How the dragon of Chinese Economy Slowdown will

Impact the World and India, in specific?

Lets start by gathering some facts about the Chinese Economy to
understand how big is the Chinese Economy, the main causes of its
slow down and how it would effect the Indian Economy in specific.
As the data from the World Bank says, Chinese Economy is the
Second largest Economy in the world according to the Nominal GDP
and the largest in terms of Purchasing Power Parity, according to the
report released by International Monetary Fund (IMF) in October
2014. According to the Report on Selected Countries and Subjects
published by IMF in April 2013, China is the worlds fastest growing
economy with past 30 year average growth rate of 10%. The huge
size of the economy is because it is the largest hub for
manufacturing in the world and as well as an exporter to worlds
leading markets of the United States and Europe just like India. It is
also worlds largest steel producing country. But in the recent years,
Chinas growth rate has slumped to 7.4% according to IMF.
According to IMFs World Economic Outlook, Chinese economy will
further slow down by 7.1 percent in 2015 and 6.8% in 2016.
So, why is the Chinese Economy Slowing down? What caused such a
majestic dragons economy to start falling after competing for the
top spot with that of the United States? One major reason is the
slump in the property market, which dragged down manufacturing
and investment. After the US Crisis of 2008, China opened its credit
tap wide that it has more money in circulation ($10 trillion) than US
($8 trillion).
The Chinese economy is following the macroeconomic business
cycle that now shows that the economy is in decline stage after
being booming for past 30 years. The slowdown would be the
product of the aging population in the country and the increase in
wages to meet the global standards. The economy was fueled in the
past with an enormous working age population and relatively low
wages. According to the article published in The Economic Times,
only five million Chinese will enter the core working ages of 35-54
this decade, down from 90 million during 2000-10.
Another reason that can be seen across the Chinese slowdown is the
fact that only 15 million Chinese are under employed in the rural
areas. Migration from rural to urban areas have been at its bottom
level and hence the cost of production is increasing due to the labor
force being scarce and more powerful than ever before.
During the boom Chinese spent heavily on building infrastructure. It
has the second most extensive network of highways, only lesser
than USA. Heavy investment to build a modern export economy has

been high to the levels that China has been spending more on
Infrastructure than US and Europe combined.
The Chinese exports are falling. Once the worlds largest exporter
now accounts for around 10% of the global exports. This is also due
to the slowdown in the major economies of US and Europe.
Moreover, the demand in the domestic market is also falling. Last
fiscal the domestic demand growth was an anemic 0.3%.
So, what would be the impact of the slow down in the worlds
second largest economy? To what adverse level can that affect our
country which has now fresh blood and is in hurry of the growth
seeing the actions of the new Government of Prime Minister Modi
with his agenda of Development? What will happen to Make In
India drive?
The countries that China trade with will face the effects of the
Chinese slowdown. The extent of the effect would depend on their
exposure with China. The countries like Australia, Brazil, Indonesia
and Canada, which are dependent on commodity exports, would be
the victims of this slowdown because of the falling prices by the
Chinese. Australia is heavily dependent on its exports to China and
with the falling economy of the dragon, it has started to cut the
price of its exports suggesting it as been started feeling the effects.
However, markets of US might be the beneficiaries because the
import would be at the lower price.
Lets talk about how the Indian Economy in specific. Well India is not
linked to Chinese economy in broad sense, hence a direct impact of
Chinese slowdown is not going to effect India adversely in the
negative way. But this slowdown can help India grow.
As mentioned earlier, the slowdown is bringing down the prices of
commodities in the international markets. The reports published by
various agencies prove that the prices of most metals are down in
the range on 6-19 percent. This is beneficial for our economy that
imports such commodities. The direct impact of the lower prices
would be decrease in the cost of production, which in turn would
reach the consumer that was earlier not possible due to high import
prices. However, the reduction in prices would not be beneficiary for
specific companies in the steel industry i.e. Tata Steel and Sail which
have their own mines and have to reduce their prices due to the
reduction of prices in the international markets. But companies like
JSW will benefit because it is importing the raw materials that is now
available at cheaper prices. Below is the snapshot of the commodity
prices in the market and the fluctuations in their prices.

The industries in automobiles and auto-ancillaries, consumer

durables, cement and tyres would benefit from the lower prices of
the commodities as it will help them reduce their cost of production
and they can see an increase in their margins.
An article in Business Standard quotes, Chinas share in Indias
merchandise export basket fell to four per cent during the April-June
period this year (from 4.7 per cent in the corresponding period last
year and 6.7 per cent in 2008-09). This coincided with a slowdown in
Indias export growth.
Another major Indian industry that would be affected will be the
Drug Industry that is heavily dependent on China for intermediates.
According to the report of Boston Consulting Group (BCG) and
Confederation of Indian Industries (CII), at least 15-odd essential
drugs raw material and key Active Pharma ingredients (APIs) come
from China. The threat is due to heavy dependence on China
because till the time these are available at lower prices to India, it
might be good for the economy. But Over-dependence of the figure
as high as 90% is not a good sign.
However, if we compare India with the Chinese counterpart, it
provides a rosy picture for the investors to park their money in the
country that are showing good signs of growth and development
with the increase government efforts in the ease of doing business.
India is marketing itself to the world as having the largest working
age population with the average age of around 28-35 years
available at relatively low wages. Prime Ministers Make in India
campaign to boost manufacturing and the recent actions by the
government can lure companies to start or shift their manufacturing
base in India.
The domestic consumption in India is higher in India than in China
that is an added advantage for manufacturing industries to grow in
India. The largest democracy in the world is all set to grow at an

enormous phase reversing the global trend by shifting its focus on

manufacturing from services.
Investing in India would be risker but the premiums are high. With
the other developing economies of the world, Brazil and Russia, also
on the path of dipping growth trajectories, India can shine and rise
to the peak. The IMF forecasts that India will become a $2-trillion
economy in 2014 the tenth biggest in the world and will cross the
$3-trillion threshold in 2019, which would make it the
worlds seventh biggest economy. This shows that the long-term
outlook is very positive.
Hence the Chinese slowdown would dip the global growth rate by
half percentage, but the Indian economy has a rosy picture, may or
may not be at the expense of the Chinese growth figures but due to
the International focus shifted to India for the benefits Investors
perceive in the Indian economy.