As China hits a dwindling growth figure, will China’s pain of economic slowdown be India’s pain too.
By Asian Review Staff
Chinese President Xi Jinping with Indian Prime Minister Narendra Modi
As China stumbles with its dwindling growth figures, the global players are gearing up to reconcile with China’s acts to re-balance its economy. With a shift from manufacturing based export driven to a less volatile consumer led economy, China has amassed global attention since 2014. China’s attempts to reorient the economic structure has sprouted additional worries : a debt crisis instigated by easy money flooded into the market, inflated real estate and an unmanageable equity market. In fact, the debt to GDP ratio stood at a whopping 250% by the end of 2015.
Alike several major players in the region, China’s economic appetite is of much concern to its Indian counterparts. Having advanced at an annual growth rate of 6.7 percent until December 2016, China’s growth is predicted to edge down to a dismal 6.1% by 2018. Academicians and policy makers are divided over the impact that China’s slowdown will have on India. According to Raghuram Rajan, former governor of RBI, “ China’s pain of economic slowdown can be India’s pain too”. Conversely though the finance minister of India Arun Jaitley retorted, amid persisting deplorable conditions India would emerge as the ‘additional shoulder’ for the global economy. Unquestionably, India will be inevitably impacted by the economic churning in its neighbourhood, the nature of which is yet to mature. An OECD report maintains, a decline in China’s growth by 2% for the next two financial years will lead to more than 0.5% decline in India’s annual growth. Furthermore, taking into account India’s ‘financial integration’ into the global economy, China’s economic slowdown would also have indirect repercussions on India’s economy. Ramification of China’s financial sluggishness on sectors including trade and investment, commodity prices, diplomatic influence, and energy have the potential to unsettle India’s economic balance.
China is India’s foremost trading partner. However, India is less vulnerable to fluctuations in China’s economy, considering India’s exports to China constitutes a less divergent mix such as petroleum, raw materials, iron ore, granite, copper and metal products. Furthermore, China’s presence is insignificant in the service sector which constitutes over 50% of India’s exports. On the other hand, imports from China to India pertains largely to household products, toys, smart phones, which has experienced a slightly positive growth over the last few years. Subsequently, China’s move to devalue the yuan has instigated a fall in the value of rupee. But, considering India is comparatively less dependent on foreign capital for its imports, India wouldn’t feel the tremors as strongly as Brazil, Russia, and South Africa.
With a pronounced price depreciation of Chinese products, threats of cheap good overwhelming the Indian market looms large. For instance, India is experiencing a massive inflow of cheap steel from China, moreover at a time when its domestic production capacities has doubled. As India’s Commerce Minister Nirmala Sitaraman reckons, “It is a worrying development, as it will make imports from China cheaper and our products expensive.” Hence, government has made bolder moves to guard dumping of goods within Indian borders.
Another major concern emanating from the slowdown is declining Chinese investments. Primarily, China’s investments in India has plunged significantly since the on-start of the slowdown. This can be attributed to growing distrust between the two states in the political as well as the economic realm. Even though much larger scope for China’s capital investment exists in the infrastructure deficit India. With declining investment, China’s net consumption capacity has declined, further instituting a decline in commodity prices, including oil and minerals.
A major consumer of commodities including global copper, iron ore, and coal exports, Indian markets stands to benefit from softer oil and low commodity prices. Largely, this has supported both the Indian government in reducing its import bill as well the corporates in improving profit margins. Cumulatively, this would provide an impetus to India’s development initiatives such as the ‘Make in India’, and Smart Cities, that seeks low priced commodities in bulk. Furthermore, as predicted by a World Bank report, a 10% decline in oil prices is expected to raise India’s GDP by 0.1% to 0.5%. Alongside, it would reduce current account and fiscal deficit, and have a positive impact on sectors such as, the airlines and transportation. Lower oil prices has also led to reduced spending on subsidies, thus increasing indirect tax collection. On the flip side, India’s remittances are marked to reduce, especially from the GCC countries, which accounts for “more than half” of India’s (around USD 69 billion) remittance income.
In a densely integrated financial system, China’s economic turmoil would have repercussions on many of its major partners, including Africa. Africa is the net exporter of oil and cheap labor to China, that accounts for more than 30% of the region’s total exports. Therefore, the African exporters are susceptible to negative shock waves originating from Chinese industries. According to IMF researchers, ‘No region may be more affected by the financial meltdown in China than Africa’.
Additionally, a persisting slowdown in China would also adversely affect demand for metals beset by a decline in China’s real fixed asset investment growth. Hence, it plummets the activities of China’s vital trading partners in Latin America and Africa. In such scenario, India holds a better chance as a viable alternative export destination for traders across the globe. Even while the commodity demand declines in several parts, India is ‘cushioned’ by its increasing consumer demands.
Both India and China underwent accelerated growth owing to trade liberalisation internal structural reforms and capital formation. It seems highly unlikely that China will grow at a stable rate, hobbled by a command economy and a corrupt political regime. In such scenario, India is barreling ahead as one of the fastest growing major economies globally. In a recent report, Moody’s Investors Service confirmed India will continue to outperform China’s growth rate, as the government commits to achieve its fiscal deficit target of 3.5% of GDP for the fiscal year ending 31 March 2017.
Even while China is tackling an unstable economy, it is much too early to expect India to overtake China in the global economic realm. According to the Global Competitiveness Report, India has the third largest market size, after China and the US. Alongside, both India and China have also doubled their share of global venture capital in the recent years. Alongside, as a recent World Bank report confirmed, both India and China have also seen their stock market capitalization increase dramatically. But, India being a fifth of the Chinese economy and majorly constrained by a lack of infrastructure has a long way to go before it could replace China in the global economic platform.
In the current scenario, India should promptly pursue internal policy reforms- an active export policy focusing on major industries for export to best deploy the existing conditions to its benefit. Moreover, India needs to stress on investing to empower majority of its population with relevant skills, alongside developing infrastructure to be able to attract foreign investment and transform into a global exporting hub. While it remains highly unlikely for India to replace China in the global economy, India would remain a hot-bed for global investors, and traders.
The views expressed here are those of the author alone and not the Asia Council.