False Sense of Security

As the Chinese economy slows down, economies that have long relied on feeding the world’s factory are becoming increasingly worried. Some Indian politicians and commentators, however, perceive in China’s troubles an opportunity for India to shine. They believe India will not be impacted by a slowdown there as it is not linked to the Chinese supply chain.


Some economists had advanced the ‘decoupling’ theory to claim that the rise of China had created an independent Asian sphere which would ride out any downturn caused by a global crisis. China did indeed stimulate its way out of the 2008 crisis but now it has to deal with overcapacity and debt. For India to be congratulating itself for not being part of the Chinese supply chain, though, amounts to celebrating its deficiencies.


Even those Indians who worry about the impact of a Chinese slowdown focus on the devaluation of the renminbi, which could hurt Indian industry by dumping low-cost products. But as the recent recession demonstrated, the effects of a slowdown in China could be far more pronounced than a linear procession of falling dominoes. Declining Chinese growth could impact India in an indirect, but no less devastating, way.


India’s trade with China is barely a tenth of its total merchandise trade and suffers from a deficit. Now China’s (5 per cent) devalued renminbi and excess capacity could further boost its exports to India, thus posing a stiffer challenge to Indian apparel exporters and further increasing the trade deficit. Also, since other Asian countries account for almost half of India’s overall exports, any fall in their exports to China will lead them to cut back on their orders from India.


Already, the share of exports in India’s GDP growth was down 4 per cent during the 2013-14 fiscal year and falling exports due to the Chinese decline could further exacerbate that fall.


A Chinese slowdown will immediately impact India’s major trading partners — especially Japan, South Korea, Malaysia, Singapore, Indonesia, the Philippines, Thailand and Vietnam — all of which have substantial exposure to China. Between 10 and 25 per cent of their total trade is with China. In fact, barring India and Argentina, all G-20 members have actually increased their exposure to China since 2007.


Commodity exporters like Australia, New Zealand, Malaysia and Indonesia that have fueled China’s export engine have been hit hard by the declining commodity prices. India may not be part of China’s supply chain, but the fact that members of China’s supply chain are among India’s top trading partners exposes India as well. Earning less from China will mean that they, in turn, will order less from India.


China’s falling currency and exports and worries about President Xi Jinping’s anti-corruption campaign have accelerated the flight of capital. Despite new regulations restricting remittances abroad, the past six months have seen more than $600 billion being sent abroad by Chinese citizens. Much of this cash has flowed into the US to be anonymously invested in real estate. Recently, the US government has been compelled to start collecting data about such purchases. As the squeeze on capital tightens it would be interesting to see if the projected Chinese investments in India (some $60 billion worth of Chinese projects are reportedly under consideration) are followed through.


Finance minister Arun Jaitley believes that China’s economic troubles may prove a boon for India. In the coming years, he said, India will replace China as the engine of global growth. But, India’s poor infrastructure, patchy electricity and shortage of skilled workers — the very conditions that are essential to join the supply chain — make all the lofty talk about India replacing China merely wishful thinking.

Nayan Chanda is the author of Bound Together: How Traders, Preachers, Adventurers and Warriors Shaped Globalization and is consulting editor of YaleGlobal Online, published by the MacMillan Center, Yale University.