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External Shock from COVID-19

In the coming months, supply chain disruptions can lead to higher prices for the products, making the core inflation rate at elevated levels. In such a circumstance, Central Bank would be forced to walk the tight rope focussing on growth and controlling inflation rate.

Photo Credit : Reuters

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The global economy is dealing with the collateral damage caused by COVID-19. As per the recent estimates, COVID-19 has spread to more than 60 countries, claiming around 3300 lives. With the spread of COVID-19, the economic health of the world is also in danger. OECD estimates that global GDP growth would plummet to as low as 1.5 per cent in FY21. 

Federal Reserve, the US Central Bank, in an emergency mode slashed the interest rate by 50bps. It is expected that other Central Banks will also follow a path of easy monetary policy in the coming months, to prevent the global economy slipping to a recession. 

The burden caused by COVID-19 on the Indian economy is also high. The economy is grappling with a growth rate of 5 per cent, lowest in the last 10 years, mainly contributed by domestic factors viz consumption slowdown, liquidity crisis and investment slowdown. In such a scenario, an external shock could further worsen the situation. The external shock could further aggravate domestic issues. And, it would be difficult for the country to achieve the growth rate forecasted by the Economic Survey at 6-6.5 per cent for FY21. 

China is one of the major trading partners of India, having a total trade worth of $87 billion. India imports mainly electronic goods, electrical machinery, auto components, Active Pharmaceutical Ingredients (API) from China. The supply chain disruption caused by the outbreak of virus can negatively affect production in these industries. This, in turn, can have spillover effects on employment, consumption, and investment, pulling down the growth rate. Similarly, the exports sector will also face the heat due to the unavailability of raw materials, slowing global demand, and shipment restrictions.

An opportunity in the crisis

Although India would be feeling the pinch from the disruption of the global supply chain and its associated spillovers, it also gives an opportunity for the country. In the coming years, global companies would try to minimise their exposure to a single country for raw materials and other businesses and will diversify their operations to other countries. In such a scenario, India has huge potential provided we offer a conducive atmosphere for the businesses to grow. It is an accepted fact that the country has made significant strides in improving the business climate, yet more measures need to be taken. Recently, the government has cut the corporate tax rate to as low as 15 per cent, which is a welcome step. However, taxes are only one of the ingredients for attracting foreign investments to the country. 

The country still faces issues with regard to land acquisition, labour laws and other logistical bottlenecks. It is mainly due to the above issues, India failed to grab the opportunity from the trade tensions between the US and China. On the other hand, countries such as Vietnam, Bangladesh and the Philippines benefited from the trade war between the US and China. 

Responses from Government and RBI

Government and RBI are also in a difficult situation on how to respond to the current crisis. Though any measures from both parties would seem to be ineffective at this point, it would be necessary in the coming quarters. One needs to look into how the Government will respond given its limited fiscal space. 

The inflation targeting regime followed by the Central makes it difficult for the RBI to cut the rates when the inflation rates are above the upper bound of 6 per cent. In the coming months, supply chain disruptions can lead to higher prices for the products, making the core inflation rate at elevated levels. In such a circumstance, Central Bank would be forced to walk the tight rope focussing on growth and controlling inflation rate.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


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stockmarket coronavirus outbreak coronavirus pandemic

Deepthi Mary Mathew

The author is an Economist at Geojit Financial

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