The Asian Voice

Could China's pain lead to subcontinent's gain? The Statesman

A labourer works inside the manufacturing unit of iron parts at a factory on the outskirts of Kolkata, India, on  Sept 11, 2015.
A labourer works inside the manufacturing unit of iron parts at a factory on the outskirts of Kolkata, India, on Sept 11, 2015.PHOTO: REUTERS

There is no doubt that China's economy will continue to slow down in the short run but it is not certain that India will gain

By Arunabha Bagchi

The Statesman/Asia News Network

The month of August was overshadowed by news of economic woes in China.

There was a meltdown in the Chinese stock market, the growth figure was a low 7 per cent, way below the historical rates of above 10 per cent for two decades, and China was forced to devalue its currency to jumpstart exports.

Indians generally were elated.

This was largely due to our huge inferiority complex vis-a-vis China, but also due to a sense that this might open up opportunities for India on diverse fronts.

Even Prime Minister Modi recently summoned Indian bankers and billionaires to his residence to brainstorm how India could use new opportunities for our economy amid China's market and growth woes.

The most publicised was the interview of the Indian finance minister with the BBC where he said, "The Chinese 'normal' has now changed. It is no longer the 9-percent, 10-per-cent, 11-pe-cent growth rate."

Arun Jaitley added: "So the world needs other engines to carry the growth process, and in a slowdown environment in the world, an economy which can grow at 8 to 9 percent like India certainly has viable shoulders to provide the support to the global economy."

This is audacity at its worst.

China's GDP is five times that of India, per capita income is of almost the same order of magnitude and foreign exchange reserve is more than 10 times that of ours.

Such statements only make us look ridiculous to the rest of the world.

There is no doubt that China's economy will continue to slow down in the short run, but reports that China's real growth is half that of the official figure are strongly disputed by Stephen Roach, former Asia chairman of the investment bank Morgan Stanley, and presently a professor of economics at Yale University.

According to him, the crash landing scenario of the Chinese economy is vastly overblown.

Roach puts the blame of the current stock market crash in China on the authorities' "handling the equity market bubble on the upside by encouraging it and fighting it on the downside" when the bubble burst.

There is no link between the Chinese listed companies in Shanghai and the international ones listed in the West.

The global impact of the slump in the mainland China stocks is merely one of short-term negative sentiments of the traders.

Furthermore, the effect of the stock market crash in China is going to have hardly any effect on the real economy there.

Only about 7 per cent of Chinese households are active in the stock market, often those with gambler's instinct. Own earnings and bank loans finance most Chinese companies.

The basic problem in China continues to be the dramatic transformation there from an investment dominated economy to a consumer spending dominated one.

The authorities might have started the process late, and are now trying to effect the change far too rapidly.

Could India benefit from all these?

According to the optimists, it is possible in at least two ways.

It is clear that the Chinese slump in the stock market was partially due to the withdrawal of foreign funds.

The hope of Indian policymakers is that these funds would find their way to India.

This may be idle speculation.

The withdrawal of funds from the Chinese market was a premature, but anticipated, action by global fund managers in view of the expected increase in the U.S. treasury rate sometime this fall.

The proposed large investment from China for infrastructural projects in India appears remote at this juncture.

India's growth in the last quarter has also suffered, registering 7 per cent growth in place of the expected 7.3 per cent.

The Modi government has abandoned the original land reform law.

To that can be added the inordinate delay in implementing the goods and services tax code and slow changes in labour laws which caused considerable heartburn among potential foreign institutional investors.

The other way India is expected to benefit is China's rising labour cost that has already made Chinese export products expensive.

The hope is that India's latest slogan of "make in India" would attract investors to shift their manufacturing bases from China to India.

The problem is that China's recent export decline may be just a reflection of weak global demand due to the persistence of a weak global economy.

According to the Princeton economist Ashoka Mody, "The pervasive global weakness ultimately does the greater harm (to India), especially because India is not competitive. China has been the linchpin of the global economy for a decade. If China goes into a swoon, so will India."

The "Make in India" campaign is to me just as meaningless as the "Swachh Bharat Abhijan."

It is all about mind-set. Indian manufacturing has an image problem.

Our work ethic is not particularly strong, quality control virtually non-existent and labour relations abysmal.

Western businesspeople often complain about our poor record of delivering goods on schedule.

We rank internationally at the very bottom in terms of enforcing business contracts.

How could we change that mind-set by slogans alone?

For decades we prided ourselves on jumping over the manufacturing stage and becoming a service economy following in the footsteps of our revered West.

To change that perception and then develop a solid manufacturing base needs a very long time. To grasp the opportunity that China may provide on that front is not feasible right now.

To get back the traditional edge in export-oriented manufacturing, China has recently devalued its currency by 4.4 per cent.

Our imports from China reached US$60 billion (S$84 billion) in 2014-15, while our exports to China have come down to only US$12 billion in that period.

Yuan devaluation could only mean further deterioration in our balance of trade.

On the other hand, China's devaluation might lead to competitive devaluation of other currencies, resulting in depreciation of the rupee as well.

This would negate some of the advantages that India now enjoys from the falling oil prices, triggering inflation. The Reserve Bank might then find it harder to lower interest rates.

Rupee depreciation would make it difficult for those companies that borrowed heavily in dollars to pay back their obligations.

Could there be ideological underpinnings behind this gloating at China's "misfortune?"

China's communist regime directing her fabulous growth has always been a source of irritation to the true believers in the free market.

They have been predicting stalling of China's growth barring political liberalisation for decades now.

Finally they claimed that totalitarian governments are not able to make the final push from a medium-income country to a high-income one.

They have now sensed their moment.

They are hoping again for the dismantling of the communist regime in China if she were to join the club of rich countries.

Ideologues within our current ruling elites have only joined this bandwagon.

China's expected average growth of 7 percent in the coming decade would be a spectacular achievement by itself.

What is far more dramatic is the shift in the global trading pattern in the medium term as the new "Silk Road" envisaged and financed by China takes shape.

China would then be able to increasingly create new supply chains away from the traditional North American/European ones.

The new infrastructure would help China to import a variety of products from South-east/South and Central Asian countries, along with the Russian Republic, and export more value-added products to those regions.

This would insulate China from the dictates of the World Trade Organization and possible sanction from the United States in case of any future conflict.

Are we preparing to take advantage of that possibility?

The writer is former dean and emeritus professor of applied mathematics, University of Twente, The Netherlands.