Implications of COVID-19 on India’s Economy and Trade

At the time of writing (27 April 2020), India is in the growing stages of the COVID-19 pandemic, with over 27,000 cases and around 900 deaths. The first case in India was recorded on 30 January 2020. The Indian government has been prompt in its measures for containing the virus with a 21-day complete lockdown policy at a very early stage when the number of cases was just over 500 and on 14 April 2020, extended the lockdown by a further 18 days. In contrast, China has flattened its curve and entered a post-peak period[1]. The immediate fall-out from this pandemic is a situation where demand is likely to soar due to stockpiling in the short-term, whilst in the longer-term, supply will be compromised due to restrictions on trade, leading to a decline in the supply of raw materials used in Indian production lines.

 

COVID-19’s direct impact on India’s industries

China being the initial epicentre of the outbreak, caused a global slowdown. It is estimated that a reduction of 2 percent[2] in China's exports in 2020 will lead to a USD 50 billion decline in exports in global value chains.[1] China is India's leading import destination with imports valued at USD 68.1 billion in 2019, accounting for a share of 14.2 percent in India's total imports from the world. UNCTAD estimates that the spill-over effects of the disruption in Chinese supplies could cost India’s exports around USD 348 million, with the most impacted sectors being chemicals, textiles and apparel, automotive, and metals and metal products. The chemicals sector is estimated to be impacted by USD 129 million, followed by textiles and clothing with a USD 64 million decline. UNCTAD places India 10th among the 20 most-affected economies due to the coronavirus epidemic and China’s slowdown in production.[2]

Figure 1: India's top import sources

Source: ITC Trademap

China is also India’s third-largest export destination, with a share of 5.3 percent of India’s exports. India’s imports from China are composed of Capital Goods (52 percent), Intermediate Goods (32 percent), Consumer goods (14 percent), and raw materials (just over 1 percent). The disruption in the Indo-China supply chains might affect intermediate goods in India’s manufacturing processes in the short-run, however, it will be the disruption in the import of capital goods, that could create supply chain disruptions in the Indian market, as machinery replacements and new technology are disrupted, thereby affecting productivity in the long-run.              

 

Figure 2: India's imports from China and impact on sectors exports (2019)

Source: World Bank WITS, 2019; UNCTAD 2020
Note: USD billions and percentage shares; Colours represent the estimated impact on the value of exports from India due to COVID-19.

 

Figure 3: Composition of India's imports from China (2019)

Source: World Bank WITS, 2019; UNCTAD 2020


COVID-19’s direct impact on India’s exports

The highest exposure of COVID-19 on Indian sectors relates to products that make around 18 percent of India’s total export basket, i.e., the Textiles, Clothing and Transportation sectors. Moderate exposure can be seen for India’s top 3 exports, which are Fuels, Chemicals, and Stone and Glass, which make up more than 40 percent of India’s exports. Sectors that are less dependent on export markets, such as vegetables, plastic and rubber, animals, food products, etc., face the lowest risks of exposure.

Table 1: Potential impact of COVID-19 on trade

Source: World Bank WITS, 2019; Moody’s analytics

 

Exposure to COVID-19 on India’s economy remains less severe than some of the other BRICS

India’s low dependence on intermediary imports from China makes it less vulnerable. Additionally, the low price of crude oil, which is India’s biggest import item, will soften any external shock. The economic impact lies mainly with the demand shocks rather than supply shocks, from countries heavily affected by COVID-19.

As seen in Table 2, the share of India’s trade compared to its GDP is at 43 percent, indicating a moderately open economy as compared to other BRICS nations (Brazil, Russia, India, China and South Africa). While India has a trade surplus in food, China has a significant deficit. India also has a relatively low number of COVID-19 cases. However, due to its high population density and low access to healthcare services, indicated by the low number of doctors in the population, India might suffer high human casualties due to the pandemic as compared to the other nations in the group. In comparison to other BRICS countries, South Africa seems to be in a better position, with a low number of cases, a trade surplus for food and a low population density.

Table 2: Statistics on India as compared to similar economies (BRICS)

Source: World Bank, ITC Trademap, WHO, John Hopkins University
Note: Statistics are for the following years: trade-2018, medical doctors-2018, population-2018; Cases as of 27 April 2020.


As China is gearing up towards getting back to normal, its industries are preparing to resume operations soon and in time to meet the global post-pandemic demand. The resumption of activity would lead to China having a first-mover advantage, and result in a potential blow to Indian MSMEs. These companies are too small to be able to absorb the credit crunch resulting from the pandemic and make up for lost markets. Growing uncertainty about the future and repercussions of COVID-19 has also led to volatility in the Indian financial market, leading to huge crashes and wealth erosion. The Indian financial market witnessed the most significant market crash on 24 March 2020, where the SENSEX[5] fell by 4,000 points in a single day, due to the increasing uncertainty of business activity.[6] Additionally, the Indian Rupee reached a record low of 77.60 against the US Dollar, on 1 April 2020.

