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Tribune,9-9-2015
PK Vasudeva
China’s crisis can be India’s opportunity
Due to the turmoil, India’s exporters will lose out on currency competitiveness to China in
segments such as chemicals, project exports, textiles and apparels — sectors in which India
competes directly with China. Cutting red tape and out-of-the-box solutions can provide a
way out to India.
THE sheer size of the stock market's fall on Monday, August 24, now called Black Monday has
naturally figured topmost in the list of worries of investors as well as that of the Government. In its
biggest fall in six-and-a-half years, the Sensex plunged over 1,600 points, losing six per cent of its
value in one day. The markets have bounced back to recoup part of the losses, but the mayhem in
the wake of Black Monday is unlikely to be forgotten.
There have been other big declines as well. On January 21, 2008, the Sensex lost more than 1,400
points. Although directly caused by the turmoil in China - the Shanghai Composite went down by
8.3 per cent - Indian benchmark indices fell more than those of some other emerging markets.
Because of its close proximity, Hong Kong was logically expected to fare worse than India and other
emerging markets. But in percentage terms, the Hang Seng, though on the downside, fared better
than the Sensex.
Volatility in stock markets has inevitably had its impact on the rupee's external value. China's moves
to depreciate Yuan have caught several central banks off-guard. In India, both the Finance Minister
and the RBI Governor have reassured investors. The Finance Minister expects the Indian markets to
settle down soon, while the RBI Governor Dr. Rajan has pointed out that the size of the exchange
reserves is such that rupee volatility can be contained.
The fact that India's macroeconomic fundamentals are in much better shape than at any time
recently, should be hammered home. Cheaper oil has certainly helped. India's GDP growth should
be on an even keel. Other indicators point to boosting economy. The current account deficit is
pegged at a healthy 1.3 per cent of the GDP. The balance of payment stands at $385 billion.
Rating agencies Moody's Investor's Service has said that India's macro- economic indicators have
improved over the last few years, which will help the country withstand volatility in global capital
flows in coming months.
With China's economic woes engulfing the world economy, the government has swung into action
and Prime Minister Narendra Modi is expected to seek advice of economists and businessmen at a
brainstorming session to work out a roadmap to strengthen India against any possible turbulence.
Chief Economic Adviser Arvind Subramanian said deflation is a far greater worry than inflation,
indicating that the Reserve Bank of India needs to read the warning signs and get cracking on
cutting interest rates. He also stuck to the government's growth estimate of 8 per cent for the fiscal
year despite the unexpected slowdown in the June quarter.
The domino effect of the slow plunge of the Chinese Yuan against the US dollar is already being
felt. The Indian currency has already felt its effect - losing practically a rupee to the dollar. The
Reserve Bank of India has claimed that it doesn't predict any further slide, but the situation remains
bleak.
Economists and analysts are debating why the Yuan was devalued by over 3 per cent by the People's
Bank of China every day. But one over-riding theory and reality is that this move will help tackle a
fall in Chinese exports. A weaker currency will make China's manufactured products even cheaper
for other countries to procure. This will ultimately result in China's exports beating out its
competitors in the global market.
While this may well be the gameplan for China, the immediate impact of this devaluation remains of
great concern - both for China and India. There are concerns that liquidity will tighten in China as
investors are moving capital out of the country.
There's further concern that Beijing may start withdrawing its hitherto unquestioned support for
share prices. China's securities regulator has also announced that market forces will be allowed to
play a bigger role in determining stock prices.
The immediate impact in India is beyond stock markets because of China's imminent role in the
global economy and trade. Today, China has over 10 per cent share of the world GDP. Its share is
more than 15 per cent in exports and 11 per cent in imports. It accounts for close to half of the
global consumption of copper, aluminium and steel, and more than 10 per cent of crude oil. Besides
imports, India's exporters will also lose out on currency competitiveness to China in segments such
as chemicals, project exports, textiles and apparels - sectors in which India competes directly with
China.
We cannot ignore the fact that if the Yuan weakens against the dollar more than the rupee, there is a
very strong possibility of Chinese goods being dumped in India. The Indian rupee fell to as low as
66.58 a dollar on Black Monday. Even if Chinese goods are not dumped, they will be sold either at
the same price at which they are sold in their domestic market or will be sold at prices below cost of
production. Neither of these are enviable situations for Indian manufacturers.
To put things in perspective, imports from China jumped by one-fifth to $60 billion in 2014-15,
compared to a year ago. Exports to China have plunged to $12 billion, leading to a huge trade gap
between the two countries. And now there is the imminent fear of a China-led global economic
slowdown.
For the Indian tyre industry in particular, this depreciation could not have come at a worse time.
Keep in mind that China's tyre industry is the largest in the world. Unlike in the US, we do not have
stringent anti-dumping policies in place. Without restrictive policies, Chinese tyre makers are anyway
making the most of the lacunae by dumping stocks in India. Imports of Chinese tyres have increased
almost 24 per cent just in the previous financial year.
Prices of other important commodities such as coal are still falling. So, at least in dollar terms the
import bill should not go up. However, on the exports front, the picture is hardly flattering.
Aggregate merchandise exports have fallen for eight months in a row, a clear sign of demand
compression in major trading partners.
Indian equities, already under pressure, will face further selling pressures as fund managers shift
portfolios away from perceived risks that the country represents. The government's ambitious
disinvestment target of Rs 69,500 crore looks unachievable if present trends continue. Indeed, the
share sale of Indian Oil, a blue chip fared badly, just scraping through. Obviously, a lot depends on
how China's policy makers manage to cushion what would otherwise be a hard landing of the
world's second largest economy.
As contradictions in China's growth model were laid bare on Black Monday, Indian policymakers
had a uniform response: opportunities were opening up for us. Their optimism grated somewhat.
After all, India has missed many such opportunities in the past.
This is no time for pessimism. But it is not time for optimism, either. Unless the government gets
cracking on reducing red tape, and finding out-of-the-box solutions for the rupee's chronic overvaluation, this opportunity -- like so many before it - might yet be again missed.
The writer is former senior Professor of International Trade at ICFAI University,
Hyderabad.