The pandemic has caused significant disruption to economic activity across the world as nations enforce lockdowns
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
Covid-19 has spooked one and all, from businesses and policymakers to economists and central bankers, and led to a disruption of global value chains. Mint explains the economic implications of the pandemic and how it can result in a manufacturing boost for India.
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. Most companies have realized the risk of depending too much on one country for their sourcing needs. Hence, there is scope for further diversification of supply chains, some of which could come to India.
Will supply disruption lead to a rise in prices?
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. While prices of primary commodities may have moderated, we should expect an increase in prices of manufactured goods such as mobiles, processed food, medicines and other pharmaceutical goods in the short run because of supply shortages.
Should India worry about a supply shortage of APIs?
India’s overdependence on China for sourcing requirements does result in a vulnerability, especially in the context of pharmaceutical manufacturing, where a bulk of our active pharmaceutical ingredients or 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.
The impact in the long run depends on factors such as domestic land and labour reforms. Much will depend on the stability of India’s taxation policies and speed of approvals. The US-China trade war followed by the covid-19 outbreak has possibly made the world aware of the risks associated with putting all the eggs in one basket. This could benefit India as it pushes for a China+1 policy and aims to integrate itself with global value chains. Thus, it may create productive non-farm employment in the manufacturing sector.
Does this mean more jobs and higher wages?
More job opportunities 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. The creation of high productive jobs will shift factors of production from the low-wage, low-productivity primary sector to the modern sector.