China’s new normal – a growth rate of at least 6.5% - has been set as a target in its 13th Five Year Plan. In this article, Sharmila Kantha, Principal Consultant, Confederation of Indian Industry, contends that the potential implications of the Chinese deceleration for the Indian economy need to be analysed in detail.
China’s ‘new normal’ – a GDP (Gross Domestic Product) growth rate of ‘at least’ 6.5% - has now been sanctified as a target in its 13th Five Year Plan with a wide-ranging economic redirection being set in motion. The Plan intends to leverage internal consumption as a growth driver, shift growth centres to different internal geographies, reinforce tilt towards the services sectors, plan for greater urbanisation, reform State-owned companies, integrate with new regions of the world under the ‘One Belt, One Road’ mission, drive innovation and R&D (Research & Development), create new drivers for sustainable and green development, and elevate value-addition in its manufacturing sector. At the same time, the country is attempting to stave off a hard landing arising from high debt and other troubles through short-term measures such as monetary and fiscal stimulus.
Given that China is the world’s largest manufacturer and trader, a top commodity buyer, a significant outward investor and inward FDI (foreign direct investment) destination, and a huge emerging market, management of its slowing economy bears crucial implications for the shape of the global economy in the future. As an increasingly integrated member of the global economic community and a large economy in its own right, India needs to analyse in greater detail the potential impact of the Chinese deceleration, its challenges, and the opportunities offered.
India’s aggregate exports contracted by 17.2% in dollar value terms in 2015, more than that of other non-oil exporting emerging economies such as China (-2.9) and Brazil (-15.1). It is noteworthy that China was able to restrict fall in its exports to much less than the global drop (World Trade Organization (WTO), 2016).
Table 1. India-China trade (in US$ billion)
ExportGrowth (%)Share in India’s total exports (%)ImportGrowth (%)Share in India’s total imports (%)Total tradeGrowth (%)Share in India’s total trade (%)
Source: Department of Commerce, Ministry of Commerce and Industry, India
India’s exports to China, which include a high proportion of primary products, have fallen in alignment with the latter’s growth slowdown. The contraction in 2014-15 over the previous year is primarily due to a steep decline in cotton and aluminum ore exports, and this trend has continued in 2015-16.
Exports suffered both due to a fall in metal prices and regulatory changes with regard to the import of cotton in China. In terms of volumes, export volumes of mineral fuels and ores have gone up, but that of most other top 10 export commodities have fallen.
Given India’s current export basket, which is dominated by commodities whose prices are likely to remain subdued, its exports to China are unlikely to hold up in coming years. Unfortunately, exports of machinery and electrical equipment, among the top 10 exports from India to China, have also failed to maintain their volume and value.
In terms of imports, India’s demand for electronic items, machinery, organic chemicals and fertilisers is likely to continue rising as its income goes up. The country would need to develop manufacturing facilities at home to counter this trend.
The combination of a slowing China and a growing India spells challenging circumstances for bilateral trade, given that India is highly dependent on imports from China with as much as 16.2% of total imports sourced from there (April 2015 - January 2016). It is important to diversify the export portfolio as well as to protect current items of high export (for example, by working with the Chinese government to avoid regulatory changes that will adversely impact exported commodities) if India wishes to have a sustainable trade equation with China. The adverse trade balance with respect to India is already six times the value of its exports to China.
Some sectors of Indian interest require sustained intervention at the governmental level in order to open up access. For example, in bovine meat, China is taking its own time in quality inspections and Indian products take a circuitous route to reach Chinese markets. Pharmaceuticals would benefit from rising Chinese consumption but the market has been largely restricted for Indian companies, which is unfortunate given that the active pharmaceutical ingredients are largely imported from China.
Table 2. India’s top 10 export items to China
|HS code||Item||Quantity||Value (in US$ million)|
|Unit||2013-14||2014-15||Apr 2015-Jan2016||2013-14||2014-15||Apr 2015-Jan 2016|
|Copper and articles||000kgs||230||284||181||1,842||1,891||962|
|25||Lime & cement||000kgs||7,413||6,672||5,107||678||621||441|
Source: Department of Commerce, Ministry of Commerce and Industry, India
Foreign direct investment
The good news for India is that it has been able to attract rising inflows of FDI. According to the Financial Times, China recorded a decline of 23% in capital investment and 16% in FDI projects in 2015. Greenfield capital investment in India was the highest at US$63 billion. As per data from the Department of Industrial Policy and Promotion (DIPP), FDI inflows expanded by 37% in calendar year 2015.
