China: Spillover effects on India

Abstract

The sheer size of the Chinese economy and the extent of its integration into the global markets means that any change in this country, albeit small, will have global repercussions. And the last year or so has seen some big changes from a China standpoint. Firstly, the Chinese economy has seen a slowdown with growth reaching a six year low of 7.0% at the beginning of 2015 - the slowest since the global financial crisis. Secondly, three consecutive devaluations of Yuan in Aug 2015 have pushed its price down by over 3% against the dollar. Thirdly, there is a slow pivoting of the economy from export intensive to a more labor intensive service sector. The spillovers of these changes on China’s neighbors and other Asian countries are slowly becoming evident, with impact being felt on both trade and the financial markets – and India’s story is no different. China is one of the India’s bigger trading partners and China’s spillovers on the Indian economy are likely to be complex and multifold. The two countries complement each other in a few markets, while competing in others. Hence while the slowdown might make certain Indian exports more competitive globally, and also make certain imports cheaper due to global inventory pileups, the dependence of India on China for exports also means that certain sectors – like steel, textiles, tyres are likely to lose out, if the supply is not met with a significant domestic demand. If the impact on these sectors is significant, necessary policy changes will have to be introduced by the government to curtail the same. The primary objective of this study is to understand all the spillover effects of the changes in China’s economy – right from the slowdown to the Yuan depreciation on India through both trade & financial linkages. The study also aims to analyse if the impact of these spillovers is at all significant and a cause for concern for the Indian economy.