China’s hell- India’s heaven or not?

China, which was once the fastest growing economy, is now going through a slump. More than $3 trillion worth of wealth has vanished. The Shanghai Composite Index, from a high of 5166 on 12th June came down to 2,927 on 26th August. What was first thought of as a correction in the inflated stock market now seems to be a real economic crisis.

The crisis in China has certainly had a domino effect on world economy since it is the second largest economy in the world and contributes to 50 percent of the world GDP growth. China’s debt to GDP is at a staggering level of 202% and is growing at a faster rate compared to the overall economic growth rate. To boost its economy through exports, People’s Bank of China devalued its currency with respect to USD by 2%. This had a ripple effect on other emerging market currencies. Notably, the INR has depreciated by almost 5% since the devaluation of Yuan. This is because when FIIs start to sell off their holdings, the demand for the dollar exceeds, which results in the rupee depreciation.

With the current slowdown of the Chinese economy, the first thing that comes to mind is the subprime crisis of 2008 and the effect it had on the entire world. Concentrating on India, FIIs have taken out close to $2.6 billion from the equity market in the month of August which is the highest since January 2008, the starting of the (in) famous subprime crisis. Almost all the gains since the inception of the Modi-led NDA government have been eroded. This is because of the economic conditions in China and the possibility of US Federal Reserve increasing the interest rates.

And just when you thought it couldn’t get any worse for India, the implementation of GST from April 2016 seems very unlikely since the bill could not be passed in the current Monsoon Session of the Rajya Sabha.

As awful as this may sound for the Indian economy, let us halt and rethink, is the current scenario really that bad for India?

The crisis in china is not entirely a bad thing. Let’s not forget the ‘Make in India’ project and the huge implications it can have for our economy. If the GST and land issues are sorted out in time, India would be in the right position to benefit from misfortunes of its peer countries. China intends to increase its exports through currency devaluation but Indian products are not in direct competition with China’s. At the same time, India has a wider export base which overall has a lower share in the country’s GDP compared to other Asian countries. Moreover, China constitutes only 4% of India’s exports, so even if the situation gets any worse India won’t be affected.

India is less reliant on export of goods because of the large amount of service sector exports mainly from BPOs and IT industry. The investors have become cautious and are pessimistic. The situation could have been better if the government had been more aggressive on the reforms front (Land acquisition and GST bill not passed in Rajya Sabha where BJP lacks majority.) Nonetheless, India still remains an attractive market for investment among all emerging economies and has strong fundamentals. The same was validated by Domestic Institutional Investors who were net buyers in equities in the month of August to the tune of $1.62 billion. Hence, It’s safe to say that the recent sell off is due to external shocks (US fed rate, China, Greece) and the current fall in the equity market is nothing but temporary.

This blog is written by Akshmeet Singh (MBA FA Sem 3, CFA Level 2 candidate) ICoFP Student, Delhi Campus

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