Slouching Dragon, Hidden Elephant
10th February 2014
With the Chinese economy apparently going into a sustained blue funk, India may benefit significantly from lower commodity and crude oil prices, argues Jagannadham Thunuguntla
The remarkable resurgence of China’s economy since the 1980s is probably one of the most crucial developments in the recent history of the world’s financial architecture. In recent times, China has obviously been the biggest story in the world in terms of economic growth. With its impressive economic development during the past two decades, it has become a major driving force behind the emergence of a multipolar global economy. Even as various commentators debate about the sustainability of the Chinese growth model, no one can deny the impact of its growth on the global map.
However, at present this giant economy is witnessing a slowdown in growth. As the latest data keep emerging from China, it is increasingly becoming clear that the growth slowdown is certainly for real. At this crucial juncture, the world is watching closely whether this dip is a text-book-case of cyclical slump in the structural growth story or whether this is a curtain-raiser to a much bigger financial crisis. The answer to this question will have several implications for various economies in the world and to various degrees. While the world has so far experienced the beneficial effects of Chinese growth, the time may have come when world economies have to brace themselves for the side-effects of a Chinese downturn.
This aspect raises a key question as to what will be the likely impact of a Chinese blue funk on other Asian emerging economies in general and India in particular. The ongoing decelaration in China is raising concerns about the potential spillover beyond its shores. a large enough spillover may lead to sob stories in quite a few other emerging markets.
At the beginning of the new millenium, there was a perception that China and India were locked in a neck-to-neck race to take the top spot in Asian growth dynamics. During the course of the past decade, however, it has become clear that China has grown considerably faster than India not only interms of absolute growth rates but also in terms of such metrics as relative growth, global economic influence, foreign exchange reserves, etc. Somewhere along the way, India seems to have lost the plot during the past decade and failed to take advantage of its position of strength.
Moreover, in the post 2008 global financial crisis era, the Chinese economy has proved to be far more resilient than the Indian economy.
Given this backdrop, observers of Asian economies are hotly debating whether the slowdown in China will prove to be a blessing in disguise for India in terms of being able to enjoy a bigger chunk of the global economic pie or whether India will have to rest content with merely continuing to sip the broth.
Why Is It Important To Understand The Implications Of China’s Slowdown?
One may well ask is this question important? Both the nations have different economic models and have gained different economic results, although both have several similarties such as the significant role that the state plays in economic and business affairs. However, one cannot deny the fact that both the countries have the potential to be leading economic powers in Asia and across the world. for this reason it is important to understand the implications of a sustained slowdown in China’s economic growth.
Areas of Potential Impact
Undoubtedly, as India has limited trade linkages with China, it will be less exposed to any sustained Chinese growth slump. The Chinese economic decelaration will primarily mean that the decade-long commodity price boom that we have witnessed so far will come to an end, as China is one of the largest consumers of base metals (both raw and finished) as well as agri-commodities globally. So, any cooling in demand from China will surely exert a downward pressure on commodity prices and that should help boost earnings of Indian companies.
Further, any slowdown in China resulting into cooling of crude oil prices will directly benefit India, as India heavily relies on imported oil with about 80 percent of its crude oil demand being met through imports. With lower commodity and crude oil prices, India’s Current Account Deficit (CAD) too will get narrowed and this will ultimately have a positive effect on cooling inflation.
Further, any such reduction on Current Account Deficit in India can lead to Rupee stability. On the contrary, countries such as Australia, Brazil, South Africa and Chile, which export their commodities, will definitely loose out from any decline in commodity prices.
The lackluster performance of China’s economy will have a big impact on the overall risks associated with emerging markets assets with other concerns such as the US Fed’s tapering and political uncertainty also coming into play. At present the Thai Baht is going through a rough patch after global funds pulled out money from the nation’s assets due to the raging political uncertainty in that country. Moreover, almost all market participants are turning a bit cautious thanks to the Fed’s resolve to continue to cut bond purchases. It appears that China’s hard-landing worries will be the cause of occasional bouts of emerging-market stress this year.
Further, China is the biggest capital provider to United States holding the highest overseas exposure of US treasury bonds worth US$ 1.3 trillion. Considering this fact, with any further slowdown in the Chinese economy, it would be fascinating to watch what kind of implications emerge on the Chinese approach to its US treasury holdings. This will have huge ramifications on US budget planning and significant influence on currencies across the world.
China And India – Fierce Competition Or Shared Growth
Both the countries have long fascinated western policy makers, and as of now these policy makers are very much aware of the importance of emerging markets in the global economy. The appearance of China as a big economic power has been followed by a more relaxed, although still important, economic revolution in India. According to a report published by OECD (Organization for Economic Cooperation and Development) in 2013, China can become the world’s largest economy as early as 2016, and a fast-growing Indian economy will surpass the American economy by 2060. However, at present both the economies are struggling with lower growth rates, inflationary pressures, currency imbalances and complex bureaucratic mechanisms. Another major obstacle to sustained growth and financial stability in both the countries is poor political governance.
Frankly speaking, the growth model of India and China have been challenged at this moment with various global economic imbalances and it seems that they cannot be fixed so easily. In order to regain buoyancy in GDP growth, both the economies have to consider collaboration in areas such as infrastructure development, manufacturing, energy, agriculture, food security, climate change, open trade and a stable global order to counter the consequences of the continuing global economic crisis.
China and India have provided extraordinary stories of economic development for the past few decades. While China is extremely integrated, both multilaterally and regionally, India will have to work hard on ensuring that its complex political and administrative structure evolves in the right direction.
In this equation, two other key developments that need to be kept in mind are upcoming elections in India with widely expected possibility of significant policy reforms following the election of a new government, and recovery of US economic growth which will have considerable impact on exports of the Indian outsourcing industry.
Conclusion
Both the countries’ economic strengths come, in part, from relatively low labour costs and large populations, but they are grappling with various factors leading to declining productivity. There is much homework left to do for India on economic ties with other economies. While one can only hope that both China and India will overcome their challenges and robust growth will continue, only time will tell who will ultimately outpace whom because on balance you cannot quite write off the possibility of the Indian Elephant inching ahead if the Chinese Dragon keeps slowing down.