Virus may close borders, beware of harder times

Just over two months after it was first reported in China, coronavirus is fast transforming into a grave threat for the global economy. With the viral infection affecting 83,385 people across 56 countries, the World Health Organisation (WHO) fears it could become a pandemic. The announcement has given jitters to risk-averse investors, who have pulled out money from equities, causing markets across the world to fall. The United States’ Dow Jones sank 10 per cent in just six trading sessions, while the Sensex and the Nifty have plunged nearly 10 per cent since their record highs in January 20, 2020. In just 11 trading sessions, investors in Indian equities have lost `11 lakh crore wealth, which averages into `1 lakh crore a day.

Initially, the coronavirus was considered a threat to the global economy as it shut factories in China as part of efforts to contain the spread of virus, disrupting the global supply chain. It threatened to disrupt the production of automobiles, electronics, and drugs. It could also potentially lead to the shortage of different products across the world. The spread of viral infection, however, to other countries, especially developed countries in the West, increased fear among investors. Though the developed countries are better placed to deal with the public health emergency, the impact of coronavirus on the global economy could be considerably greater as they account for 79 per cent of trade and commerce in the world. Apart from the impact on trade, the cost of dealing with coronavirus could be humongous if the epidemic spreads to poor countries whose public health systems are weak.

The world has seen several pandemics in the past. There were viruses that killed a larger number of people than coronavirus has. But the current epidemic could be different in terms of the wide-ranging impact that it could have on the global economic order. The current global economy stands on the premise that an enterprise could source goods and services from low wage countries to optimise profits. But the shutting down of factories in China due to coronavirus has created shortages at production facilities across the world and exposed faultlines in this sourcing model. There are reports that production lines at most Indian pharmaceutical companies, which have become the mainstay of drug supply in the world, could come to a halt as most of the active pharmaceutical ingredients (APIs) and intermediates were sourced from a handful of Chinese companies which remained locked down. Similarly, the production of iconic Apple products could stop if the supply of key components were stopped.

Such a disruption could trigger a relook at globalisation and dependence on large-scale production in foreign countries — policies that accelerated economic development in many Asian countries, including China. If there is any such change in corporate strategy, India would be one of the worst affected as it aims to replace China in the global supply chain. Even if there was no such drastic change in economic policies and the threat of coronavirus has ended shortly, it may take months for the global economy to recover. So hard times in India, already witnessing the slowest economic growth in a decade, could get harder.