Economy Bytes

Will China’s slowing economy impact India?

New Delhi, January 20 (G’nY News Service): According to the data released by the National Bureau of Statistics of China on the 19th of January 2016, China’s GDP grew by 6.9 for 2015 as compared to 7.3 per cent for 2014, falling from 7 in the first quarter to 6.8per cent in the last one. The value of tertiary and secondary sectors were up by 8.3and 6.0per cent while primary sector saw only a gain of 3.9per cent. Fixed asset investment and export and imports saw a slow down at the end of 2015 while consumer goods grew rapidly. This was the slowest growth seen by China in 25 years.
Therelease of this data caused stock markets and oil prices to slide down further though stock markets recovered by late afternoon on 19th Jan 2016.

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China’s economy saw a huge boom period between the early 1980s to 2010 where the annual growth rate was around 10.1per cent.China has also weathered the global recession well in 2008 with GDP figures in double digits. But, in 2015 the manufacturing sector saw a decline due to exports slumping. In the last year China had also devalued the Yuan to boost exports. On 24th August, 2015 the Chinese stock market witnessed a huge fall in shares leading to global panic. While the stock market did recover this crash added to investors’ fears that the Chinese economy was not healthy.

All these reports point to a possible slowdown for China and point towards a serious underlying problem with the Chinese economy.

graph 4

(Source: Data from Global Economic Prospects, databank.worldbank.org)

Change over a five year period (2013-2017) is projected Fig 1. In 2013 the GDP of China was around 7.7, compared to India’s 6.9. Globally the GDP of developing countries together was at 5.3 while for high income counties it was at 1.2.Over the next two years China’s GDP slowed down and reached 6.9 in 2014.This low figure of GDP growth did not come as a complete surprise as China has decided to move away from its manufacturing roots and concentrate more on consumption and services.It was also in line with the ‘around 7 per cent’ target of the government. For India though GDP continued to grow and in 2015 reached 7.5per cent. High Income countries on the other hand saw a rise in 2014 to 1.7 followed by a slight drop in 2015. The World Bank data’s outlook for China in 2016 and 2017 maps a further decline in GDP with GDP falling to 6.7 and 6.5 respectively. India seems to be on an upward curve with GDP projected to grow from 7.5 in 2015 to 7.9 in 2017.

But why is SabyasachiChina slowing down? According to Dr. Sabyasachi Kar, Associate Professor at The Institute of Economic Growth, New Delhi “China is moving away from export and public investment. It is trying to increase consumer spending and consumption. This means that on a sustainable basis i.e. with no push from the government, China is going to use its huge middle class to sustain growth between 7-8per cent”. China’s demographics may play a part in this too. Due to its one child policy it is estimated that the Chinese population will stabilize with the huge burden of an aging population. China had earlier announced a series of measures to counter slow growth which included cutting interest rates and its central bank reserve requirement ratio. The government is expected to intervene again to help boost the economy.

China’s GDP slowing down could cause ripples across the world – both good and bad. As per Dr.Sabyaschi,that this could have mixed effect on global and Indian economies. For starters, “since China is looking towards more consumption based economy, luxury goods that are not produced in the nation will be sought by its high-income groups, leading to higher imports. But for countries that are linked to Chinese supply chains this may result in a negative impact.”

Driptos

China does not make everything it exports. It depends on other countries such as Philippines, India, etc for raw material or pre made supplies and then exports them after adding value to them. Dr. Dripto Mukhopadhy, Director-Economic Research, Nielsen-Indicus, New Delhi, said that “There is definitely going to be an adverse impact in the global market. Since China consumes major chunk of many of the raw materials used in the manufacturing sector, the economic slowdown will heat the commodity market the most. Largely, a large number of countries exports’ depend on China’s import, especially in Asia, Africa and Latin American zones. These countries will be panic stricken because of this slowdown.”Some analysts are also suggesting that the figures released by the Chinese government are ‘misleading’ and may not be entirely accurate.

The effect of this will also be felt on the Indian economy. According to Dr. Sabyasachi, “India could take advantage of this situation to increase exports”, although he felt that certain sectors, such as the Indian Steel industry could be affectednegatively as India imports a considerable amount of steel from China [in 2015India held the third position in steel production globally]. Dr Dripto added that, “it has already been observed that large number of investors are leaving China and investing in other countries, especially countries such as Australia, USA and Canada. The current slowdown may lead to reduce the confidence amongst foreign investors before investing in China. If India can show the right direction for economic growth in the country and attract these investors, we can perhaps see a big jump in investment front in India”.

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China’s slowdown will affect the global economy but in different ways. For India it could be an opportunity for to improve its exports and increase foreign investments. It could also mean a drop in constructing infrastructure as China moves away from manufacturing. China’s slowdown could also have an effect on oil prices as less consumption by China will lead to a further drop in oil prices. The oil and gas Industry is already facing a problem with high production rates and low demand. The global economy will also be affected as commodity prices will fall and will hit countries which export goods. China’s shift from manufacturing is envisaged to bring down commodity prices even further and its economic slowdown has reportedly the potential to affect the entire world.

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