biggest source of imports.
India had imposed curbs on trade and businesses in 2020 amid the deadliest
fighting in decades at their disputed Himalayan border.

However, former Niti Aayog Vice Chairman Arvind Panagariya has opined that
cutting trade ties with Beijing now will amount to sacrificing India's potential
economic growth.

Stocks markets, including that of India’s, have already started to plunge. This
is reminiscent of the outbreak of the pandemic during the start of 2020.

Indian companies, ranging from electronics and apparel manufacturers to gold and
diamond exporters, are already worried about another bout of supply chain
disruptions. India's pharmaceutical industry, which is dependent on China for
active pharmaceutical ingredients (APIs), intermediates and bulk drugs, are
already shelling out up to 25% more for APIs from China. This may squeeze
margins, raise drug prices and also lead to drug shortages.

The haunting memories for Budget playbook

"Ahead of the Budget, the government is likely to weigh global developments,
including rising recession risks in the West, tight liquidity, high rates and
tail risk of a spurt in Covid cases,” said Radhika Rao, senior economist, at DBS
Bank.

However, while the authorities keep a close eye on the evolving Covid
developments globally, DBS is not of the view that the Budget’s direction will
materially change due to this concern, except injecting some caution in
underlying growth assumptions.

In a bitter recap, the coronavirus, that first originated in China, had wiped
off one-fourth of India’s economy in April to June 2020 and dragged India to a
contraction in fiscal 2021. The outbreak was one of the worst in India despite
strictest lockdown measures, in addition the economic contraction too, according
to a IMF report, was more severe than the average of emerging and developing
economies.

What the Mint Street had to do was come up with ultra-loose monetary policies
and was asked to do much of the heavy lifting when the economy was ravaged and
job losses spread from cities to the hinterland.

On its part, New Delhi came up with fiscal measures that Prime Minister Narendra
Modi had claimed to be the size of 10% of India’s economy. The fiscal measures
bloated the government's expenditure while income dropped to a trickle, widening
the fiscal deficit to a record 9.2% in fiscal 2021. Despite this, many argued
that the government had not offered direct benefits, while experts and rating
houses opined that additional budgetary allocation to various social safety
measures were relatively low in India.

So, what the current government may have to work on is a large allocation for
healthcare spending and other expenditure to avert Covid choking the ecosystem.
This is all the more crucial given that it is the last full federal budget
before the world’s second most populous country goes to the polls to select
their new government. However, economists say the Modi administration can not go
on a spending spree in the budget given its need to stick to a fiscal
consolidation roadmap.

Finance Minister Nirmala Sitharaman has made it clear that despite external
shocks, New Delhi intends to achieve the 4.5% budget gap aim by fiscal 2026 end.
This reflects concern over India's credit rating at BBB-, just a notch above
junk status.

India is done with its budget preliminary talks with states and stakeholders.
However, before the Budget proposals are finalised, it certainly will be best to
thwart the China impact to have a sweet ‘halwa’ ceremony and eventually
Sitharaman reading out proposals befitting for a conducive environment.




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