Date : 23/08/2023

Relevance: GS Paper 2- International Relations- Effect of policies and politics of developed and developing countries on India's interests.

Keywords: COVID-19, Production linked scheme, FDI, Diversified Supply Chain

Context-

China's economic trajectory was projected to rebound this year after a triad of years following a zero-Covid approach. However, the most recent economic indicators paint a picture of China's economy slipping into a state of deflation. Both industrial production and retail sales have fallen short of initial forecasts, with a concerning decline in domestic demand. The decline in housing prices and various goods, along with a drop in the Consumer Price Index-based inflation, are especially noteworthy.

Underlying Factors of China’s Economic Slowdown

• Covid Strategy Impact: China's persistent pursuit of eradicating Covid-19 within its borders resulted in frequent lockdowns, travel constraints, and widespread testing. This strategy not only disrupted global supply chains but also triggered geopolitical tensions, prompting relocations in manufacturing that in turn weakened both domestic growth and consumer expenditure.
• Industrial Output Contraction: The year-on-year expansion of value-added industrial output has decelerated to 3.7%, a decline from the 4.4% growth registered in the previous June.
• Export Downturn: July 2023 witnessed a 14.5% decrease in China's exports compared to the previous year, accompanied by a 12.4% drop in imports.
• Rising Unemployment: By July 2023, the overall unemployment rate had reached 5.3%, while youth unemployment reached an alarming record of 21.3% in June.
• Housing Sector Collapse: China is currently grappling with an economic confidence crisis, primarily due to the near collapse of its debt-driven housing sector, accounting for about 30% of the country's GDP.
• Debt Burden: China's rapid economic growth relied partly on substantial borrowing, which has led to a significant accumulation of debt. China's debt-to-GDP ratio is estimated at 282%, surpassing that of the US.
• Tech Industry Crackdown: China's government initiated a crackdown on its thriving tech sector, including video gaming, tech, and e-commerce, citing concerns of excessive size and influence. This led to substantial revenue losses and job cuts as numerous firms downsized or shut down.
• Investment and Consumer Spending Decline: Amidst economic uncertainty, both Chinese households and investors are reducing expenditures, contributing to a deflationary environment. Retail sales grew by 2.5% year-on-year in July 2023, down from the 3.1% growth in June.
• Structural Transformation: China has been striving to transition its economy from export and investment dependency to a more balanced model emphasizing domestic consumption and innovation. This shift, while vital, has introduced challenges, leading to slower growth rates and amplified financial risks.
• Trade Dispute with the US: Escalating trade tensions between China and the US since 2018 have resulted in tariffs, sanctions, and market disengagement, adversely impacting both economies and eroding consumer and business confidence.

Global Concerns Over China's Slowdown

The IMF's previous projection indicated that China would contribute 35% of global growth this year, a forecast that now seems unlikely. Recent data suggests that China may struggle to attain its targeted growth rate of approximately 5%, which could in turn affect global demand. As the world's largest manufacturing economy and a major consumer of vital commodities, a China slowdown could reverberate across markets.

Opportunities for India

• Diversifying Supply Chains: With many nations seeking alternatives to China for raw materials, intermediate goods, and finished products, India's ample domestic market, skilled labor pool, cost-efficient workforce, and improved infrastructure position it favorably as an alternative destination.
• Attracting Foreign Investment: China's waning attractiveness as an investment destination presents India with an opportunity to enhance its business environment, simplify regulations, offer tax incentives, and facilitate ease of land acquisition and labor reforms.
• Fostering Innovation and R&D: Capitalizing on China's vulnerabilities in innovation and R&D, India can invest in its own innovation ecosystem, fostering collaboration between academia, industry, and government. Leveraging its talent pool, India can develop cutting-edge technologies to compete on the global stage.
• Boosting Domestic Manufacturing: India is actively promoting domestic manufacturing through initiatives like the Production Linked Incentive (PLI) scheme, the Atmanirbhar Bharat Abhiyan, and GST reforms, enhancing self-reliance and resilience.
• Strengthening Alliances: India can counterbalance China's influence by bolstering economic and strategic relationships, particularly in the Indo-Pacific region. Participation in forums like the Quad and BRICS supports regional cooperation and stability.

Amid China's slowdown, India strategically benefited by:

• Export Diversification: India has expanded its exports to other nations, particularly in sectors where China's competitiveness is declining. Notably, India's exports of engineering goods, chemicals, pharmaceuticals, and textiles have experienced significant growth in recent months.
• Foreign Direct Investment (FDI) Attraction: India has attracted a higher influx of FDI from companies seeking alternatives to China. To achieve this, India has eased its FDI regulations, provided incentives, and enhanced its ranking in the Ease of doing business index. Reforms in sectors like electricity, land acquisition, and labor have been introduced to attract investment.
• Strengthening Domestic Manufacturing and Consumption: Through initiatives like the Production Linked Incentive (PLI) scheme and the Atmanirbhar Bharat Abhiyan, India is boosting domestic manufacturing and consumption. These efforts aim to enhance self-reliance and resilience against external shocks. Additionally, GST reforms contribute to this goal.
• Fostering Economic and Strategic Alliances: India is actively enhancing its economic and strategic partnerships with other nations, especially within the Indo-Pacific region. This is done to counter China's influence and aggressive behavior. India's engagement in multilateral forums like the Quad and BRICS is aimed at promoting regional cooperation and stability.

Conclusion

India's strategic response to China's economic slowdown involves diversifying exports, attracting FDI, boosting domestic manufacturing, and forging alliances. By employing schemes like the Production Linked Incentive (PLI) and engaging in a 'China plus one' strategy, India aims to position itself as a prominent player in global supply chains and manufacturing. The prospect of diminished Chinese exports could further bolster India's efforts in this direction.

Source - The Hindu Business Line