The two ways that China’s deceleration may have positive investment benefits for India are, first, the movement of global FDI out of China and into India, and secondly, Chinese investments in India.
With India forecasted to be the fastest growing large economy in the world in the medium term, some part of China’s slowdown would be reflected in shift of FDI from China to India. Multinational corporations (MNCs) like Amazon, Foxconn and Apple are already targeting investments in India to leverage its potential for their future growth.
It can be expected that FDI flows to India from other countries would continue to increase in the coming years due to a combination of factors such as India’s growth, China’s rising costs and slowing economy, and India’s attention to attracting FDI through policies and branding under ‘Make in India’ and other government campaigns. However, foreign companies in China are also viewing ASEAN (Association of Southeast Asian Nations) members such as Indonesia and Vietnam as attractive alternatives to China for shifting out their FDI. Vietnam’s membership of the Trans-Pacific Partnership (TPP) presents a particularly alluring opportunity for global businesses. India would need to move swiftly on reforms and ease of doing business to emerge as a valuable FDI destination.
Chinese investments in India are expected to increase as businesses explore outward opportunities. Outward FDI from China has surged from an annual average of below US$20 during 2005-2007 to US$116 billion in 2014 (United Nations Conference on Trade and Development (UNCTAD) World Investment Report 2015 database). India should be able to attract a rising share of this outflow. Several Chinese high-value deals have been forthcoming in recent months in sectors such as real estate, e-commerce, infrastructure, and manufacturing. During President Xi Jinping’s visit to India in 2014, investments worth US$20 billion were announced - a big jump from US$1.4 billion, the current cumulative level of Chinese investment in India (DIPP, FDI Fact Sheet on Foreign Direct Investments from April 2000 to March 2016).
Chinese companies such as Huawai, ZTE, Xiaomi, Alibaba and so on have made large investments in India, including US$900 million each in Paytm and Ola Cabs. The Dalian Wanda group has signed a project of US$10 billion for real estate development in Haryana. The Chinese government also wishes to increase its participation in India’s high-speed railway plans, and contracts have been inked for Chinese industrial parks in Maharashtra and Gujarat. Project commitments from Chinese companies in India are estimated at a cumulative US$64 billion till 2014 (Embassy of India, Beijing).
Investments from China could also contribute to India’s infrastructure sector, bringing in funds as well as expertise in project management. China has been participating in Indian power projects, and supplying machinery and equipment to infrastructure companies along with financing options. China’s entry into the Indian real estate development industry could also see commendable growth in coming years as India’s urbanisation process gathers pace. The engagement of Dalian Wanda in Haryana could be a model for future partnerships.
China’s rising wages
Chinese economic deceleration is accompanied by rising wages, with hourly wages estimated to have increased by 12-14% over the past three years. In 2013, average monthly wages in China were almost three times that in India. A granular study of which sectors in India would benefit from this development would be pertinent. For example, the World Bank has recently reported that India can create as many as 1.2 million jobs in the textile sector as a result of rise in Chinese production costs.
For India’s manufacturing sector, the combination of slowing growth and rising wages in China would have varied sectoral impact. Manufacturers of metal products benefit from lower commodity prices as well as government policies to restrict imports of these items from China. ‘Fabricated metal products’ grew by 2.8% during April 2015-February 2016, slightly faster than the overall IIP (Index of Industrial Production) for machinery and equipment. Automobiles and chemical products expanded at encouraging rates in the first 11 months of the fiscal year. However, production of electronic machinery and medical devices contracted (Ministry of Statistics and Programme Implementation, February 2016).
China’s efforts to move out of low value-added manufacturing to more sophisticated products have led to new manufacturing facilities in low-wage countries. Sectors such as textiles and apparel, footwear, furniture, and plastic toys could benefit and India should take advantage of this trend. Chinese investments in the manufacturing sector could play an important part in the effort to put up import-substituting production facilities, such as in electronics manufacturing.
To conclude, India must keep a close vigil over developments in China in order to assess the impact on its economy. In addition, businesses must be alive to the potential for India arising from the Chinese slowdown and be quick to take advantage of its large markets as well as global manufacturing shifts.
The combination of a slowing China and a rising India is a phenomenon that the world is unfamiliar with, and the full unfolding of this narrative will occupy businesses for some time to come.
Views are personal.
- The Silk Road Economic Belt and the 21st Century Maritime Silk Road initiative were unveiled by President Xi Jinping in October 2013 as a response to global slowdown; these involve connectivity of Asian, European and African continents and seas to promote trade and regional cooperation.
- Greenfield investment involves setting up of a new venture/construction of new facilities by a parent company in a foreign country.