Viral Economy: COVID, The Rat and Lessons From Chinese Culture

According to Chinese zodiac calendar, the year 2020 is considered to be the year of the metal rat. The rat year marks the beginning of a new zodiac cycle. The rat in Chinese culture is associated with wealth, surplus and prosperity. Hence, the coming of a rat year is generally believed to be favourable for all people. However, the year so far has been otherwise. The dawn of the new year saw a cluster of pneumonia cases being reported in Wuhan, the capital of Hubei province in China. A virus called SARS-CoV-2 originating from a bat or a pangolin found its way to humans in a bustling wet market and is wreaking havoc across the world. It's been more than 2 months since the outbreak of COVID-19 and the situation doesn't seem to ease anytime soon. So far, a total of 1,82,609 cases have been reported worldwide and the death toll has touched 7164 (as of 17th March 2020). India has reported 124 confirmed cases with 2 deaths. The World Health Organization on March 11 declared the disease to be a pandemic.

The spread of corona virus across the world comes in the backdrop of an already decelerating global economy. With things looking gloomy, economies across the world find themselves in doldrums. Will this pass? What will be the impact on humans and their economic processes? Are we headed to a recession? How long will it take to recover? These questions linger in the minds of those in decision making positions.

The virus and the economy

The virus has already brought economic activities in China to a standstill. Chinese exports have contracted by 17.2% in dollar terms in January and February. (Financial Times, March 7). For India, sectors that are over dependent on Chinese imports like the pharmaceuticals and consumer electronics sector are feeling the pinch. Mobile phones and other electronic items are set to turn dearer in the coming months. But since the next two months are necessity months for items like air conditioners and refrigerators, industry observers expect that a price hike of 3-4% will not impact demand.

The pharmaceutical sector that imports 80-85% of Active Pharmaceutical Ingredients (APIs) from China is now facing volatility due to supply disruption. Input costs have gone up by 50%. However, this is less likely to impact the poor in India as the government will absorb the impact through its Jan Aushadhi stores.

The fertilizers industry that imports non-Urea and phosphate fertilizers could face price volatility due to fall in supply. As the stock levels are adequate, there is nothing to fear as of now. Even if the prices of fertilizers and pesticides increase, it is likely to be absorbed by the government through its subsidy component to safeguard farmers.

But, some of the key service sectors are bound to face the brunt of corona. Transport, logistics, tourism and entertainment will be affected due to restrictions in travel and temporary lock down. Economic Times has reported that most airlines might go bankrupt by May end if the current status persists. It is important that the government pitches in and insulates the sector from facing losses. Spice Jet head Ajay Singh has applauded the Indian government's proactive efforts to address the situation and likened the current crisis to a 'turbulence'. (Economic Times, March 12). It is expected that as normalcy returns, these sectors will rebound.

Silver lining

Any crisis is a challenge for some and opportunity for others. The outbreak of corona coupled with the free fall of crude oil prices has come as a boon to companies that use oil and oil derivatives as their base. Amidst a plummeting stock market, shares of oil companies and fast-moving consumer goods companies (FMCG) have been on the uptick. Demand for biscuits, ready-to-make food items, soaps, etc., is set to boost local small and medium scale industries involved in their production. Companies producing medical supplies also stand to benefit. On one hand, e-commerce platforms will gain from the spurt in online sales as people avoid malls and shopping streets, while on the other, street vendors doing business on streets in prominent cities like Delhi, Mumbai, Chennai, Bangalore, Hyderabad and Pune will be hit in the short run.

It is to be noted that the high impact due to corona will be largely felt in metros and other tier-1 cities. Tier 2 cities where industries are located will be affected due to demand slump. Tier 3 cities and villages will be least affected where majority of Indians live. All this will stand true if the government and the people manage to prevent the further spread of virus.

Are we headed to a recession?

When the economy shows two successive quarters of contraction (6 months or longer), it falls into recession. It is feared that the global economy may spiral into a recession if the virus does not turn out to be seasonal. If within the next six months, the COVID impact doesn't subside, things will get difficult for governments across the world. There is uncertainty about how long the impact of virus is about to stay and businesses hate uncertainty. This is where the role of the government and the central bank comes into play.

RBI Governor Shaktikanta Das has assured that the central bank has all the firepower to fight the economic threat arising out of corona virus and said that various policy instruments would be used from time to time depending on requirements. The US and the UK slashed interest rates to spur economic activity. It is not that easy for India to go ahead with a rate cut. CPI inflation stood at 6.58% for February 2020. A steep rate cut could lead to an inflation rise, trigger foreign outflows and lead to weakening of the rupee. The challenge is to effect a rate cut just enough to shore up positive sentiments. The RBI also has the options of slashing SLR and buying government securities to infuse money into the system. One may have to wait till the next Monetary Policy Committee review meeting scheduled from March 31-April 3 for the RBI's next steps. Apart from monetary policy tools, the government might resort to sector specific sops instead of an outright government spending to cushion industries from the negative impact and give a fillip to the economy.

It is hoped that India being a consumption-driven economy unlike China which is export-driven, will be able to tide through this crisis. R.C. Bhargava, Chairman of Maruti Suzuki echoed similar sentiments and said that despite the global impact of the corona virus being much greater, India would not be affected much as it does not rely heavily on international exports.

What can we do now?

Given that the central government and state governments across the country are working on war-footing to contain the spread of the virus, all one can do is be hopeful, follow the guidelines given by the government, and refrain from spreading panic. Panic spreads faster than virus and its impact on the economy is far reaching than the impact of the virus.

The year of the rat is meant to realize our interconnectedness. It invites us to create new alliances and support systems to take on big challenges. Prime Minister Narendra Modi did precisely that by reaching out to the SAARC nations to fight the corona virus.

The rat in Chinese culture is also associated with midnight hours and cold winter. What does nature do in these wee hours? Seeds ready themselves to germinate and buds wait to blossom. Hence, this is a time of waiting and planning. We should take this time to pause and think about what we are doing to nature and prepare ourselves for the future.

In these tough times,

As nature tests the resilience of humankind,

It is the lines of P.B. Shelly that comes to my mind,

"If winter comes, can spring be far behind?"