India should brace for pandemic-led supply disruptions
For three years now, haunting visuals of surging Covid-19 infections and cold-blooded cremations in China have become common around this time. The havoc unleashed thereof seldom stays within China, and like water, the virus outbreak finds its way globally, border shutdowns or not, every single time. What follows in weeks and months ends as a global healthcare and economic collapse of varying proportions. The scars from the past two years have barely begun healing, and the speed with which the infections are rising is unnerving households and economies yet again. Like in the past, the latest health emergency in the world’s second-largest economy, commanding 18% of the global GDP, is likely to leave some damage on trade and supply chains. But unlike in the past, the prevailing backdrop makes it all the more disastrous.
Given the high inflation, rising interest rates and the ongoing Russia-Ukraine war, 2023 will begin its journey on a rather nervous note. If the pandemic has had any lesson besides highlighting public healthcare sector inadequacies, it’s the world’s over-reliance on China, a country with which the global supply chains are tied to the hip. Several countries like Vietnam, Thailand, India, Malaysia and Taiwan began positioning themselves as China’s alternative, but the truth—which economies too have come to realise—is that reducing the dominance of the Asian dragon takes immense time, money and manpower. Given that efforts are already afoot, chances are that feared logistics and shipping delays may not be as detrimental as in the past. What’s certain, though, is that some amount of disruption is unavoidable, particularly for neighbouring countries like India.
India is heavily dependent on intermediate and capital goods from China, and the fear of supply disruptions has already gripped traders. Among others, the Indian pharmaceutical industry is heavily dependent on China for active pharmaceutical ingredients (API), intermediates and bulk drugs. While companies are placing advanced orders even at a 25% premium to avoid production delays and drug shortages, they may face a margin squeeze and increase drug prices. Other sectors at risk include the automobile and electronics industries, which import critical parts from Chinese suppliers. On the other hand, a domestic demand dip in China could impact Indian exports as well. As it is, one-fourth of our economic output was lost to Covid in FY21, so it’s essential for India to remain vigilant.