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MARKET TRENDS COVID-19 Outbreak: Coming above the pandemic

Apr 10, 2020

Ever since the COVID-19 pandemic has spread across the world, the disruption in businesses, including those in the manufacturing industry, is being felt strongly globally. India, too, is watching closely as the outbreak is potentially overturning the manufacturing sector. Although the conditions in India are not as alarming as in China and Europe, they are getting close to a distressing state in the country. Despite this, there is a possibility of India having opportunities of being able to leverage on its strengths during this period. The cover story finds out the impact of the lockdown, how the manufacturing industries in India can recover once back in business, how bigger corporates can come to the rescue of MSMEs, the reforms implemented by the government to stabalise the economic conditions & help industries & MSMEs survive this period of shutdown and how India can possibly benefit from this crisis.

The infamous coronavirus or COVID-19 has spread across the globe like wildfire in a short period. The virus has gained its popularity for not only affecting close to 4,71,802 people globally (numbers as of March 26, 2020) but also because of its drastic effect on various industries, share markets, corporates and even on one’s daily life. The virus, which is still not certain if is manmade or natural, is giving a tough time to everyone who is trying to make sense of the situation and get a designated timeline of how and when the world will recover from its impact.

Pandemic disruptions around the globe

China, known as ‘the world’s factory’, due to its low labour cost, business ecosystem, lower compliances, lower tax tariffs, etc has been a leading exporter of goods around the world. Just to reiterate, China, in 2019, shipped goods worth $2,499 trillion around the world. With the stoppage of production in China and now, throughout the world, industries around the globe have been impacted severely. According to a report by Euromoney, China’s year-average GDP growth will be reduced by 6% this year. This comes after the economy slowed down to 6.1% in 2019 from 6.8% in 2018. As per OECD Interim Economic Assessment, owing to a longer lasting and more intensive coronavirus effect in the Asia-Pacific, European and North American regions, the global growth is set to drop by 2.4% in 2020 from an already weak 2.9% in 2019. The United Nations Conference on Trade and Development (UNCTAD) in its published estimates mentioned, that among the most affected economies are the European Union ($15.6 billion), the United States ($5.8 billion), Japan ($5.2 billion), South Korea ($3.8 billion), Taiwan Province of China ($2.6 billion) and Vietnam ($2.3 billion). IMF Chief, Kristalina Gerogieva, in an online press briefing mentioned, “It is clear that we have entered a recession, but we expect a recovery in 2021.”

Amidst all of this, it is important to understand that the manufacturing industry forms the crux of the global economy. It is obvious that the downfall of manufacturing in any one country in the world has a ripple effect on the global economy. For example, with the automotive components production stopping in China, according to the World Economic Forum, Hyundai and Kia recently had to stop several assembly lines in Korea and Nissan and announced it would suspend its auto production in Japan. India, whose import dependence on China is of roughly 68.36%, gravely worries of exhausting its inventories before the country is back in business.

Automotive sustaining through shutdown

Despite being among the top 15 most affected economies, India, believe it or not, is presently in a better position than what Europe or China have been in for the past three months. Timely actions from the central government has prevented the disease from becoming a community spread, which would have led to much bigger losses. Considering the dipping Indian economy for the past year, had a lockdown not been implemented, it would have caused further attrition to the country’s GDP. According to the UNCTAD, the Indian industrial sectors with major impact on trade due to the pandemic are the chemical sector ($129 million), textiles and apparel ($64 million), automotive sector ($34 million), electrical machinery ($12 million), leather products ($13 million), metals and metal products ($27 million) and wood products and furniture ($15 million).

The Indian automobile industry contributes up to 7.5% to India’s overall GDP and occupies 49% of the manufacturing sector. It is presently witnessing a revenue loss of ₹13,000 - ₹15,000 crore due to the lockdown, according to an ETAuto report. With China accounting to 15-30% of India’s automotive parts imports, Rajesh Nath, Managing Director, VDMA, remarks, “The shipments via sea have been suspended, and hence, the Indian OEMs are unable to produce beyond the inventory already lying with them. The positive side is that it has also led companies to look within and source more parts locally, which has given a boost to the local auto components industry.” With most automotive companies in India trying to align with the government's agenda of ‘Make in India’ and increase profitability, this opportunity could be utilised to start de-risking by looking to source parts locally.

Plummeting import to surge profits

One industry that is possibly going to benefit majorly from this present pandemic is the pharmaceutical manufacturing industry in India. Despite having the third largest pharmaceutical industry in the world, the present period has worked as a rather rude awakening for the government and the import-dependent pharma industry. The Indian pharmaceutical industry imports 69% of its API requirements from China. According to an analysis presented by the CII, the Indian pharmaceutical industry has faced a cost disadvantage with China. It also mentions the necessity of taking active measures by procuring KSMs, APIs, fast track approval processes and immediate environmental clearances so that pharma companies can start manufacturing APIs locally. Now, considering all the footfalls and the risk of importing goods from China, the government has cleared a slew of measures to promote manufacturing of APIs and KSMs within the country. With a ₹3000 crore project set-up for three bulk drug parks and 20% financial incentives for the next six years for manufacturers to make 53 critical bulk drugs, it is certain that dependency on other countries for bulk would be vastly reduced. “Reducing dependence on China is a major shift and an opportunity we should see. Bulk drugs and intermediates industry has a big opportunity in manufacturing,” discloses D S Ravindra Raju, President – Manufacturing, Deepak Fertilisers and Petrochemicals Corporation.

