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Bleak prospects

The economic downslide caused by COVID-19 is set to hit India harder than China unless competent authorities take appropriate steps

Bleak prospects

The outbreak of Coronavirus (COVID-19) in China and its spread to 48 countries has caused considerable human suffering and economic disruption. Its impact is felt around the world. Even on the presumption of its being mild and contained, it is likely to hit Indian economy hardest, even more than China. Though the world GDP outlook has been revised downward by 0.5 per cent compared to last assessment in November just before the outbreak, the interim report, Coronavirus: The World Economy at Risk of OECD has projected the fall for India by 1.1 per cent, even worse than China's 0.8 per cent. A sharp rise in unemployment in India is its reflection which has reached 8 per cent as per CMIE's assessment of March 3, 2020, higher than 45 years high of 6.1 per cent in January last year. With a deepening economic crisis, a further rise in unemployment is inevitable. Rural areas are to suffer more than the urban areas.

China has been playing a key role in global supply chains, travel, and commodity markets of the world. That is why output contractions in China due to Coronavirus outbreak and its subsequent spread in 48 other countries have adversely affected the global economy and its prospect has become highly uncertain. In the November outlook, OECD has projected growth rate for India at 6.2 per cent for 2020, higher than 4.9 per cent for 2019. However, after four months, its interim report has projected India's growth rate at 5.1 per cent for 2020, and 5.6 per cent for 2021 with a downward revision by 0.8 per cent.

Prospects for China have been revised markedly, with growth slipping below 5 per cent this year, before recovering to over 6 per cent in 2021, as output returns gradually to the levels projected before the outbreak. The adverse impact on confidence, financial markets, the travel sector and disruption to supply chains contributes to the downward revisions in all G20 economies in 2020, particularly ones strongly interconnected to China. India is one such country along with Japan, Korea and Australia.

Provided the effects of the virus outbreak fade as assumed, the impact on confidence and incomes of well-targeted policy actions in the most exposed economies could help global GDP growth recover to 3.25 per cent in 2021. However, a longer-lasting and more intensive Coronavirus outbreak, spreading widely throughout the Asia-Pacific region, Europe and North America, would weaken prospects considerably. In this event, global growth could drop to 1.5 per cent in 2020, half the rate projected prior to the virus outbreak.

In the given scenario, governments need to ensure effective and well-resourced public health measures to prevent infection and implement well-targeted policies to support health care systems and workers while protecting the incomes of vulnerable social groups and businesses during the virus outbreak. Supportive macroeconomic policies can help to restore confidence and aid the recovery of demand as virus outbreaks ease but cannot offset the immediate disruptions that result from enforced shutdowns and travel restrictions.

If downside risks materialise and growth appears set to be much weaker for an extended period, co-ordinated multilateral actions to ensure effective health policies, containment and mitigation measures, support low-income economies and jointly raise fiscal spending would be the most effective means of restoring confidence and supporting incomes.

In China, containment efforts have involved quarantines and widespread restrictions on labour mobility and travel, resulting in unplanned delays in restarting factories after the Lunar New Year holiday and sharp cutbacks in many service sector activities. These measures imply a sizeable output contraction whilst the effects of the outbreak persist. Subsequent outbreaks in other countries, including Korea and Italy, have also prompted containment measures such as quarantines and border closures, albeit on a smaller scale. The adverse consequences of these developments for other countries are significant, including the direct disruption to global supply chains, weaker final demand for imported goods and services, and the wider regional declines in international tourism and business travel. Risk aversion has increased in financial markets, with the US 10-year interest rate falling to a record low and equity prices declining sharply, commodity prices have dropped, and business and consumer confidence have turned down.

Relative to similar episodes in the past, such as the SARS outbreak in 2003, the global economy has become substantially more interconnected and China plays a far greater role in global output, trade, tourism and commodity markets. This magnifies the economic spillovers to other countries from an adverse shock in China. Even if the peak of the outbreak proves short-lived, with a gradual recovery in output and demand over the next few months, it will still exert a substantial drag on global growth in 2020.

Preliminary estimates suggest that global GDP growth slowed further in the fourth quarter of 2019, to just over 2.5 per cent, with strikes, social unrest and natural disasters affecting activity in a number of countries. Global trade slowed down and growth continued to be subdued in many emerging market economies. Similar was the fate of India which witnessed slowest growth rate in the last six years. Large non-performing loans and over-leveraged corporate balance sheets weighing on investment in India. Industrial production continued to stagnate in late 2019 and the growth of consumer spending lost momentum. Merchandise trade volumes also contracted in the fourth quarter of 2019 and declined in 2019 as a whole.

Container port traffic and air freight traffic were also weak ahead of the Coronavirus outbreak and further sharp falls seem likely in the near term. Survey measures of manufacturing new export orders had begun to turn up but fell back in the flash PMI surveys for February. Investment data was also soft, held back in part by continued high uncertainty and weak expected future growth. Aggregate investment growth in the G20 economies (excluding China) slowed from an annual rate of 5 per cent early in 2018 to only 1 per cent last year.

If the outbreak of the virus in China were to spread much more intensively than at present through the wider Asia-Pacific region and the major advanced economies in the northern hemisphere in 2020, the demand is likely to be significantly hit across much of the world for an extended period. With a significant hit to confidence, heightened uncertainty and (voluntary) restraints on travel and commercial and sporting events are likely to depress spending.

Views expressed are strictly personal

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