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Below is the Views On COVID Impact on Indo-China Trade By Mr. Praveen Khandelwal, Motilal Oswal Services Ltd
Normalization of disrupted supply chain to take time
We organized an expert call with Mr Praveen Khandelwal – General Secretary of Confederation of All India Trade (CAIT) – to understand the impact of coronavirus (COVID) on Indo-China trade. Key takeaways:
* Bilateral trade ties between India and China are far more extensive and wide-ranging than generally understood. Dependence on China for supplies spans across sectors and sub-sectors, and in many cases is as high as 60%. On-ground situation indicates that normalization of trade can take at least six months.
* Industry participants have sought support from the Indian government (in terms of credit, technology, logistics, etc.) to unclog bottlenecks in the supply chains by building a formidable alternative to Chinese supplies.
How is the situation on the ground?
* Traces of coronavirus were first observed at the beginning of January 2020. With the quick spread of the virus, China intensified its response, putting Wuhan – the epicenter of the outbreak – under lockdown on 23rd January .
* Almost 750 million people are under lockdown and production in 18 cities/towns has come to a standstill. Key ports in China are shut as of now.
* The repercussions are now being felt in India as almost all sections of the country’s retail trade are dependent on supply from China. Traders usually keep inventory of 45 days, and with protracted supply interruption, they are now in a particularly painful spot with max 10-12 days of inventory. This has heightened concerns about serious disruption in the supply chain.
* Another challenge is safety of goods (free from virus). The trade community needs to ensure quarantine certificate is received before the release of supplies originating from virus-affected regions.
Areas exposed to disruption risk as of now
* Finished goods
* Raw materials – many find application in the MSME sector
* Spare parts across a wide range of sectors which can also impact onward exports
When can the situation normalize?
* Chinese trade counterparts appear uncertain about the resumption of production due to
(a) high government intervention in trade and industry and
(b) difficulty in estimating how many workers will resume work.
* Lockdown of cities and ~750m people only aggravate the problem at hand and make it tricky to provide a timeline.
* According to Mr Khandelwal, it would take at least six months or end of 2020 to resume production to pre-virus outbreak levels.
What can the Indian government do?
* The Confederation of All India Traders (CAIT) has held multiple interactions with the government and trade & commerce minister. A group of ministers is likely to be formed soon to take up this issue and suggest remedial measures.
* The CAIT has sought assistance from the GoI in the following areas:
1. Enhance or provide all facilities to regain production capacities for SMEs.
2. Suggestion for alternative sources for spare parts from countries other than China.
3. Provide credit facilities to optimize utilization of spare capacity. 4. Provide logistics support.
Industry wise impact
* Chemicals: India is a big importer of basic chemicals, specialty chemicals and API. Near-term impact on the chemicals sector cannot be ruled out as the scale of operations and the dependence of the sector on imports are too big to find an alternative.
* Auto & auto parts: The impact would be less compared to other industries as demand and production in India are curtailed in the run up to BS-VI transition. Here again the dependence of some components and their criticality of application will decide the eventual impact (imagine a car waiting on shop floor for a small engine part which is only made in China!)
* Consumer durables: This sector also has huge dependence on China, largely due to the cost advantage, which can evaporate in the near term. Alternative supplies from India are still possible for some spare parts but that would lead to cost escalation.
* The CAIT is an apex body of the trading community of India representing more than 70m traders and 40,000 associations, Trade Federations and Chamber of Commerce & Industry.
* The members of CAIT cumulatively do annual revenues of USD650b across a wide variety of sectors – auto, pharma, consumer durables, FMCG, electronics and many more.
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