India looks to find an upside from China’s economic struggles

The economic struggles in which its neighbour is embroiled could create new opportunities, with investors looking for reliable returns. But some analysts feel that the dragon’s demise will be far-reaching.

Oil is India’s largest import and the country has already benefited from a decline in prices. Above, petroleum products being transported from a refinery in Gujarat. Amit Dave / Reuters

China’s economic woes are leading to much debate over whether the situation presents an opportunity for India to push ahead or whether it will be dragged down by the dragon’s decline.

On the one hand, China’s loss could be India’s gain, some experts say. Others warn that India cannot distance itself from the spillover of a downturn in the world’s second largest economy.

“In light of the Chinese slowdown, India might appear to be a relatively safe emerging market for international funds,” says Saravana Kumar, the chief investment officer, equity and debt of LIC Nomura Mutual Fund.

But the Associated Chambers of Commerce and Industry of India (Assocham) last week cautioned that “there would be more negatives than positives from the ripples of a dragon dragging the shaky world economy”.

On the positive side, India, a major importer, could gain from a fall in commodity prices, which have already declined because of a drop in demand from China. Oil is India’s largest import and the country has already benefited from a decline in prices.

India’s economy is already expected to grow at a faster pace than China’s over the next two years.

China’s economy has been slowing. It grew at its lowest levels in a decade last year at 7.4 per cent. Second quarter GDP figures released on Wednesday showed growth was 7 per cent on an annual basis.

India is set to overtake China this year as the world’s fastest-growing major economy, according to the IMF. This follows recent years of slowing growth for India. The IMF has predicted an economic growth rate of 7.5 per cent for both this year and next for India, while it is forecasting that China will decline to 6.8 per cent this year and 6.3 per cent in 2016. Both countries, which have huge populations, need high levels of economic growth to create enough jobs.

China’s trade, investment, domestic demand and property market have been faltering. There has been huge volatility in Chinese stock markets over the past few weeks. The Shanghai Composite is down by almost a quarter from its peak in June. Despite intervention by Beijing, foreign investors have been pulling out of the market.

Mahaveer Shankarlal, a senior analyst at India Ratings and Research, a Fitch Group company, says economic weakness in China triggers a withdrawal from emerging market funds, which could have negative implications for the Indian rupee, partly supported by the foreign investment in India’s stock markets.

“A significant portion of the inflow is attributable to emerging market exchange traded funds [ETFs] whose contribution to Indian markets is usually higher than India dedicated funds,” he says.

Listed funds globally hold Indian equities worth $110 billion, according to India Ratings and Research. Emerging market funds make up 64 per cent of this, while the remainder is accounted for by India dedicated funds.

“In India, global fund activity turned negative for the first time this year, with outflows worth $300 million in June,” says Mr Shankarlal. “The redemptions were mostly attributed to regional funds even as India-dedicated fund activity remained positive.

“If the turmoil in Chinese market continues, emerging market ETFs may face redemption pressure, this could translate into such funds selling Indian stocks which form part of the ETF basket. If these stock sells are not lapped up by foreign investors through India dedicated funds, there may be some depreciation pressure on the Indian currency.”

Manufacturers in India could also be hurt by India’s slowdown, he adds.

“China often tries to export its way back to growth. Thus, in the event of a slowdown in China, Chinese producers are likely to increase export quantities and hurt producers elsewhere. Imports from China at lower prices will further affect Indian players’ volumes and operating margins.”

More than half of India’s population of 1.2 billion is under the age of 25, which gives the country a demographic advantage over China.

“By 2020, India will have the world’s youngest population, with a median age of 29 years, compared with a median age of 37 in China,” says Brijesh Ved, the senior portfolio manager of equities for BNP Paribas Mutual Fund. “This demographic dividend could potentially give India the biggest labour force and make it the largest consumer market in the world.”

Mr Ved adds that “the sharp decline in oil and commodity prices has helped the economy to turn the corner, and improved the economic outlook significantly”.

But India is not isolated from the global economy and there would be grave implications for the country if China’s economic troubles worsen, according a report released by Assocham last week.

“A slew of sectors in the global markets, which get their sizeable chunk of revenue from China – tourism, hotels, education, health – will feel the immediate impact,” the industry body wrote. “Then, the kind of cost competitiveness which the Chinese companies provide to several manufacturing, semi-process industries like electronics, electrical, telecom equipment, will go missing from the global supply chain.”

India has not invested enough in many areas of manufacturing to occupy spaces that might be vacated by Chinese companies, according to Assocham. This is despite India’s ambitions to become a global manufacturing hub following the prime minister Narendra Modi’s launch of the “Make in India” campaign last year. Poor infrastructure is often cited as a significant hurdle to India’s ambitions.

“Even if the Chinese get temporary jerks, they are not going to disappear from the scene,” Assocham said. “Indian enterprise, as of today, has its own problems of large debts, aggravated by high interest rates, slow demand, inability to pass on the costs and a big pressure on profit margins. Imports from China account for 21 per cent of India’s total import bill, but not all the imports are avoidable, given the fact that at this point of time, we have not built manufacturing capabilities.”

Therefore, China’s woes would have a knock-on effect on the Indian economy.

“The ‘Make in India’ types of initiatives are a long haul and any disruption in essential imports from China can hit the Indian supply chain as well,” according to the report. “Moreover, because of pre-dominance of the services sector in our GDP, it is the trade which drives the Indian economy. Trade, in turn, has become China-centric, which for right or wrong reasons, cannot be given a shake-out.”

It concludes that “each dollar that will come to India will come because of its own merit and not due to weaknesses in China or elsewhere”.

Recent economic developments in China are much bigger concerns for the Indian economy than the Greece issue, according to India Ratings and Research.

“China being the second- largest economy in the world, an economic slowdown in the country will have larger implications for global and Indian economies,” says Devendra Kumar Pant, the chief economist and senior director, public finance, at India Ratings and Research. “Although Indian exports could be affected due to slower global growth, lower commodity prices can provide some support. Indian exporters can see a window of opportunity to cater to global demand. However, it will not be easy to match the size and scale of China as a supplier to global demand.”

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