*****Can the Indian economy survive a global downturn? – The Hindu BusinessLine

Clipped from: https://www.thehindubusinessline.com/opinion/can-the-indian-economy-survive-a-global-downturn/article65401455.ece

China’s lockdown is disrupting global supply lines and creating shortages globally

China’s lockdown is disrupting global supply lines and creating shortages globally | Photo Credit: STRINGER

Covid-19, a war in Europe and the Shanghai lockdown could derail the world economic recovery

Everyone was hoping this would be the year of recovery when the global economy climbed off its Covid-19 sickbed and took the first tentative steps towards normalcy. As we recovered from Omicron, there were faint hopes we might have put the illness behind us. That brief spurt of optimism now seems premature.

The grim truth is the world couldn’t be in a worse shape. For a start, Covid-19 hasn’t gone away. Then, there’s the Russia-Ukraine war, now stretching into its 77th day with no end in sight. If all that isn’t enough, Shanghai, China’s biggest industrial city, is still undergoing a prolonged lockdown and supply disruptions could throw the global economy out of gear.

Let’s take Covid-19 first. When the pandemic began in early 2020, epidemiologists breezily talked about herd immunity. After suffering through the Delta and Omicron waves, the received wisdom now is herd immunity doesn’t come into play with Covid-19.

I’m one of many who’s had the illness twice and one person I know has had it three times. It seems ‘revenge’ partying may be slightly premature. Should we shut ourselves indoors and not venture out at all? Obviously, we can’t stay in isolation forever. What’s the medical verdict? “Omicron’s milder but we can’t treat it like the common flu. Apart from anything else, there are also Long Covid side-effects,” says one epidemiologist.

Medical advances are steadily being made in treating Covid-19. But until there’s a discovery that really does make the virus like the common flu, we’ll never know when a new outbreak might slow the economy or bring it to a juddering halt. Even the largest corporations must plan for such contingencies.

Turn to Russia and Ukraine, a region that till recently was almost an Area of Ignorance for most Indians. The last time our gaze wandered in that direction was when a reactor at the Chernobyl nuclear plant exploded in 1986. After Moscow began its “special operation” against Ukraine in February, everyone expected Russian tanks would be rolling down Kiev’s streets within days and that Volodymyr Zelenskyy (did he consult a numerologist like Jayaalalitha?) would either meet his end fighting or catch the last plane out.

In the event, Zelenskyy’s courage and eloquence has been a PR disaster for the Russians with their unconvincing “neo-Nazi” tirades against Ukraine. (Zelenskyy’s response to the Americans offering to fly him out when the Russians invaded that, “I don’t need a ride, I need more ammunition,” is destined for Bartlett’s Familiar Quotations). The Russians appear to have settled into waging a grinding war against Ukraine and Europe is facing the harsh reality sanctions may hurt the sanctioning countries as much as they hurt the sanctioned. 

Chinese firms moving in

Interestingly, Western companies could be also taking a blow from a different direction. In Russia, Chinese companies are moving in where Western companies have exited. Ural Wind Architects is a new Chinese-Russian joint venture that’s just been launched after Danish and Italian companies pulled out of two projects. Similarly, two Chinese oil companies are negotiating to buy Shell’s stake in Russia’s Sakhalin-2 oil field.

In any event, Europe looks like it will have to survive the coming months without Russian gas and oil. Germany’s economy is already feeling the pinch and growth predictions are down to 1.8 per cent from an earlier 4.6 per cent. If that isn’t bad enough, German inflation is running at a four-decade high of near eight per cent. Don’t forget Germany is super-sensitive about inflation (it was the country that endured hyperinflation in 1922-23 when it took a trillion marks to buy a loaf of bread). Germany is also the locomotive economy pulling the rest of the European Union — if it slows, so does the EU.

Inflation has become a global phenomenon, and the Reserve Bank of India and other central banks are all hiking interest rates with more tightening to come. Throw in the falling rupee and that will push up the prices of all imports starting with oil, coal, steel and cement and other commodities. Inevitably, prices of everyday necessities to luxury goods will rise. The Indonesians have already banned edible oil exports which we need in large quantities and prices of pulses are also rising, driven in part by the Russia-Ukraine war. And as consumers abandon discretionary spending, this lowers tax revenues and leaves the government in a tighter-than-ever squeeze with less to spend on key projects.

It’s the same story globally. In the UK, inflation’s running at 7 per cent, forcing the Bank of England to increase interest rates four times. In the US, too, where inflation’s also at four-decade highs, the Fed has jerked into action and embarked on an aggressive rate-raising phase. But everyone, both in India and abroad, worries raising interest rates may not have much impact against imported inflation from commodities like oil and coal. 

If all this isn’t enough to stall growth, there’s also Chinese leader Xi Jinping’s determination to ensure his Zero-Covid strategy stays a winner, at whatever economic price. The result is an ever-stricter lockdown in Shanghai where even delivery boys are being kept off the streets and locked-in residents are relying on government rations. Shanghai’s the world’s second-largest port and ships are lined up outside to load everything from PCs, laptops and tablets to automobile and white-goods components. 

Mercedes Benz’s India CEO has gone on record to say he doesn’t have enough vehicles to meet strong demand. On a different level, companies like Maruti and Hero are saying there’s insufficient demand for their lower-end vehicles, suggesting buyers in those categories are stalling on purchases due to financial worries. Throw in sliding stock markets for the more well-heeled and it’s clear discretionary spending will suffer.

Outsourcing to China where manufacturing was cheaper seemed like a great idea until now when the perils of putting all your production eggs in one basket are becoming clear. Over the last 30 years, China has become the world’s factory and there’s nothing left in the West. Take shipbuilding for instance. The world’s 10 top shipyards are in South Korea and China.  

Now, with China in lockdown, it’s disrupting global supply lines and creating shortages globally. It’s unclear when Shanghai will get Xi’s all-clear to open up. We’ve seen from our own experience a two-to-three week lockdown doesn’t stamp out Covid-19 totally and Omicron is especially fast-spreading.

Can India escape the effects of a global slowdown? We emerged relatively unscathed in 1999 and also 2008. But now we’re more interlocked with the world and it’s tough to see us escaping the multiple blows that are striking different corners of the globe.

Published on May 10, 2022

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