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COVID-19 Poised to Cause Severe Disruption to Indian Business Conditions


COVID-19 Poised to Cause Severe Disruption to Indian Business Conditions

As in so many other countries in the world, turbulent skies lie ahead for India’s economy as a result of the widespread upheaval COVID-19 is leaving in its wake.

Analysts from trade credit insurer Atradius expect that the repercussions of the pandemic will be widespread in India, having dire consequences for trade and causing GDP to contract 3% and business insolvencies to increase more than 30% year-on-year in 2020. This negative outlook tracks with the scenario for the rest of the southeast Asian region, which overall is expected to see a 25% increase in insolvencies this year.

Trouble Brewing For India Ahead of COVID-19

The business environment in India ahead of the global crisis was already on the shaky side. Last year, India’s economy saw weak economic performance, growing only 5.3%, the lowest increase in more than six years. The government – led by Prime Minister Narendra Modi’s reform-minded Bharatiya Janata Party – was focused on solving some of these economic issues, including resolving the banking sector’s bad debt and liberalizing foreign investment restrictions in key sectors. However, it remains to be seen whether those steps will make any difference when the coming wave of business and trade problems hit.

Although the lockdowns imposed to stop the spread of the coronavirus have put an end to clashes for now, an economic downturn that plunges many Indians into poverty could renew and increase social tensions.

Indian Firms Face Significant Headwinds

The comprehensive lockdowns in India that began in late March have caused a drop in domestic demand and a sharp increase in unemployment. Investment and industrial production will likely contract, as well, leading to a 10% or more decline in exports this year. Lockdown measures have especially impacted the millions of daily wage earners and migrant workers employed in India’s informal sector.

Supply disruptions from China, where many manufacturing facilities stood idle for weeks, have caused issues for import-reliant industries, such as pharmaceuticals, consumer durables and electronic manufacturing. Although Chinese plants are largely up and running, supply chain problems could continue should a second spike in COVID-19 cases occur.

Finally, external demand for Indian products has plummeted as key export markets such as the U.S. and China are facing recessions. Although there is no clarity for how long recessions will linger, it is safe to say that export-dependent sectors are in for a tough ride.

All this means most of India’s key sectors are poised to see a deterioration of performance and rise in insolvencies. Specifically, the outlook is poor for India’s automotive and transport, construction and construction materials, consumer durables, electronics and ICT, machines, metals, paper, services, steel and textiles industries. As of this writing, the only major sector with a positive outlook is food.

SMEs, which do not have the financial resilience as larger firms, will likely bear the brunt of the insolvency growth. Even though the Indian government has put forth a sizable stimulus package worth USD 266 billion that includes tax breaks for SMEs and domestic manufacturing incentives, the fundamental weaknesses of the economy represents a severe limit on how much protection the government is ultimately able to provide. In comparison to India’s stimulus package, which Citi analysts peg at around 4% of GDP, Singapore, one of the most stable economies in the region, passed stimulus measures worth more than 10% of GDP.

A Rapid Rebound in India Not Likely

 High corporate debt and the problems plaguing India’s financial sector pre-pandemic will likely get in the way of a quick rebound of the economy. In late 2018, the default of IL&FS, India’s large infrastructure financing and construction company, led to concerns about the financial standing of other non-bank lenders and straining corporate and consumer debt markets. In addition, India’s banks carry a high amount of bad debt – non-performing loans accounted for approximately 9% of bank lending last year.

At the same time, the rupee is seeing depreciation pressure and is at risk of volatility in coming months – a scenario caused in part by the withdrawal of global investments in emerging markets in Q1 as financial markets have become more risk averse since the beginning of the coronavirus outbreak. For Indian firms, this adds to already significant cashflow issues, especially those with high loans in foreign currencies.

The extent and duration of the economic impact of the COVID-19 pandemic remains uncertain, but Indian firms face a variety of significant headwinds. Many won’t survive. For businesses trading with Indian companies, it’s imperative that they closely monitor the financial health of trade partners and mitigate credit risk to protect cash flow.


Gordon Cessford is the President and Regional Director of North America for Atradius Trade Credit Insurance, Inc.



American Icon in a Global Market

A couple of years ago, the Fat Boy Arnold Schwarzenegger rode in Terminator 2 sold at auction for more than half a million dollars. The bike’s on-screen presence with Arnold cruising in a black leather jacket and Italian Persol sunglasses fueled a run on the bike back in the early 1990s. Maker Harley-Davidson just released a 30th anniversary limited edition Fat Boy.

Harley-Davidson bikes have been an American icon for more than 100 years. With a classic foundation story, starting out of a small shed in Milwaukee, Wisconsin in 1903, the company and its bikes are a stand-in for the American ideal of freedom and strength, its brand recognizable across the world. Harley-Davidson weathered the Great Depression, two World Wars and the financial tsunami in 2008 to emerge as a “great American company,” as noted by U.S. President Donald Trump in 2017.

The company is focused on nurturing a new generation of riders who include young, female — and global — enthusiasts. Expanding its portfolio of motorcycle offerings for global appeal, it has set a goal to grow its international business to 50 percent of annual revenue by 2027.

