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Expected turbulence

Owing to China’s centrality in global trade, the ongoing Coronavirus crisis will continue to significantly impact and slow down the global economy

Expected turbulence

While the novel Coronavirus is leaving a trail of its victims throughout the world, it is for sure going to dent the global economy just as hard. The crisis underlines several action plans for the future.

First, in a connected world, even local crises would have to be handled at a heightened level. Disaster management of local episodes should be much more geared to handling global spread.

Second, the virus crisis already is hurting the global economy because of the weight of the Chinese economy. Brace for a spot of economic tumult. Third, the organisation of manufacturing industry needs a re-look. For the sake of cost savings, humongous factories have been set up which are now found to be vulnerable in a crisis of this kind.

The death toll from the virus is fast approaching the 1,000-mark, most of which are in China, the total number of people infected runs into 40,000. Some reports are indicating that some five lakh people have been infected in Wuhan alone, which remains quarantined.

With repeated outbreaks of communicable diseases from that country, one thing is however undeniable. China's image has suffered immensely as a responsible collaborator.

As the crisis worsened, a dictatorial regime sought to isolate the affected province and let it suffer. The authorities are trying to insulate the rest of the country from the worst-hit region. This is not such a humane way of dealing with an area already suffering from such a disaster.

Along with that approach to disaster management, the top leadership of the country was nowhere to be seen. It is only now that President Xi Jing Ping has been seen in public.

There are speculations that a power struggle is also on around crisis management. Xi is trying to pass on the responsibility to others and therefore, his face is no longer visible in handling the crisis. Popular sentiments are also rising to a pitch.

Following the virus outbreak, China's economy is already showing signs of distress. Estimates are tumbling out of economic studies institutes and global banks with as much gusto, detracting from the country's potential growth rate by half a per cent to 2.5 per cent eventually. The growth rate might slump to 3.5 per cent from the present 6 per cent.

Other countries are also bracing for a hit on their national economies. After all, China is the second-largest economy in the world and has developed a synergy with others through supply chains, both backward and forward.

Currently, China's impact on the global economy would be far greater than during the last heath crisis —the SARS infection— some twenty years back. At that time, China had accounted for 4 per cent of global GDP. Currently, it is 17 per cent of global output.

In many critical areas, industries depend on Chinese made intermediatory supplies.

For example, India's drug industry is finding it hard to get many of the compounds which used to come from China. The aggressive pricing followed by the Chinese bulk drug makers had decimated most of the smaller Indian bulk drug manufacturers.

The attraction of cheaper basic drugs from China had meant switching to Chinese supplies from erstwhile Indian ones and now that medicine is coming home to roost.

On the other hand, many of India's exporters to China are facing uncertainty.

But India should be one of the least affected by any China downswings. India is more an importer from China than an exporter. What will be needed for Indian entities is to either ramp up domestic supplies or look for alternative supplies from elsewhere? This could also mean a step up in domestic investments.

China is the largest automobile market in the world and already the global automobile industry has been affected. Car plants of major manufacturers have all ordered production to be stopped for the moment.

German automaker, Volkswagen, has the largest footprint in China with plants in major consumption centres. All the car plants are reported to have hibernated at present. The company had suffered a major blow couple of years back when it was caught cheating on its pollution tests. Now, this crisis is even worse with plants remaining idle since after the Chinese authorities have locked down Wuhan city as a measure to fight the viral menace.

Toyota, another one of the largest car manufacturers, ordered all production to be stopped in Chinese plants because of requirements of quarantine rules. It is scheduled to re-open after the middle of February but the prospect for the resumption of production is uncertain. Honda is in a similar situation.

The virus crisis is showing another shortcoming of the current pattern of large-scale manufacturing followed in China. Most of the global majors had partnered up their production with subcontracting firms who set up huge factories. Foxconn, the major supplier to Apple and many other electronics manufacturers, have factories which employ 30,000 workers under one shade.

Foxconn is no longer in a position to recall their workers for fear of infection from a single person in its compound which can spread to others. Quarantine laws prevent them from coming back. Foxconn might resume production at about 30 per cent of its capacity.

The shipping industry has started feeling the pinch. Since China is one of the largest buyers as well as importer, goods traffic towards China and outside it has touched down to a trickle. Shipping companies do not have buyers and the ships are also idling.

Global e-commerce, in a similar vein, is quite immobilised. China had taken to the e-commerce model with vigour and even daily purchases are done on cyber platforms.

Right now, that e-commerce model is under duress, mainly because of the delivery mode. The delivery boys are no longer being admitted into the housing complexes and they are simply leaving the couriers and its stuff outside the compounds and buyers have to now pick up their purchases from outside the gates.

The virus crisis has a host of lessons for India from the organisation of manufacturing factories to disaster management.

Views expressed are strictly personal

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