“Covid-19 crisis is a great opportunity to revive multilateral trade framework”

Prof. Pravakar Sahoo, Institute of Economic Growth, tells TPCI in his exclusive interaction that owing to lockdowns around the world, Indian sectors such as steel, oil & gas, pharma, auto ancillaries, electronics, IT services and chemicals will be most impacted as their production depends on intermediate goods imported from abroad. He also sees the present crisis as a great opportunity for reviving the multilateral trade framework.

TPCI: What impact will the three-week lockdown have on India’s supply chain in terms of import of raw materials? What impact will it have on the domestic market?

Prof. Pravakar Sahoo (PS): In the world of global value chains or value addition at different stages and places, any lock down affects the whole production network. The lockdown across the countries affects India’s imports, which are mostly inputs or intermediate goods for its supply chain. For example, we depend on Chinese imports in many sectors. Between April and December 2019, India imported goods worth US$ 52 billion from China. More specifically, sectors such as steel, oil & gas, pharma, auto ancillaries, electronics, IT services and chemicals will be most impacted as their production depends on intermediate goods imported from abroad. Further, the domestic lockdown completely disrupts the movement of goods from farm/warehouse to firms/markets. In fact the three-week lockdown, which was necessary, has brought economic activity to a standstill.

According to estimates, the shut down could costs around US$ 120 billion, or 4% of GDP. Therefore, lockdown badly affects the supply chain and there may be shortage and spike of prices in certain sectors.

TPCI: What repercussions will the halt of manufacturing activities have on Indian exports?

PS: The lockdown affects the whole set of domestic production network and thereby affects manufacturing and exports. Manufacturing exports constitute more than 60% of India’s total exports and the import content of India’s exports is very high. Some of sectors that feature in India’s top exports are also in India’s top imports. Therefore, lock down affecting imports used for manufacturing will severely affect India’s exports. Moreover, the world market is in crisis as most of our export markets –USA, Europe, China – are severely affected by the Corona Pandamic and the disruption to the domestic production chain does not help India’s export competitiveness to penetrate into the world market during this tough times.

There are many export sectors which will get affected, including petroleum products, gems and jewelry, automobile, pharmaceutical, organic chemicals, machineries etc. For example, the Indian pharmaceutical industry’s active pharmaceutical ingredients (APIs) are heavily dependent on imports, with more than 60% demand met from imports. Out of the total imports, 65-70% alone is imported from China. Thus, pharma manufacturing will be hit and the prices of import dependent products may rise. Similarly, the automobile sector is dependent on China for certain components such as fuel injection pumps, turbochargers, etc. A shortage of supply may lead to running out the inventories and causing supply chain disruptions in manufacturing activities. Given that India exported US$ 15 billion worth of automotive products in 2018, the impact can be felt on manufacturing exports if the imports of critical components are disrupted.

TPCI: Although the government has assured the nation that the supply of essential commodities will not be affected, the industry anticipates developments like a spike in food prices and dearth of medicine supplies due to the difficulties in transportation from the field/factory to the markets. Are these fears misplaced?

PS: These fear factors are not completely misplaced. While the government is aggressively involved in providing supply of essential commodities, the implementation may not be completely smooth during the lock down. Some of these may include lack of supply, logistical disruptions, etc.

There may be a temporary spike in prices of certain essentials due to genuine shortage, logistical disruptions, hoardings by suppliers and also by households in a climate of uncertainty. However, the government has been very effective in managing the supply chain of essential commodities so far.

TPCI: What does this present crisis portend for the future of an already damaged multilateral trade framework?

PS: The present crisis is a great opportunity for reviving the multilateral trade framework. The current pandemic has brought broader disruptions to global trade. The trade war between the US and China has resulted in a climate of uncertainty where exporters and importers are unsure about new tariff policies. However, a coordinated push, through the G20, that includes not only fiscal-monetary stimulus but also push for globalization will infuse confidence in the exporters and importers. In the past like during GFC in 2008, the international community has successfully gathered a coordinated response to similar crises.

While the current scenario is not too good, still a mutual halt to trade wars and defining new and more open multilateral trade agreements will help boost economic activity globally through increase in confidence and economic activity. In fact, G-20 leaders virtually met on March 26, 2020 and urged for open trade policies. The world economy is staring at a prolonged crisis, much more than global financial crisis of 2008 and therefore it can least afford any more protectionism policies. Multilateral open trade regime is the way to go.

TPCI: How do you see the supply chains and trade linkages getting restored once the crisis is over? How much time should it take, and how would India need to strategise its international trade going forward?

PS: Supply chains, dependent on imports and more so from China, will be hurt because of the current pandemic. The capacity utilization will remain very low and will take some time to return to normalcy. In a scenario where the situation worsens, the supply chain of manufacturing sectors, that depend heavily on imports, may eventually run out of their inventories in a few weeks. It is difficult to predict the time when economic activity comes back to normal. We are not sure how the Covid-19 pandemic will span out and how long. However, the recovery might take several months if not years to come to pre-Covid-19 levels.

As a remedy, India should prioritize producing intermediate goods to reduce dependency for imports from other countries in the long-run. However, this is not possible in the short-run due to infrastructure and other constraints.

TPCI: Covid-19 has shown the importance of greater indigenous capabilities in an area like APIs for instance. Which sectors do you feel India should work on for building its indigenous capabilities now and how can it be done?

PS: Today, the production is not confined to any particular place or firm. The competition drives firms to be part of bigger production network to reap the benefits of comparative advantages. We have moved from the world of ‘Self-sufficiency’ to ‘self-reliance’. Therefore, it is not possible to develop indigenous capabilities across sectors in the short term. Yes, we should improve our indigenous capabilities across sectors and some necessary ones are defence, pharmaceuticals, chemical industry, energy etc. Improving domestic capabilities need huge investment in research and development (R&D), a developed financial sector and world class infrastructure among others. We are doing much better than before on many of these indicators and improving our indigenous capabilities across sectors, though gradually.

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Professor Pravakar Sahoo teaches Macroeconomics and International Economics to Indian Economic Service (IES) probationers. He has 20 years of teaching and research experience that includes many academic and research institutes such as ICRIER, India; Bruegel, Belgium; East West Center, USA; Asian Development Bank Institute (ADBI), Japan; University of Saitama, Japan; University Antwerp, Belgium; PRI, MoF, Japan; Institute of Developing Economies (IDE), Japan; MSH, France; and RIIO, China. He has wide international exposure and served as a consultant to several national and international organizations. He has work experience on India, South Asia, Japan, Korea, China and US.