India: Modest impact from Covid-2019
- Outbreak of Covid-19 is set to adversely impact China and regional growth
- We take stock of the likely impact on India
- Lack of alternate domestic or global suppliers might temporarily lift prices
- Monetary and fiscal policy have already adopted a growth-supportive stance
- Overall economic impact on India should be modest
Developments on the Novel Coronavirus (Covid-19) is evolving. Aspects around the infection, transmissibility and prevention are still being established. Market action in the past week suggests the worst is behind us, but the economic fallout on China and parts of Asia will be more telling in first half of this year. Compared to the brush with SARS in early-2000s, China’s economic scale and reach are now far greater and broader (see chart). To capture the economic fallout from the COVID-19, we have downgraded our forecasts for China, Hong Kong, and Singapore (PDF, HTML).
In this context, we take stock of the impact on India. At the time of writing, three people have been infected, all of whom are in the group that returned from Wuhan University in early-February. Press reports suggest that nearly 4000 others are either under observation (travel history from China & other affected countries) or under home quarantine.
Channels of impact – we see a measured fallout
Impact might be felt through three channels: a) financial markets; b) tourism; c) supply chain disruptions and slower global growth.
a) global financial markets have taken developments in their stride. Equity, rates and currency markets reacted negatively to the news of the outbreak in January and early February but have since recouped most of their losses. This is buttressed by remarks by China’s top epidemiologist, Dr Zhong Nanshan, who predicted that the epidemic may peak in the second half of February before plateauing. Accordingly, the Chinese yuan and CNH have appreciated beyond the 7.0/USD. The Indian rupee is flat on the year, eking +0.1% vs USD on year-to-date basis. The central bank remains keen to beef-up the foreign reserves stock and thereby strong flows are unlikely provide much relief for the currency.
b) The next channel is tourism. Using country-specific arrivals as an indication of their spend, a freeze on tourists from China might not materially dent tourism receipts. The fallout can, however, magnify if the outbreak deters arrivals from other countries, hurting overall foreign exchange earnings for the sector. Travel receipts (USD7.4bn, 4Q sum) makes up a third of services surplus under the current account balance, helping to partly offset the sizeable deficit in merchandise trade.
c) Supply chain disruptions and slower global growth. A DBS impact study of coronavirus on the regional supply chain (PDF, HTML) highlight the importance of China as a manufacturing hub, which creates considerable risk to the outlook for both intermediate and finished goods shipments. Taiwan, South Korea and Vietnam would be hit the hardest, while India is the least.
Indian businesses in selected sectors are already facing disruptions. A breakdown of imports from China show dependence for electrical machinery & telecom equipment (40%), machinery, mechanical appliances etc. (25%) and organic chemicals (16%). The other affected sectors likely include iron & steel as well as vehicle parts.
With respect to growth, despite significant imported inputs from China, its value-addition to India’s domestic final demand is measured, lagging the US’ and close to Saudi Arabia and Japan. This suggests that any. prolonged interruption might temporarily weigh on production, but material impact on downstream demand will not be significant (see chart).
Drawing inferences from the SARS experience
Considering few historical examples, a study on the economic costs of SARS  estimated that the knock-on temporary impact on India was least amongst Asian economies. While the direct impact on the economy will be small, it is worth remembering that regional growth, led by China, will encounter a sluggish 1H20.
Of the three we discussed, impact will be most pronounced through the financial markets if safe haven flows ride the USD higher (weigh on INR) and asset classes correct if the virus-related worries escalate. Fallout through trade and supply chain is likely to translate into short-term disruptions, but unlikely to derail a modest recovery expected in FY21 (DBSf: 5.8% yoy) – driven more by domestic catalysts of higher public spending, stabilisation in rural demand, base effects and smaller drag by net trade. Monetary and fiscal policy have already adopted a growth-supportive stance
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