China economy slowdown: India should focus on mitigating impact
India should focus on how to mitigate the effects of turmoil in an integrated world economy.editorials Updated: Jan 11, 2016 21:26 IST
The two slides in Indian stock markets over the past week have only served to underline what has become increasingly evident: Our economy is strongly integrated with the Chinese one, and there is no escaping the impact of a slowdown in what was until recently the engine of global growth.
So hapless Indian investors catch the mother of all colds when their northern neighbour sneezes, and there is little to suggest that their sniffles will die down anytime soon. For, the Indian companies in which they invest are battling several fallouts: Poor demand for their products in China due to slow growth and a weaker yuan, the prospect of dumping of Chinese goods in India, and higher costs of servicing dollar debt due to downward pressure on the rupee.
The yuan has fallen nearly 6% since August, exacerbating a trade imbalance. Steel plants are prominent on the non-performing asset list of Indian banks and the current situation is likely to make things worse. Global commodity prices have tanked due to a fall in Chinese demand and a combination of tepid offtake and oversupply has kept crude oil prices low. This is a big silver lining for crude importer India, on the face of it, but the underlying message is disturbing: Economic growth in some key export markets is unravelling. The falls in Chinese stocks are also disturbing for another reason.
They suggest that the totalitarian regime is struggling to come to grips with financial markets, and that markets are not fully reflecting what is happening in the economy. In July the Chinese market regulator had said people who owned more than 5% in a company were prohibited from selling stocks for six months, the reason being that the markets had been falling “irrationally”. As a result, over 1,000 companies had stopped trading. In the first week of January, partly owing to the rumour that the ban would be lifted and partly because of the weak manufacturing data, the markets in China fell hugely, wiping out $2.5 trillion of wealth.
Then followed a second round of devaluation of the yuan and its ripple effect: The shaving off of $194 billion from the wealth of the world’s 400 richest people. The market injection of $20 billion by the Chinese authorities could not do much to improve the situation.
The rupee has fallen sharply against the dollar, but Indian exports are still struggling because other currencies such as the euro have fallen further. India will have to come to grips with the fact that in an integrated world, much is beyond its control and it needs to focus on the things it can change: Slashing red tape, boosting investments and generating jobs. The next big opportunity for action is next month’s Budget.