India-First-Global-Insights-Analysis -Sharing-PlatformIndia-First-Global-Insights-Analysis -Sharing-Platform

China vs India : Dragon bites the elephant

and , September 8, 2015, 0 Comments

dragon-elephant-china-india-marketexpress-inThe Dragon finally bit the Elephant and the Sensex crashed by 1600 points on a single day. Over the last few decades, China has been the fastest-growing economy in the world. In the process, the policy makers and economists were sceptical about this astronomical growth and were questioning about its sustainability. Finally, some sort of limits was reached and the economy received a setback.

In an effort to quell one problem, the Chinese government encouraged retail investment in the stock markets to act as a source of investment to heavily debt-laden government and private companies. The investors seeing a policy backed push rushed headlong into equity investments having an implicit assumption that the communist government would not let the market fall precipitously. Valuations were taken to stratospheric heights of 40 p/e for mainstay companies. Indian valuations were at a more modest 20 p/e. However, at the same time, the government was moving the economy from an investment-led to a consumption-led model as there was over capacity in several sectors. With the resultant cooling down of the economy, and disbelief in official statistics, the market was ripe for a fall.

There was a crash in the stock markets in China. The Chinese government reacted by inducing a devaluation of its currency. Things were no longer the same now. China could no longer be considered to be the fastest growing economy in the world. Close on the heels there was India aspiring to take over that distinction.

We used to look upon the United States as the engine of growth for the world economy. China was all set to take over this role. But with the recent crisis China’s aspirations have received a setback. China is still an economy much larger than that of India. It is only China that can take on the United States economy in terms of size. India, at best, is still only a marginal player. The $10 trillion Chinese economy was within striking distance of United States $17 trillion economy. In 2008, it was the U.S. which first went into recession caused by the subprime crisis. This was followed by Europe. Now it is China which is cooling. Whether China is able to prevent a hard landing or not will greatly determine global growth.

The Indian economy at the present juncture has some inherent strengths. The fall in international crude oil prices have come as a boon to the Indian economy. This has led to control over the fiscal deficit, reduction in the subsidy bill and a cooling down of inflationary pressures. When there has been overall depreciation of the currency in a large number of countries, it is still the Indian Rupee that stood out as one the strongest and the one that depreciated the least. This was in part due to the RBI governor’s commitment to keep a disinflationary stance. However, actions by the Chinese government have rendered Indian exports uncompetitive.

To top it all, with over capacities in China, the companies there have started dumping their steel and other primary goods onto the Indian market. For instance, finished steel is reaching Indian markets at between $320 -$350 per tonne, thereby making sick Indian primary steel producers. This has a ripple effect since the loans to these companies turn bad and become NPAs in bank loan books. This prevents banks from lowering interest rates, even though the RBI has lowered interest rates by 75 basis points. Relative high-interest rates in turn make domestic companies uncompetitive in the global market.

The future is still very uncertain. Will the Chinese economy stabilize even if only at a lower level of equilibrium? Will the Indian stock market recover and wipe out the losses? Will India emerge as the fastest growing economy in the world? Will the world economy be able to achieve some kind of a soft landing? With exports from China likely to receive a setback what are the prospects for global exports? Whatever the trajectory, India has to gird itself to buttress a strong demand driven economy and make its industry globally competitive to be able to tackle the headwinds coming out of China.

Answers to the questions posed have led to speculation among the economists. It is difficult to see China performing as if nothing has changed. While the Chinese contagion has badly affected most Asian economies there is no reason why the United States and Europe should be caught in the whirlwind as well. Are we in for a crisis limited geographically and in depth or are we in for a major worldwide collapse?

It might take several decades for India to emerge as an economic counterweight to China. We need to strengthen our economy by carrying out reforms to efficiently utilise our product and factor markets. We need labour reforms and passing of the GST Bill as a first step