India's Opportunity

After a long period of steady growth the Chinese economy has now begun to slow down (“Yuan Devaluation and Its Impact” by Biswajit Dhar, EPW, 5 September 2015). Chinese foreign trade in August 2015 decreased by 9.7%, a record drop of $93.9 billion. The main reason for this is the internal debt of China, which was 125% of GDP in 2008 and has touched 282% of GDP or $28 trillion now. For faster economic growth and development, the Chinese government sanctioned huge amounts of loans to the small and medium enterprises, but a significant share of this loans remained unused.

After a long period of steady growth the Chinese economy has now begun to slow down (“Yuan Devaluation and Its Impact” by Biswajit Dhar, EPW, 5 September 2015). Chinese foreign trade in August 2015 decreased by 9.7%, a record drop of $93.9 billion. The main reason for this is the internal debt of China, which was 125% of GDP in 2008 and has touched 282% of GDP or $28 trillion now. For faster economic growth and development, the Chinese government sanctioned huge amounts of loans to the small and medium enterprises, but a significant share of this loans remained unused. Chinese banks are now facing critical problems as these enterprises are unable to repay their loans. As a result, Chinese imports and aggregate demand have come down. In the long run, it will be very difficult for China to control this crisis. To stop the wave of capital outflows, China devaluated its yuan by 2.8% compared to the dollar. If the US hikes the interest rate then it will be very difficult for China to protect its own currency, which is weaker than the dollar.

In this situation India’s position is better. Indian manufacturing and services sectors have begun picking up. Besides the fact that India’s foreign currency reserve is one-tenth of China, India has an opportunity to strengthen its economy in this transient phase. Most of the world economies are struggling, both in terms of their growth rates and the currency markets are experiencing large fluctuations. In the Indian context there is no need to panic or get influenced by the current global situation. We must understand that the Sensex is no parameter to measure an economy’s health. Inflation, both wholesale and retail, is under control. The most important aspect is that with political stability, the mood of the people is also positive. There are no big Chinese investments in Indian stock markets and therefore the Indian economy is likely to remain insulated from Chinese upheavals. The present Chinese crisis cannot be equated with the US meltdown, which gave a jolt to the Indian economy.