An opportune moment
China’s slowing economy and its trade war with the US have created a space for India to tap new markets and recover from its own slump in economic growth
India's GDP growth slid and plunged to a six-year low of 4.5 per cent in the second quarter of 2019-20. Policy makers are anticipating an upturn in the third quarter but the investors are keeping their fingers crossed.
Indeed, the fall in growth deciphers concerns over the weak health of the economy. But the main issue for the uproar in the country is presumably different when the growth rate is compared with global economic growth which hovers around 3-4 per cent. The main issue of concern is jobless growth and the lacklustre situation in manufacturing (0.6 per cent and 1.0 per cent in April-June and July-September, 2019 respectively), even though PM Modi was assertive in promising faster industrial growth. This led to a trust deficit in Modi's governance despite his massive victory in the 2019 general election. The contraction in GDP growth post-election has shadowed Modi's economic policies.
The leader of Bombay Club, Rahul Bajaj chided Modi for his anti-democratic gagging of industrial voices. Economists and investors blamed Modi's for tackling black money through demonetisation. This caused significant damage to micro, small and medium industries, they asserted. Conventionally, this sector has been banking heavily on cash flow, which opens opportunities for flow of black money. This sector is the main source of mass employment. As a result, even though the fall in GDP growth by world standard should not have been devastating, it caused a considerable lull in job creation. As a matter of fact, the major investment during Modi period was made in capital intensive industries, according to a NITI Aayog report.
Against this backdrop, slow growth in the Chinese economy can prove salutary to India's current economic woes. Buoyancy in trade, particularly export and foreign investment can play an important role in resuscitating the economy and bring it back on a growth trajectory. In recent months, the government has taken a number of steps to stimulate investors by lowering corporate taxes at par with ASEAN, rationalising GST and other such measures. These have, however, not been enough to bottom out the falling tendency in growth, unless these measures were to be supplemented by external factors.
After three decades of double-digit growth, China is slowing its economy to rebalance between volatile export market-driven economy and stable domestic demand-driven economy. Ample opportunities will emerge for India to take part in the market which has been vacated by China.
India, being a labour-intensive industry-based country, pitches for high potential in agriculture and allied services. According to a study, India is faring better than China in regards to its export of meat, tea, cereals, animal vegetable fats and oil and pharmaceutical products.
Besides slow growth in the economy, China is facing an onslaught of Trump's tariff war. More than USD $ 200 billion worth of Chinese exports to the USA are being subjected to Trumps' high tariffs. Even though India is far behind China in producing and exporting these items, this gap can be narrowed with a move towards increasing investment in these sectors, along with government support.
For example, the USA is the biggest importer of apparels from China. Apparel is also an important item in India's exports to the US. Chinese export of apparel to the USA is worth nine times that of India. The high tariff on Chinese apparel will shrink its export to the USA. This will vacate a huge market for India to penetrate, albeit, against stiff competition from Vietnam.
A unique feature of the US apparel market is that it is cotton-based. Incidentally, China is a cotton deficient country. This will be a leg up for India as India is one of the major exporters of cotton to the world. It is also one of the major items of China's import from India.
There is an opportunity for a significant increase in the export of raw cotton to China from India after China imposed 25 per cent tariff on imports of cotton from the USA as retaliation. Of the 5 billion bales of cotton imported yearly by China, 40 per cent are imported from the USA.
Similarly, there is scope for soybean export to China. China is the world biggest buyer of soybean and the USA has been the biggest supplier to China. Annually, China imports $39-40 billion worth of soybean from the world. Of these, more than one third is imported from the USA.
In addition to vacating market due to China's new economic strategy and USA-China trade war — which is unlikely to be resolved in the near future — China prompted the relocation of investment both by foreign investors and Chinese investors. This resulted in a surge of M&A in Indian companies. It increased to USD $93.7 billion in 2018 which is an increase of 52 per cent over the preceding year. India has now exceeded China in foreign acquisition. In 2018, foreign acquirers invested USD $ 39.5 billion in India as compared to USD $32.8 billion in China.
Chinese investors are increasingly becoming active in India. "Starting from start-ups and smart cities to infrastructure, Chinese investors see India as the benchmark destination", said Mr Liu Xiaxue, an associate Research Fellow at the Chinese Academy of Social Science's National Institute of International Strategy.
As of the end of 2017, the Chinese Ministry of Commerce recorded Chinese investment in India more than USD $ 8 billion. Infrastructure and electronic manufacturing have become the key areas of Chinese investment. For example, Chinese Medea Group announced that it would invest USD $1.85 million in Supa Parner, Pune Technology Park.
Even though manufacturing has become the main drag on GDP, owing to domestic investors' trust deficit on Modi's governance after demonetisation, FDI surged in this sector. According to a report, FDI in manufacturing reached its highest level in 2018 since 2011. India witnessed a 40 per cent increase in manufacturing between 2017 and 2018.
To sum up, drive in export and FDI should be the primary area of focus in rejuvenating the economy.
Views expressed are strictly personal