 

Outlook for India’s growth

The IMF estimates India’s growth rate at 1.9 percent for 2020, following the global pandemic, along with a high projection of growth for 2021 at 7.4 percent. IMF estimates for other BRICS countries stands at -5.3 percent for Brazil, -5.5 percent for Russia and -5.8 percent for South Africa for 2020. On the other hand, China is the only other country in this group to have a positive growth projection at 1.2 percent for 2020 and 9.2 percent for 2021.[7]

 

Impact on India-Africa trade

India exported USD 29.5 billion worth of products to Africa in 2019, while Africa exported USD 32.2 billion to India in that same year. Africa’s imports from India amount to 6 percent of its total imports, while Africa’s exports to India amount to 8.8 percent of its exports.

However, the composition of this trade is essential. Africa relies quite significantly on India for fuels (India ranks 3rd as a supplier in terms of share), Machinery (India ranks 7th as a supplier in terms of share), Pharmaceutical products (1st supplier) and cereals (4th supplier). These are the 5 highest-ranking sectors in African imports from India. The effects of a slowdown in India’s capacity to supply Africa will affect Africa’s industry. It is also important to note the restrictions imposed by India since March 2020 on the export of essential medicaments that are a major import item for Africa as a whole (HS3004 – Medicaments of mixed or unmixed products).


Figure 2 Africa's trade with India in 2019

Source: IEC; Data from ITC TradeMap

 

India is also an important destination market for Africa. Out of Africa’s 4 largest exported sectors to India, India is Africa’s 2nd-largest export market for mineral fuels, 2nd-largest market for precious metals and stones, the 1st largest market for chemicals, and the 4th largest market for edible fruits and nuts. Again, demand in India has a significant effect on exports from Africa.

India’s real GDP has decelerated to its lowest in over 6 years, as reported in Q2 of 2020, at 4.5 percent, and the COVID-19 outbreak has posed fresh challenges. The steps taken to contain its spread have brought almost all economic activity to a standstill and could significantly impact both consumption and investment. Africa will need to rapidly consider switching supplies from other regions of the world with less disruption caused by COVID-19, as well as explore new export markets. In this light, South-East Asian countries and African destinations need to be considered. Africa’s own internal markets offer great opportunities for exports and imports, although significant barriers to trade remain, despite efforts at the regional level, and at the pan-African level through the African Continental Free Trade Area (AfCFTA).

 

Authors: Paul Baker, Ria Roy

 

References

IMF (2020).  Chapter 1: The Great Lockdown, World Economic Outlook, International Monetary Fund, April 2020, Available at: https://www.imf.org/en/Publications/WEO/Issues/2020/04/14/weo-april-2020

Modak, S. (2020). Biggest crash ever makes India worst-performing market in the world, Business Standard, 24 March 2020, available at: https://www.business-standard.com/article/markets/biggest-crash-ever-makes-india-worst-performing-market-in-the-world-120032301809_1.html

UNCTAD (2020). Global trade impact of the Coronavirus (COVID-19) epidemic, Trade and development report impact, UNCTAD/DITC/INF/2020/1, 4 March 2020, available at: https://unctad.org/en/PublicationsLibrary/ditcinf2020d1.pdf

  

[1] Post peak period: when levels of the disease drop from the peak and the process of recovery begins.

[2] Based on UNCTAD’s estimates of a drop in production equivalent to -2 percent of the supply of intermediate goods observed in February in China.

[3] UNCTAD, Global trade impact of the Coronavirus (COVID-19) epidemic, Trade and development report impact, UNCTAD/DITC/INF/2020/1, 4th March 2020, available at: https://unctad.org/en/PublicationsLibrary/ditcinf2020d1.pdf

[4] UNCTAD, ibid.

[5]  SENSEX is the benchmark index of the Bombay Stock Exchange (BSE)

[6]  Samie Modak, Biggest crash ever makes India worst performing market in the world, Business Standard, 24th March 2020, available at: https://www.business-standard.com/article/markets/biggest-crash-ever-makes-india-worst-performing-market-in-the-world-120032301809_1.html

[7] IMF, Chapter 1: The Great Lockdown, World Economic Outlook, International Monetary Fund, April 2020, Available at: https://www.imf.org/en/Publications/WEO/Issues/2020/04/14/weo-april-2020

 

Disclaimer: The opinions or views expressed herein are those of the authors and do not necessarily reflect the opinions of the site’s owner or editors. We endeavour to report accurate information and as such, we use sources that are widely considered reliable . All site content is intended for information purposes only and thus shall not serve as or be deemed professional advice or services. By accessing and using the content on this site, you agree that you shall remain solely responsible for the use of and reliance upon all site content at your sole option and risk.

 

© 2020 International Economics Consulting Ltd., All Rights Reserved