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The coronavirus threat

Govt should prepare for the fallout

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Hong Kong: A woman wearing face mask walks past empty shelf of tissue papers at a supermarket in Hong Kong, Thursday, Feb. 6, 2020. Ten more people were sickened with a new virus aboard one of two quarantined cruise ships with some 5,400 passengers a
Business Standard Editorial Comment
3 min read Last Updated : Feb 10 2020 | 10:47 AM IST
In 2003, the outbreak of severe acute respiratory syndrome (SARS), which killed hundreds in East Asia, had a noticeable but eventually manageable effect on the global economy. The People’s Republic of China, where SARS emerged, suffered some growth costs — but the economy was so super-charged at that point in its development that it soon shrugged off the effects and continued to set world-beating records. Much is different today, as another coronavirus has emerged from the Chinese city of Wuhan. Mainland China is far more integrated into global supply chains than it was in 2003, when it accounted for less than 5 per cent of global output. And the Chinese economy itself is less robust than it was earlier — and, of course, many experts believe that this coronavirus is even more virulent and dangerous than SARS. Beijing’s response, though scandalously tardy, is finally reaching proportions commensurate with the crisis. Many factories in globally networked areas of the mainland are closing their doors temporarily. The effect on some industries such as automobiles and mobile phones will be particularly marked. Both these networked industries depend crucially on output from Chinese factories.

It is important to note that coronavirus is still some distance from reaching worst-case scenarios. Indeed, the World Health Organization has been careful to not yet call it a pandemic. But its effects will soon be felt. The Indian auto industry, for example, has at best a couple of weeks of inventory of supplies from mainland China. The pharmaceutical industry, which is a major export earner for India, imports many of its active ingredients — and by some estimates over 80 per cent of those are imported from China. Thus, in any case there is likely to be an economic effect of coronavirus on India. This assumes that the virus itself will not take hold in Indian conditions. The first case in India was reported in Kerala some time ago. However, it is far from certain that the Kerala cases are the only ones of concern. After all, the Indian public health system is not among the most efficient in the world, and it is worryingly possible that some relevant cases are dropping through the cracks. There is no reason yet to panic, as global cases of coronavirus appear to be under control. But the government should be clear and transparent about what it plans to do if cases happen to multiply in India. How can capacity be created at short notice to deal with an epidemic?

There are other ways in which the government should prepare for the fallout of coronavirus. One such consequence is already visible in the global crude oil market, which has now entered bear territory. Brent crude for April delivery is now trading at around $55 a barrel, with estimates that global oil demand might drop by as much as 200,000 barrels a day. If large oil producers do not cut production, the downside for oil prices could be considerable. But it means that the burden on the Indian exchequer and the external account would be considerably eased. As was done in 2014 and 2015, when oil prices began their sustained drop, the government should take advantage of this to secure its finances.

Topics :Coronavirus

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