Context: Covid-19 has impacted businesses and policymakers to economists and central bankers, and led to a disruption of global value chains and opens a possibility of a manufacturing boost for India.
Impact of COVID on businesses
- The pandemic has caused significant disruption to economic activity across the world as nations enforce lockdowns.
- China has been the biggest exporter of steel, chemicals, toys, rare earths, mobiles, electronics, garments, bulk drugs and many other items.
- Shutdown of manufacturing, transportation and shipping in various countries has disrupted supply chains of raw materials and end-use products.
- While prices of primary commodities may have moderated, an increase in prices of manufactured goods such as mobiles, processed food, medicines and other pharmaceutical goods is expected in the short run because of supply disruptions.
- India’s overdependence on China for sourcing requirements does result in a vulnerability, especially in the pharmaceutical manufacturing, where a bulk of its Active pharmaceutical ingredient (APIs) comes from China.
- Some shortages are possible and it will take a few years for India to become self-reliant in the production of APIs.
Disruption compared to Oil shock of 1970s
- Covid-19 can be viewed as a supply shock similar to the oil shock of the 1970s, when oil prices rose substantially, along with a slowdown in economic growth.
- But unlike the oil shock,COVID-19 has reduced demand for primary commodities such as crude oil, hence its prices have moderated.
- The present shock has both a demand and supply component to it.
- The US-China trade war followed by the COVID-19 outbreak has possibly made the world aware of the risks associated with relying on a single source for supply chains.
- India too has pushed for a China+1 policy and aims to integrate itself with global value chains.
- China Plus One Policy
- By adopting this model, companies can reduce its operating costs as well as access new markets.
- Business spreads its production across another several markets becomes less vulnerable to supply chain disruptions, currency fluctuations and tariff risks in any individual market.
- India has the ability to create productive non-farm employment in the manufacturing sector and thus will shift a lot of India’s workforce from the agricultural sector to the non-farm sector.
- Given the supply of unskilled labour, the immediate impact on wages may be small due to India’s surplus labour.
- However, over time as productivity increases, wages may go up steadily.
- But India needs to take care of factors such as domestic land and labour reforms.
- Also stability of India’s taxation policies and speed of approvals will play an important role.
Image Source: Mint