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CORONAVIRUS AND IMPACTS ON ECONOMY

The Topic covers GS paper 2[Issues relating to development and management of Social Sector/Services relating to Health, Education, Human Resources.]

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Context


  • The human cost of the coronavirus outbreak is climbing across China and beyond. 

  • The economic cost is also mounting. 

  • That damage is, for the most part, not due to the virus itself, but due to efforts to prevent it from spreading. 


What is the Background?


  • There are strict restrictions on moving out of Wuhan, where the outbreak began, a city with a population of 11 million. 

  • The lockdown, also now extended to other parts of Hubei province, prevents business-related travel as well as the movement of goods and workers. 

  • The impact is not confined to China.

  • International retailers have closed operations in China. Several overseas airlines have stopped flights to China and international hotel chains have been offering refunds. 

  • And beyond that, there is growing concern about integrated international supply chains. 

  • Hyundai, of South Korea, has suspended its car production because of problems with the supply of parts from its operation in China - an early warning sign of possible extensive disruption ahead. 


What is China’s significance in the Global Economy?

 

  • It is one of the world’s fastest-growing countries and is the tenth-largest exporter.

  • China plays a growing role in the world economy.

  • Today, it is the world’s second-largest economy and produces 9.3 percent of global GDP.

  • China is also the largest exporter of goods in the world, with 9.6 percent of the global share and an 8.4 percent share of goods and non-factor services.

  • It also forms a very important trade element in other countries.

  • India’s pharmaceutical industry depends on the imported active ingredients from China.

  • China’s vast and growing domestic market has encouraged thousands of foreign businesses to open their own factories on the mainland, and join local distribution networks. 

  • The country is also the centre of a diverse range of supply chains. Most of the raw materials are shipped to China before being converted into a manufactured product.

 

What is the global impact?

 

  • A 2017 paper by economists Victoria Fan, Dean Jamison and Lawrence Summers estimated the expected annual losses from pandemic risk to be about $500 billion, or 0.6% of global income per year, accounting for both lost income and the intrinsic cost of elevated mortality.

  • Wuhan, which was the centre of the outbreak, is a large industrial hub, a regional hub, an important cog in the automotive industry and a magnet for foreign firms.

  • The outbreak has caused economic activities in China to come to a standstill. This has also affected economic activities on a global scale.

  • GDP growth in the first quarter of 2020 could be about 5% and the possibility of falling below 5% could not be ruled out, according to the Chinese Academy of Social Sciences. Certain analysts have warned that the worst-case scenario could result in an economic contraction. 

  • Most industries in China shut down over the two weeks around the lunar new year. The lockdown in the country prevents business-related travel as well as the movement of goods and workers. 

  • The time around the lunar new year usually is when most of the economic activities increase in China.

  • There is a growing concern about the integrated international supply chains.

  • The shut down of business in China also affects the economic activities on a global scale. Economists are speculating that perhaps 0.3 percentage points may be shaved off global growth.

  • Bangladesh derives 85% of its Foreign Exchange revenue from the garment and clothing industry. They, however, import the cloth from China.


Which are the vulnerable industries?


  • China is a leading supplier of auto parts, electronics, and mobile phones. Travel companies, automobile industry, and luxury product outlets are among the most volatile sectors.

  • The automobile executives in the USA and UK have warned that they’re very close to the shortage of parts. 

  • Many global companies rely on suppliers based in China. For example, 290 of Apple’s 800 suppliers are based in China and the country is also responsible for 9% of global TV production. However, Apple stores have been closed in the wake of the epidemic.

  • Wuhan is also the third-largest education and scientific base in China, with two of the top ten universities. However, the Universities are closed down currently, to control the virus from spreading.

  • The travel and tourism sector will be affected badly.

  • Several overseas airlines have stopped flights to China and international hotel chains have also been offering refunds.

  • Shipping companies are reporting a sharp drop in container volumes. 

  • China also has a huge domestic market for retail and food and beverages. Starbucks alone has around 4000 outlets in China, however, half of them were closed due to the outbreak.

  • API China is China’s leading exhibition for the pharmaceutical manufacturing sector covering the complete spectrum of products. However, due to the lockdown, business has been moving at a snail’s pace.

  • The Asian stock markets are enduring volatile weeks. It had initially gone down due to a slump in the retail, consumer services, and transport businesses before it recovered back again in the hope that the virus outbreak would be contained.

  • China is the world’s largest crude importer and also a big consumer of metals such as copper and iron ore. The oil prices have fallen sharply along with the spread of the virus.


How is it an opportunity for India?


  • It isn’t exactly an opportunity for India, however, there will be a positive effect on India’s external balances. 

  • The ASEAN (Association of Southeast Asian Nations) countries will be affected on a large scale as they are very closely integrated with the value chain of China.

  • Japan, although possessing a stable economy, would still be affected, as China is a big buyer of Japan’s industrial machines, its cars, trucks, and technologically advanced consumer goods.

  • India would be impacted as China is one of India’s largest trading partners.

  • The USA and the UK rely heavily on China for its automobile parts and other electronic goods. 

  • Tourism in most countries will also be affected, as Chinese tourists would not be allowed to travel for quite some time to come.

  • Thus an economic slowdown in China would affect most of the countries in the world. 


What is the way forward?


  • India and the other countries should be prepared to face the effects both in terms of the spread of the virus and in dealing with the economic slowdown which can occur. 

  • The public should not panic and the spread of misinformation should be regulated.

  • The affected countries could try to look for alternate options while taking this opportunity to strengthen their domestic markets.

  • Try to help the people in China by not making the situation harder for them then it already is.


Conclusion


  • Given China’s huge importance to the global economy, the ripple effect could be choppy and lasting. 

  • However, with greater cooperation among the rest of the countries, the intensity of the effects could be minimized. 

  • China is also a highly organized country, thus it is expected that the country could make a fast recovery from this epidemic.