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Slowdown in Chinese Economy and its impact on India and World

Sep 9, 2015 17:55 IST

    Causes of Slowdown

    Chinese growth has basically been an export led growth and present slowdown can be attributed to slowdown in its manufacturing sector due subdued global demand world over and especially in European countries. After the 2008 global recession the demand world over slackened but China continued to grow robustly because of a massive stimulus of $600 billion dollars injected by the Chinese government. Indeed, the fiscal and monetary stimulus helped China double its GDP from $5 trillion in 2009 to about $10 trillion today. However, a large part of the stimulus went into the real estate sector as China created massive overcapacity in housing creating “Ghost towns”.  A ghost town is a place that has become economically defunct — in other words, a place that has died but in respect of china It is new cities that have yet to come to life. There are rows of buildings and high rises devoid of occupancy or inhabitants.This resulted in a property market bubble that threatened to burst in 2014.

    Further monetary easing and credit got diverted towards stock market soaring Shanghai index by about 150 percent since June 2014. In 2009, China’s total debt – including those of the government, business and household – was about 130% of GDP. After the big stimuli packages of the past six years, this stands at roughly 270% of GDP. It is self evident that this cannot be repeated again. It is evident from the past that all major economies had slowed down after growing tremendously like Japan, South Korea etc. China tried to managed this slow down by massive stimulus which indeed is responsible for hard landing in its real economy

    China being the second largest economy is the single largest contributor (over 35%) to world GDP. Its slowdown is going to have ripple effects. The global commodity market is sinking due to decreased Chinese demand. The manufacturing and construction sector accounted for 42.7 percent of GDP while farm sector accounted for 9.2 percent only. China is currently reporting over 7 percent growth rate which is expected to slow down to 5 percent in imminent future. The investment led growth after 2008 has created excessive investment in property, commodities and stocks. In order to arrest its manufacturing slowdown and access global demand china has devalued its currency successively over 4 percent.

    Currency Devaluation

    This Currency devaluation by China has led to Competitive devaluation by other Asian countries who do not want to lose its global export share by cheap Chinese exports. India’s central bank governor Raghuram Rajan has cautioned nations to restrain from this competitive currency devaluation which was indeed precedent to great depression of 1930. Though India has resisted the temptation of devaluation unlike other Southeast Asian nation but its domestic steel manufacturer has been hit hard due to cheap Chinese import. This is happening at a time when the domestic India steel industry has doubled its own production capacity over the past decade. Many steel companies have defaulted on loan repayments to both public and private sector banks in recent month. There will be mayhem not only in the domestic steel sector but also in banks that have lent huge sums to this sector. Government of India has increased the import duty by 10 percent to protect domestic manufacturer. Steel Industry is one such industry responsible for rising stressed assets of public sector banks.

    Impact of Chinese imports in India

    The excess Chinese capacity in steel, aluminum and tyres will lead to dumping in India. Already imports of steel, tyres, auto parts, white goods among other products from china have increased to such an extent that many industries are now running at less than half their capacity. The auto industry is running at 60 percent capacity, the steel at 35-40 percent all because of dumping and no pick-up in domestic market demand as people are not spending. This is happening at a time when the domestic India steel industry has doubled its own production capacity over the past decade. Many steel companies have defaulted on loan repayments to both public and private sector banks in recent month. The Indian steel industry owes about $50 billion in debt to banks. There will be mayhem not only in the domestic steel sector but also in banks that have lent huge sums to this sector. In a major towards this Government of India has increased the import duty on steel by 10 percent to protect domestic manufacturers and has also levied anti-dumpy duties on other imports. As per RBI recent report Steel Industry is one such industry responsible for rising stressed assets of public sector banks.

    India’s road ahead

    India has emerged as a “bright Spot” in this period of turmoil and is one of the fastest growing major economies of the world. Indian economy is predominately domestic demand driven and only a part of the economy will be impacted negatively by the Chinese fallout which can be neutralized by investing more in Infrastructure projects like roads, railways and renewable energy sector etc.  In the present context it is quoted as “China’s pain can be India’s gain” but this can only be realized when India makes considerable effort to fit in the space vacated by China. India has to take a great leap forward by reaping the success of “make in India” in order to get the Chinese pie and initiating reforms like--

    •Implementing the Goods and Services tax on war footing India will able to rationalize its taxation regime which will give impetus to export by creating India as a unified market.

    •Government has reiterated its budget proposal of reducing the corporate tax from 30 percent to 25 percent and doing away with complex deduction thus further simplifying the taxation.

    •Government has launched eBiz portal to improve ease of doing business by placing various regulating permission at one place.

    •Rationalisation of various labour laws are in progress.

    India has not lost competitiveness to China as the rupee has weakened more than Yuan in the preceding years. We are better prepared now than in 2013 with good fundamentals, and forex position, GDP growth, current account deficit and fiscal growth. Investors fleeing from China can be attracted by ‘India story’ due to its robust macroeconomic credentials. Experts argue that the crisis will remain until

    China’s overcapacity works itself out and a new equilibrium is reached between supply and demand though this shifting will inevitably cause some volatility in coming future. This provides a tremendous opportunity for India to lead the centre stage of global growth and write its story.

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