Essential structural revival

While how quickly the manufacturing industries can revive is still a question, the announcement by the Indian finance minister on March 24, 2020, on the extension in the GST return filing timelines with the deferment of e-invoicing and waiver of penalty, late fee and interest on GST, should bring in some relief once businesses have resumed. Suggesting on how this period of lockdown can be used wisely by the manufacturing industry, Ravi Raghavan, Managing Director, Bharat Fritz Werner (BFW), opines, “The shutdown period is an opportunity for learning and upgrading skillsets. The citizens, industry leaders and workforce should constructively think and plan, so that ideas get generated and implemented when the shutdown ends.” Even though the losses incurred are going to cause complications, Ashutosh Athalye, Sr Vice President - Projects, Technical & Business Development, Sigma Electric Manufacturing Corp, suggests that companies should continue to protect their employees by adhering to the health guidelines & urgently focus on supply chain stabilisation through production capacity optimisation, inventory management through critical parts identification & parts rationing, supplier re-engagement & support and customer engagement with proactive & transparent communication.

Alleviating the burden of closedown

Another crucial strand of the country that is going to greatly suffer during this period of lockdown is the MSME sector. MSMEs contribute around 6.11% to the manufacturing GDP and 24.63% of the GDP from service activities as well as 33.4% of India’s manufacturing output. MSMEs in India have been struggling for the past quarter with the slowing domestic demand. Now, with the collapse of economic activities due to COVID-19, it has raised existential questions for many of them. The announcement of raising of insolvency filings to ₹1 crore from ₹1 lakh by the finance minister and the three-month moratorium levied on loans by the RBI is set to bring in relief to the MSMEs to a certain extent. Further, to help MSMEs, CII has set-up a CII COVID-19 rehabilitation and relief pool fund to help them and the society from the impact of disruptions caused by the coronavirus. Gaurav Awasthi, Division Head – Quality Control Centre, Honda Cars India, suggests, “Banks should write off / defer loan re-payment to the needy. The schemes and benefits extended to the SME sector should be adequate to bring them out of the woods.” But it wouldn’t be enough. During this present crisis, corporates need to step in and help Indian MSMEs survive the initial period of being back into business. If not as a help, corporates can view this as the perfect opportunity for India’s ‘Make in India’ movement to shine out. With the help of MSMEs who produce components locally, the Indian manufacturing sector can loosen itself out from the manufacturing dependence on China.

Exploiting the desolate space

While China is recovering from the aftermath of the virus, what India is missing out on is maybe a historic opportunity to grab some space in the global supply chain which has been vacated by China. No doubt that India is going to feel the pinch as China was India’s major supplier for pharmaceutical ingredients & intermediaries, electronics & telecommunication, capital goods, automobile accessories, power plant equipment and steel products. But what we need to realise as a country is that we are well equipped to manufacture all these items on our own. Like China, India also has low labour cost, skilled labour, ease of doing business, a malleable business ecosystem, etc. The Indian industrialists and companies need to start reflecting on the void getting created due to China’s backfall. It is essential to understand that due to less cases at hand and executed circumspect measures, the country’s recovery period would also be shorter. India, which is the second fastest growing market in the world after China, can easily seize this opportunity of becoming a world exporter. With the already existing US-China trade war at hand, India could capture this opportunity and replace the communist giant in the global market. With the news of more than 200 US companies looking to invest in India doing rounds, we should consider strengthening our infrastructure to accommodate them. Athalye accentuates, “The pull for risk mitigation & transferring business from China to low cost competent countries like India, Vietnam and Indonesia etc will increase further. India can be that option, given its size and relative insulation from the impact of the virus.”

Recuperating & ascending

The world recovery process from the COVID-19 damage would be slow, keeping in mind the grave impact it has had on the world. Though uncertain when, once the recovery begins, with it being a wake up call for India concerning its import dependency on China, the manufacturing industry here should pursue functioning its daily operations by locally sourcing products in alliance with MSMEs. While the rest of the world struggled to produce a COVID-19 test kit, India managed to do the same within a matter of six weeks. This clearly suggests that our country has the talent and the resource to grow globally. We need to work on growing with local retention of both, our resource and talent. The short-term effect of this virus could possibly prove to be a long-term eye opener for the country. If provided with the needed land and labour reforms, infrastructure and logistic & supply chain support, our country could match the global leaders.

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  • The world recovery process from the COVID-19 damage would be slow, keeping in mind the grave impact it has had on the world

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