China Economic Slowdown: What is for India?
(Relevant for General Studies Paper Prelims/Mains)
China Economic Slowdown: What is for India?
Anticipated to make a recovery this year following three years of a zero-Covid policy, the Chinese economy is facing an unexpected turn of events. Recent economic indicators reveal that the world’s second-largest economy has entered a state of deflation. Notably, both retail sales and industrial production have fallen short of the projected estimations. Of greater concern is the contraction in domestic demand. Apartment prices, along with a variety of goods and services, have experienced a decline, leading to a reduction in the Consumer Price Index-based inflation.
Causes behind this Slowdown
- China’s strategy of eradicating Covid-19 cases within its borders through repeated lockdowns, travel constraints, and widespread testing has not only led to significant disruptions in global supply chains but also triggered a series of manufacturing relocations. These factors, coupled with geopolitical tensions, have contributed to the weakening of both domestic growth and consumer spending.
- The current state of the Chinese economy is marked by a crisis of confidence, driven by a combination of factors. One pivotal issue is the near-collapse of the housing sector, which has been heavily reliant on debt for its sustained growth and constitutes approximately 30% of China’s GDP.
- China’s rapid economic expansion was fuelled partly by substantial borrowing, resulting in a substantial accumulation of debt in the economy. If not managed judiciously, this debt burden could potentially impede future growth.
- The Chinese government’s decision to impose stricter regulations on its dynamic tech sector, encompassing areas like video gaming, ed tech, and e-commerce, was prompted by concerns about the excessive size and influence of these tech giants. This crackdown has led to significant revenue losses and widespread job cuts, as numerous companies were compelled to downsize or cease operations.
- China has been endeavouring to shift its economic model away from overreliance on exports and investment toward a more balanced approach that prioritizes domestic consumption and innovation. However, this transition has proven challenging, resulting in lower growth rates, increased debt levels, and heightened financial risks.
- Trade tensions between China and the United States have escalated since 2018, leading to the imposition of tariffs, sanctions, and decoupling measures that have adversely impacted both economies. This trade dispute has resulted in a reduction of China’s exports, investment, and access to essential technologies and markets.
Global worries about this slowdown
- Earlier, the IMF had predicted that China would contribute to 35% of the worldwide economic growth for this year, but this projection seems increasingly unlikely.
- Recent data indicates that China might face challenges in attaining the growth objective of approximately 5% that was established for the current year.
Opportunities for India
- Numerous nations and corporations are exploring options beyond China for their supply of raw materials, intermediate goods, and final products, particularly in industries like electronics, pharmaceuticals, textiles, and automobiles. India holds the promise of becoming a favored choice for these sectors, thanks to its expansive domestic market, skilled labour pool, cost-effective workforce, and advancing infrastructure.
- China’s decelerating economy has diminished its appeal as a target for foreign investment. In this scenario, India can leverage this chance by presenting a steady and favourable business atmosphere. This can be achieved through the simplification of regulatory obstacles, granting tax benefits, and streamlining processes related to land acquisition and labour reforms.
- China’s economic deceleration has unveiled its weaknesses concerning innovation and research and development (R&D), notably in sectors like semiconductors, artificial intelligence, biotechnology, and aerospace. India can take advantage of this situation by boosting investments in its own innovation and R&D framework.
- This can be achieved by nurturing partnerships among academia, industry, and government and promoting a climate of entrepreneurship and willingness to take risks.
- The impact of China’s declining demand is strongly felt in commodity markets. If China decides to export essential metals and other commodities at lower rates due to reduced demand, it could potentially be advantageous for our domestic manufacturers.
Steps taken by India to leverage this opportunity
- Enhancing its exports to global markets, particularly in sectors where China’s competitive edge is diminishing. As a case in point, India’s exports of engineering goods, chemicals, pharmaceuticals, and textiles have shown substantial growth in recent months.
- Attracting additional Foreign Direct Investment (FDI) from companies seeking alternative investment destinations to China. India has streamlined its FDI regulations, offered attractive incentives, and elevated its ease of doing business ranking to entice a greater influx of investors.
- Strengthening its domestic manufacturing and consumption through diverse strategies and policies like the Production Linked Incentive (PLI) initiative, the Atma Nirbhar Bharat Abhiyan, and GST reforms.
- These measures are designed to enhance India’s self-sufficiency and ability to withstand external shocks. Fostering strategic and economic partnerships with other nations, especially in the Indo-Pacific region, as a counterbalance to China’s influence and assertiveness.
- India has engaged in various multilateral discussions and forums, including the Quad and BRICS, to foster regional collaboration and ensure stability.
India aims to establish itself as a significant contender in the worldwide supply chain and a prominent manufacturing center, directly challenging China’s position. Initiatives like the Production Linked Incentive (PLI) program have been introduced to bolster domestic manufacturing. India’s ‘China plus one’ approach to diversify its sources could gain traction in the event of a reduction in Chinese exports.
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