How lockdown in China may hurt Indian economy

Global headwinds are increasing further for the Indian economy. To add to the worries over the repercussions of the Ukraine conflict, the latest news about shutdowns in China owing to a surge in Covid cases is a cause of concern. This is because the interlinking of India's economy with that country is growing rather than the reverse. Despite the chill in relations, Sino-Indian trade is expanding rapidly. Bilateral trade flows rose to $125 billion during 2021. Imports during the first nine months of 2021 are reported to have risen by over 50 per cent, while exports grew by about 21 per cent. In contrast bilateral trade with India's old ally, Russia is only in the region of about 10 billion dollars. Even so, the impact of the Ukraine war on this country is going to be widespread owing to surges in prices of crude and likely shortages of key commodities like fertilizers, edible oils and precious metals used for industrial applications. Thus with the even larger economic linkages with China, there is bound to be a fall-out here.

One of the global apprehensions, in this context, is over the fact that China's lockdowns include major manufacturing hubs. Shenzhen, for instance, which has been closed for about seven days is a key industrial centre from where components are supplied to many countries. The net result is that several Indian industries may face shortfalls in supplies of components and intermediate materials. These include the pharma, electronics, steel and automobile sectors. Such sectors require inputs from this region including coal supplies that may have to pass through the Shenzhen port. Reports indicate that much will depend on the time frame of the shutdowns in this key industrial centre. In case it continues for the next three to four weeks, supply chains will definitely get affected and the outcome will be shortages of critical goods in this country.

Apart from the shutdowns in industrial areas, other fears are over the prospect of ports in Shenzhen or Shanghai having to close down. Last year, the closure of the port in Shenzhen had led to worldwide disruption in availability of containers. The logjams continued for months and freight rates rose sharply at the time. In case the situation is replicated, there will be a similar impact on supply chains. One of the vital sectors that will be seriously affected is the global semiconductor industry. In this case, components are sourced from several countries including China, so roadblocks in one area inevitably stall final production outcomes. Semiconductors or chips are have already been in short supply over the past year. This has been due to the pandemic having led to a decline in production followed by an inability to ramp up output to meet rising demand. In case ports are closed yet again in China, the scenario could well be replayed over the next few months.

The question is, how can India insulate itself from the impact of a breakdown in manufacturing facilities in China. First, it becomes imperative to identify alternative supply sources. This is an issue that was highlighted even two years ago when there were shortages of pharmaceutical ingredients as well as components of electronic devices including smartphones. Chips especially have come under the scanner due to their having become essential elements in a host of products including cars. Clearly, lessons have not been learnt by the situation at that time as industry here continues to be heavily dependent on many key electronics components supplied by China. At the same time, it must be conceded that it takes a while to either become self-sufficient to some extent by setting up domestic manufacturing facilities for components, or to manage alternative supply sources.

The second is for India to retreat from its policy of raising tariffs on imported components, which is being seen by the government as a way of incentivizing domestic production. The protectionist policies that have been gaining ground in the past few years need to be shed as it will impede efforts for this country to become part of global supply chains. In the case of semiconductors, for instance, it is well known that it is difficult for one single country to become a manufacturing hub. In fact, components sourced from several places are combined to form the final product. The proposal to promote semiconductor production here in collaboration with the Quad countries is a more realistic approach to ensure that these critical items are easily available for use by the country's manufacturers.

It also has to be accepted that India cannot become self-sufficient or Atmanirbhar in all products. The policy of trying to set up manufacturing facilities in areas where other countries are producing high quality products is not always the right route. For instance, the production linked incentive (PLI) scheme was extremely successful at the outset for mobile phones and electronic goods. It led to the creation of a whole new eco-system of electronic manufacturing facilities. It is not necessary that the same scheme will prove as successful in other sectors. There should be a careful identification of areas where the PLI scheme can yield results, rather than giving in to industry's pleas for launching it in many sectors.

These solutions, it must be conceded, can only yield results in the medium and long term. For the short run, the country will have to cope with a difficult external environment. The timing may not be ideal as the country was just on the verge of recovery from the two year long pandemic. On the positive side, it looks as if the China shut downs may be short lived, as the lockdowns may have the desired effect within the next few weeks. One can only hope this is the outcome as only then will it be possible for the economy to gradually move towards normalcy.