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Coronavirus Outbreak Positions India As A Production Alternative To China

Posted by Frost & Sullivan

The Coronavirus outbreak is expected to have immense global implications—GDP growth will take a hit, oil prices will drop due to weaker demand, global interest rate cuts will deepen, and so on. The economic research team at Frost & Sullivan has identified three 2020 scenarios tied to the virus outbreak: the gradual abatement scenario, the severe epidemic scenario, and the severe pandemic scenario. While the gradual abatement scenario initially carried a probability of 70%, this figure now stands at 60% with the spike of cases outside China in the past few days. From 2.9% global GDP growth in 2019, growth is expected to slide to 1.7% or less in 2020 should a severe pandemic scenario unfold.

With China being much more deeply integrated with the world economy today through channels of trade, tourism, etc., compared to the 2003 SARS outbreak, the impact of the virus outbreak is expected to be much more pronounced. Economies across the globe face unique risks and implications based on ties with China and other factors. US businesses, for example, might not see timely Chinese purchases of goods and services as part of the Phase 1 US-China trade deal, while countries such as Japan and Sri Lanka face the prospect of a sharp drop in tourists.

Some of the key implications of the virus outbreak in regards to India and the Middle East include:

Oil Price Slide Dampens 2020 Middle East Growth Prospects

While oil prices were initially forecast to rise in 2020, driven by OPEC+ production cuts, the finalization of a US-China trade deal, and improved Brexit certainty, the situation is now seeing a reversal. The slowdown in China’s economy (the world’s largest oil importer) coupled with the dent in demand for jet fuel (with deepening travel restrictions) will cause Brent crude oil prices to slide from $64.3 per barrel in 2019 to $60.4 per barrel in 2020 or lower, depending on the extent of the virus outbreak. Economic growth across the Middle East consequently stands to be restrained.

India, a prominent global oil importer, on the other hand, stands to benefit from the slide in oil prices. Positive gains are expected in regards to the current account deficit and the rupee.

Gains for India Tied to Production Disruptions in China

US-China trade wars had already prompted production relocation from China, with Southeast Asia attracting a lot of businesses. The virus outbreak in China is expected to intensify production disruptions and relocation away from China, and India could reap gains with the right set of policies. Factors such as recent hefty corporate tax cuts in India and the relative strength of the Indian economy place India in an advantageous position. Furthermore, in the current scenario, India faces less competition from Southeast Asia, as locations such as Singapore and South Korea are grappling with the virus outbreak. Indian manufacturers nonetheless will have to cope with disruptions in intermediate inputs from China, necessitating near-term supply-chain diversification.

Virus Outbreak to Usher in More Interest Rate Cuts

In 2019, global central banks pursued a loose monetary policy amid the weaker economic environment. The virus outbreak will restrain central banks from issuing interest rate hikes in 2020, with a loose monetary policy expected to continue. While China already cut its benchmark loan prime rate (LPR) in February 2020, other countries are expected to follow suit. The Philippines also cut its key interest rate in February in response to the virus outbreak. Repo rate cuts in India, initially forecast for H2 2020, could potentially be pushed up to H1 2020.

―Authored by Neha Anna Thomas, Senior Economist, Frost & Sullivan, BCS Bureau

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