Impact of Chinese Economy on Indian Trade

Posted in Finance Articles, Total Reads: 1404 , Published on 24 October 2015
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There are two brothers in a family. One of them is doing well in his career however; he has fallen sick in recent times and is suffering from low productivity, lower growth rate and other symptoms while the other brother is doing well, as compared to him in current scenario. He has not done something great but he is in a position to take advantage of the situation of his brother. This is the short story of India and China in terms of its economic condition. Since last couple of months we are seeing an economic turmoil in the China that has global impact. Devaluation of Yuan and struggling growth in China also led everyone in the time of economic slowdown where sustainability has become critical for many countries.



Image: pixabay


Impact of Chinese slowdown in India’s Petroleum import bill:

China has been a huge borrower of crude oil from international market. However, due to the slowdown, the demand from China has contracted thereby adding to the already dwindling demand of crude oil. This will result in further lowering of crude oil prices which is a highly conducive situation for India as there will be a substantial cut in the import bill of India. The data of Crude import has been shown below for the five consecutive financial years. We can deduce from this data that Petroleum plays major role in India’s import bill and thus the implication of small changes in global price of this commodity can save Millions of dollars of India.



(Figure – 1: Import of Petroleum Crude in last 10 financial years)

(Source: Department of Commerce – Export Import Data Bank Version 7.2)



(Figure – 2: Share of Petroleum Crude import in Total Import)

(Source: Department of Commerce – Export Import Data Bank Version 7.2)


Impact on India’s exports:

Exports contributed a substantial part of the GDP of China. However, in the wake of slowdown, Chinese exports have taken a hit as well, thereby prompting their central bank to devalue Yuan. This move will result in the world market being flooded with low priced Chinese goods which can hurt India’s exports as traditionally Indian and Chinese companies compete for many identical portfolios. Currently India’s total export in Financial Year 2015-2016 in Q1 stands at $66,414.20 Million. India majorly exports to Northern America which includes USA and Canada and Europe region which includes major European countries like UK, Germany, France Ireland etc.



(Figure – 3: % Share of India’s total import – Region wise)

(Source: Department of Commerce – Export Import Data Bank Version 7.2)


Inability of India to penetrate Chinese market:

Due to higher production cost, India is unable to penetrate Chinese market. For the current fiscal year 2015-16 (Apr – Jun) India’s export to China stands at $2,390.59 million which consists only 3.5995 % of India’s total export in this fiscal year. If we look at import from China it stands at $14,704.89 million which is around 14.8597% of India’s total import. Thus, there exists trade imbalance between India and China with the figures being heavily skewed towards China. Though there is a considerable slowdown in Chinese economy, China is able to maintain its export to India due to devaluation of Yuan and other factors. The major reason for slowdown in China is that its domestic demand is not rising. Chinese consumers are not willing to pay more due to their conservative nature and lack of social security. Therefore the threat to Chinese economy comes from its domestic demand not from the international demand. For commodities like electronics items and other disposable products, China is having much higher stand than India. India has lack of technology available to produce in large quantity as well as lack of commodities. India is also facing consequences of its “license raj” era where we were unable to shift from “primary sector” to “secondary sector” i.e. “manufacturing sector”. After opening up our economy we directly shifted from “primary sector” to “tertiary sector”. Due to this shift, India is standing with “trade surplus” with USA and North America trade region. If we see the graph in Figure-3, North America constitutes around 17% share of total exports from India which is the highest but the export to other countries, which are not dependent on India’s tertiary sector, is very low. These countries include countries from Central Africa trade region.


China as a major competitor in export:

If we look at the USA import-export data, historically it shows that USA’s major trade partner is China. In terms of import, China is ranked 1st whereas India occupies 10th spot. This tells us about the level of competition India faces from China in one region i.e. USA. Due to the evident slowdown in Chinese economy, this is a really good opportunity for India to grab the share of China in trade with USA. We majorly export services to USA but we have little presence in export of manufactured goods. That’s a campaign like “Make in India” and “Digital India” can be the real game-changers in terms of revival. “Make in India” aims to promote the ailing manufacturing sector whereas with “Digital India” the onus is to grow domestic demand of IT services and education. Chinese economic slowdown has provided opportunity for India. But for many of the USA-based electronics companies who have their manufacturing units in China, it is a cause of concern. So if the Chinese economy slows down, there will be an overall impact on the spending power of individual households which will further add to the woes of the economy causing further economic distress. This will cause lower domestic demand in China and due to this, investors will become reluctant to invest in China. Such scenarios will prompt these companies to look for other viable investment destinations like India where domestic demand is quite high. India happens to be a lucrative destination given its strong economic fundamentals and the new government’s promise of reforming the manufacturing sector and reviving the draconian land acquisition act. Thus, it becomes imperative for us have more investment in infrastructure and skilled manpower to maintain high growth rate. Share of India and China in total import of USA has been shown in figure-4. Total export to the world in terms of trade merchandise has been shown in figure-5 for leading four economies.



(Figure – 4: Comparison between India and China in terms of export in USA)

(Source: U.S. Census Bureau)



(Figure – 5: Export to the world by leading four economies in terms of Total In terms of Trade merchandise)


Opportunity for India and road ahead:

As China is facing slowdown in the economy, it is an opportunity for India. Due to low domestic demand and being an investment based economy, Chinese slowdown means investment opportunity for India. China will take time to change over into a consumption-based economy from being an investment-based economy. This presents India with a galore of opportunities. India can attract investment in manufacturing sector. Being a commodity-intensive manufacturing country, China is major importer of industrial commodities including iron ore, copper, steel etc. Due to slowdown in China, the prices have fallen down drastically worldwide which is also helpful for India to lower its import bill of these commodities. But this also poses threat for India as we are also one of the leading producers of many of these commodities. Being service-intensive economy we should also focus on strengthening our manufacturing sector to grab the opportunity in the wake of Chinese slowdown and accordingly we should frame our policies and introduce structural changes in our economy to attract investment as well as to improve our growth rate.


This article has been authored by Pratik Dilipbhai Ghetia and Siddharth Warrier from International Management Institute – New Delhi


References:

1. Department of Commerce, Ministry of Commerce and Industry (2014) Trade Statistics. [Online] Available from: http://commerce.nic.in/MOC/trade_statistics_india.asp

2. U.S. Census Bureau, U.S. Department of Commerce (2015) Country and Product Trade Data. [Online] Available from: http://www.census.gov/foreign-trade/statistics/country/index.html

3. World Trade Organization (WTO) (2015) STATISTICS Merchandise trade. [Online] Available from: https://www.wto.org/english/res_e/statis_e/merch_trade_stat_e.htm



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