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7 PM Editorial |Woes of China and the US hand India an opportunity| 23rd April 2020

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Woes of China and the US hand India an opportunity

Context: Role of India post the pandemic

There are many factors that seems to converge that may offer India a chance to play a bigger role in global growth. With world’s two superpowers under great distress due to COVID-19 outbreak, India can grab an opportunity created by the changing world order.

This brings us to the question of what are the opportunities for India and what are the challenges India needs to overcome to grab this historic opportunity. Therefore, in this article we will discuss the following:

  • How China is facing distress due present scenario?
  • How USA is facing distress due to present scenario?
  • How India can use the present scenario as an opportunity to grow?
  • What are the challenges India needs to overcome to emerge as a global favorite?
  • Conclusion

How China is facing distress due present scenario?

  • China started its economic reforms in 1978 under the leadership of Deng Xiaoping who laid out a pragmatic vision for China’s future. China kicked off its journey from economic isolation to becoming the world’s factory following Deng’s vision.
  • China’s economic growth since the reform has been very rapid, exceeding the East Asian Tigers (Hong Kong, Singapore, South Korea and Taiwan). Since the beginning of Deng Xiaoping’s reforms, China’s GDP has risen tenfold.
  • China is widely seen as an engine of world and regional growth. Asian leaders view China’s economic growth as an “engine of growth for all Asia”.
  • But China is facing criticism from the world because of the COVID-19 outbreak.
    • US President Donald Trump has blamed China for the cause of COVID-19 outbreak and warned China of “consequences” because of its actions that led to the outbreak. The relations were already strained by the ongoing trade war between two countries.
    • A German newspaper accused China of a surveillance state that infected the world with a deadly disease. German Chancellor Angela Merkel told reporters, “I believe the more transparent China is about the origin story of the virus, the better it is for everyone in the world in order to learn from it.”
  • The poor quality of Chinese goods has been a loud whisper across consumer markets. But now, with so many countries suffering from faulty test kits imported from China, it is out in the open.
    • The testing kits procured from China have a mere 5% accuracy rate in India.
    • Spain, with one of the largest counts of positive cases returned around 6, 00,000 faulty kits to its manufacturer.
    • The British government is seeking a whopping $20 million refund from the two Chinese companies for providing faulty testing kits.
    • Italy and Netherlands have also halted testing with Chinese kits.
  • The  companies based in Japan and South Korea are looking at alternatives as China’s wage cost advantage fading over the last few years and now the rising risk of having operations in the country. The wages for skilled labor increased rapidly in the past decade. Though, wages for unskilled labor still remains quite low compared to the skilled intensive sectors.

How USA is facing distress due to present scenario?

  • USA has been the worst affected country due to the deadly virus that originated in China in December last year. New York City, the financial capital of the world, has emerged as the epicenter of corona virus in the world.
  • The quarantines and lockdowns that are needed to fight the virus’s spread are freezing the economy, too, with unprecedented force and speed. Unemployment is shooting up far faster than it did during the 2008 recession, a sign the economy is headed toward recession.
  • Other potential threat to USA comes when prices of benchmark United States crude turned negative on April 20, dropping as low as -$40.32 per barrel. This means that supply exceeds far than the demand and prices turning negative signals that traders are willing to pay to have oil taken off their hands.
  • The demand declined so much because of the corona virus that led to containment measures that shut down businesses, closed borders, disrupted international travel and locked down consumers.
  • To deal with the situation President Trump strikes an output-cut deal with Saudi Arabia and Russia. Saudi-led OPEC and its allies did agree to a record production cut of 9.7 million barrels a day. But the markets were hardly impressed because even that historic curb is not enough to counter the blow corona virus has delivered to demand and US shale producers are still struggling.
  • US shale oil producers, because of their higher cost of production need crude to fetch between $46 to $54 a barrel to break even, let alone to turn a profit.
  • According to Haynes and Boone’s Oil Patch Bankruptcy Monitor of 6 April 2020, the cumulative debt of exploration and production companies in the US had climbed to $130 billion by the first quarter of this year, sharply up from around $18 billion five years ago.

How India can use the present scenario as an opportunity to grow?

  • The slump in oil prices will be beneficial for India, which gets to record a lower current account deficit and shore up its government finances.
  • India imports over 80 per cent of its crude oil requirements. Low oil prices can not only reduce India’s import bills but it can also give a room to the government to increase fuel taxes, offsetting low direct tax collection. Further, low petroleum and fuel costs also bring down energy prices, moderating the inflation rate.
  • With the imposition of lockdown in the country, India’s information technology (IT) services companies used the occasion to test their levels of preparedness for a new world order. As their operations in Bengaluru, Pune, Kolkata and Gurgaon were halted,  they moved thousands of people to work from home while simultaneously allaying the security concerns of their global clients.
  • Video conferencing and virtual offices have been used extensively for official work without actually hampering productivity.
  • India’s corporate sector has been working vigorously in the past 2 months in the field of health sector. From domestic manufacturing of testing kits to R&D in the field of drug and vaccine trials, Indian companies are working actively to fight the pandemic.
  • The over-dependence on China is hurting the global economy and companies are now on a lookout for alternative production hubs. For many companies, the shift from China began prior to the Covid-19 outbreak, thanks to the rising input costs and the US-China trade war. India can use this opportunity and emerge as a nerve centre of modern supply-chain of the world.
  • A changing global economic order will make many focuses on India as a preferred destination for investment. While the global economic system is slated to go to a slump, opportunities and challenges for India occur through all avenues. India can emerge as a potential alternative choice for cost-efficient, quality products which are preferred from China.

What are the challenges India needs to overcome to emerge as a global favorite?

  • Lack of skill:Apple’s manufacturing stint in India began in 2016, and since then it has been producing four models in the country, all of them old models. However, the new models are still manufactured in Shenzhen, China. The complexity of the components manufactured goods warrants a standard of skill which may be lacking in the Indian labor force.
  • To attract foreign investment, a better business environment, lower administrative bottlenecks, more incentives would be required.
  • There is a need for a massive push for creating a robust infrastructure. This calls for investments in steady power supplies, efficient port and road operations, and greater ease in custom clearance.
  • India needs to move away from an input base system to a more support base system (manufacturing of parts and components) that would promote participation in the supply chains.

Conclusion

In this raging global epidemic, many developed nations’ responses have proved inadequate — so overwhelming has been the challenge. Only a handful of countries have withstood the virus onslaught. India has fared somewhere in the middle, though some would reckon that the nation has done well to contain the virus’ community spread. Post COVID-19, India needs to address the various challenges and work in the direction to grab the opportunity created by the change in the World order due to Covid-19.

India also looks at economic slowdown due to the pandemic. Once the pandemic is brought under control, India must actively engage in rebuilding the world economy. The world must think beyond naked profit and look to shift manufacturing and sourcing the services to a democratic and competitive nation which guarantees basic freedoms, is committed to reforms and can continuously adapt and innovate to changing global market needs. That is the essential economic take away from the catastrophic disruption of supply chains due to Covid-19 pandemic.

Source: https://www.livemint.com/opinion/columns/woes-of-china-and-the-us-hand-india-an-opportunity-11587572799806.html

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