Heavily indebted China cannot afford shuttered factories.

This piece comes at a time when the death toll from coronavirus is mounting, both in India and globally, even as world leaders continue to grapple with no answers on how to contain the damage. Most experts agree headwinds from the pandemic are so severe that let alone policy guidance and roadmap, even estimating the severity of economic damage is extremely difficult at this stage. In short, it’s a wait and watch for policymakers as they react on a case-to-case basis to these headwinds. In such a scenario, it will be wise to understand how the world economic order has been permanently altered, in more ways than one.
For starters, economy of every country on this planet has been ravaged by the pandemic; some a lot more than others. There has been much speculation if the pandemic will lead to new economic order, one where the supremacy of the world’s largest economy will be challenged by the second biggest one. In due course of time, a lot of research will be done to understand why the impact of Covid-19 was far more pronounced in Europe and US than in China where it originated from, and whether this was by pure coincidence or by design. However, at this stage I will confine this piece to ask whether the fall out will be more pronounced in Europe and USA or in China. Much of the economic impact in India will be a corollary to the larger question.
Firstly, we live in a massively globalized world (nothing explains this better than how a disease in Wuhan has spread to 215 nations on this plant) so there will be no country that will not have significant economic distress. On one end, while service driven economies will witness a huge economic fallout of lockdown due to a complete stoppage of all economic activity, countries which have manufacturing driven growth will also see shuttered factories and equally significant contraction. So essentially, just like there is no template in the medical world about how to cure the virus, there is no template to even gauge the extent of economic fallout.
In fact, when—and if—a lockdown should be imposed has also been a bone of contention between economists and healthcare professionals.
While economists have suggested bringing the economy to a grinding halt through a lockdown will have a far bigger impact than coronavirus, doctors have argued the havoc that Covid-19 spread could cause if there are no restrictions in place could be unimaginable. In fact, this doctors versus economists argument is the precise reason USA has so far delayed announcing strict lockdown. US President Donald Trump had resisted the advice by medical fraternity fearing that the impact on the world’s largest economy and driver of global growth would be unprecedented; and would lead to a compromised position as against the Chinese economy. It is a well-established fact that USA and China have been competing for global domination in the last few years and escalation peaked when the trade war between the two nations saw both intensifying their stated arguments. Trump—facing a re-election this year—knew a declining US economy could hurt his election campaign significantly. But with cases mounting, restrictions have finally been imposed in the US and unemployment data is at a record- indicating pain ahead. All of this indicates that the world economy will take a few years to fully recover. But while a $21 trillion economy will need multiple stimulus ($5trillion has already been announced), let us now understand how Xi Jinping’s position gets altered in post-COVID-19 economic order. Shuttered factories, shifting supply chains and with most companies seeking cheaper labour markets (Vietnam, Philippines, Bangladesh) than China will mean a severely dented Chinese economy.
The $14 trillion Chinese economy is powered by manufacturing—it is after all the world’s factory. To power its factories and other physical infrastructure, the Chinese are under tremendous debt. Undue focus on creation of physical infra, decision to pour billions of dollars into OBOR and hunt for mineral rich nations in Africa have all come at a huge cost, that is debt. The Debt to GDP ratio for China is one of the highest in the world. Debt requires servicing, it requires the economy to run on all four cylinders, it requires the giant factories and huge supply chains to run overtime.
The debt bubble for China is a reality and Xi Jinping is aware that economic disintegration is a possibility given the ambitious over spending that has happened in the last decade.
The new world economic order will witness a lesser role for China—both due to the possibility of a debt bubble and due to unwillingness of other countries to trade. But will it lead to a significant shift towards India? Our largely ineffective “Make in India” campaign should be completely overhauled to roll out the red carpet for global corporate giants. But the one factor that could be equally decisive in shaping the new world economy will be crude prices- at historic lows. It is unimaginable that a little of petrol is priced at the same as a little of water! This has ramifications not just for oil producing countries—Russia, USA and OPEC—but for oil guzzling nations like India and China. If these prices continue, it could reshape not just crude economics but also alter economic positions.
Only time will tell Russia’s gamble to drive down oil prices will hurt Moscow or will it actually be a death knell for American Energy companies. For India, it will give a golden chance to pump billions of dollars into our economy (not just through DBT, but through creation of productive assets) due to savings on our oil bill. How that is done will decide not just the fate of 1.3 billion Indians, but also reshape the world order.
Gaurie Dwivedi is a senior journalist covering economy, policy and politics.