Harley global sales

Taken for a Tariff Ride

Harley-Davidson bikes enjoy a well-earned prestigious reputation around the world and the price tag reflects it. Adding to its price, many countries also impose high tariffs on imported two-wheelers. In fast-growing Asia, tariffs range from 20 percent in Taiwan to 30 percent in China, 60 percent in Thailand, and 100 percent until recently in India.

Facing a declining U.S. consumer base and eyeing growing markets in Asia, Harley-Davidson is working to expand its sales particularly in South and Southeast Asia. U.S. tariffs have thrown a monkey wrench into those plans.

Here at home, the Trump administration’s tariffs on imported steel and aluminum would add some $40 million in domestic production costs, according to the company. Making matters worse, the European Union retaliated by increasing the tariffs on U.S. motorcycles from 6 percent to 31 percent, adding an average $2,200 to the cost of a Harley-Davidson bike exported to Europe. If the steel tariff dispute isn’t resolved, Europe has threatened to raise the tariff in 2021 to 56 percent.

Harley-Davidson, like so many other companies, hastened production expansion in overseas plants to mitigate costs from the tariff war, a strategy the company undertook in India more than a decade ago.

The Largest Motorcycle Market in the World

India‘s auto industry is regarded as one of the fastest-growing in the world. In 2018, India produced over 29 million vehicles (including passenger vehicles, commercial vehicles, three-wheelers and two-wheelers).

The two-wheeler category leads the Indian automobile market with 80 percent market share due to a growing middle class and a young population. India is now both the largest two-wheeler consumer market and the largest manufacturer of two-wheelers in the world. There are an estimated 170 million motorcycles, scooters and mopeds on the roads today in India. But until 2007, Harley-Davidson was denied access to the Indian market.

Size of India's Motorcycle Market

Mangoes for Motorcycles

In 2007, President George W. Bush struck the so-called “mango deal” with India, which allowed Harley-Davidson to sell its bikes in India in exchange for the end to an 18-year-ban on imports of Indian mangoes to the United States. The deal was signed a year later by then-U.S. Trade Representative Susan Schwab and Union Commerce and Industry Minister Kamal Nath.

The mango deal allowed Harley to invest in India and permitted imports of Harley-Davidson bikes with an engine capacity of 800 cc or above if it complied with Euro-III emission norms. But India remained firm it would not lower its 100 percent tariff on motorcycle imports, which continued to deny Harley-Davidson effective access to the Indian market for its bikes completely built in the United States.

In August 2009, Harley-Davidson announced plans to enter the market in India through a subsidiary and started assembly operations in 2011 in a plant located in in Bawal in Haryana state using parts imported from the United States. Through a complicated tax system, imported motorcycle parts face around a 39 percent tariff. India-built Harley-Davidson motorcycles are also exported to Europe and Asia.

Too Much for Trump

Whether standing on the factory floor in Wisconsin or making a State of the Union speech, President Trump frequently complains about India’s 100 percent tariff on Harley-Davidson bikes as a sticking point in U.S-India trade relations.

In February 2018, the Indian government responded by lowering the custom duty on fully-built imported motorcycles from 100 percent to 50 percent. However, since Harley-Davidson assembles 12 out of its 16 models in India for domestic consumption, most of its bikes won’t be subject to the 50 percent tariff either.

In a media interview with an Indian newspaper, Peter MacKenzie, Managing Director of India & Greater China for Harley-Davidson was quoted saying, “We don’t see any significant impact. Yes, there is a reduction in custom and any cut is always welcome. However, a large portion of our portfolio is locally produced.”

Beyond trade wars and tariffs, one of Harley-Davidson’s biggest issues is consumer preferences for smaller and cheaper motorcycles in Asian markets like India. The company plans to develop a more accessible, small-displacement motorcycle (250cc to 500cc) to increase sales in India and other Asian markets, but for now the country’s vast middle-income group generally prefers less expensive bikes that sell for between $1,000 and $1,500, about eight times less than a Harley-Davidson. The smaller bikes are more adept at navigating narrow, pot-holed streets choked with thousands of other bikes.
Harley-Davidson Sales in India

Big Hog, Small Trade Deal

President Trump is scheduled to go to India at the end of February and he wants to sign a trade deal with India’s Prime Minister Modi. Right now, the deal appears narrowly focused on addressing U.S. complaints regarding lack of access for the U.S. dairy and medical technology industries in exchange for the U.S. restoring India’s tariff benefits under the U.S. Generalized System of Preferences and removing India from countries hit by U.S. tariffs on aluminum and steel.

India might also ratchet back the tariff hike it imposed last year on high-value farm imports such as almonds, walnut, apples, and wine, among 29 other items.

As in Terminator 2, next week is judgment day. If Modi says “Hasta la vista, baby“ to President Trump’s request to eliminate or lower the tariff on Harley-Davidson motorcycles, Trump is likely to say, ”I’ll be back.“



Pragya Bhatnagar is a Research Associate with the Hinrich Foundation where he focuses on International Trade Research. He is a Hinrich Foundation Global Trade Leader Scholar alumnus, earning his Master’s degree in International Journalism, specializing in Business and Financial Journalism, from Hong Kong Baptist University. He received his bachelor’s degree in Economics from Lucknow University, India.

This article originally appeared on Republished with permission.