Economic Implications of China’s Slowdown for India

Source-This post on Economic Implications of China’s Slowdown for India has been created based on the article “India has reason to be wary as China fumbles” published in “LiveMint” on 21 August 2024.

UPSC Syllabus-GS Paper-2- Effect of Policies and Politics of Developed and Developing Countries on India’s interests

Context– Recent data shows that China experienced a record $15 billion net outflow of foreign investment from April to June. This raises concerns about China’s slowing economic growth, which could have important effects on the global economy, including India.

The International Monetary Fund (IMF) has confirmed that China’s economy is slowing down. After growing at 5.2% in 2023, it is projected to slow to 5% in 2024 and further to 3.3% by 2029.

What are the Challenges faced by Chinese economy?

1) Internal Challenges-

A) Stagnant Consumption: Demand within the country remains sluggish.

B) Real Estate Issues: The real estate sector is experiencing decreased demand.

C) High Government Debt: Elevated debt levels are constraining economic flexibility.

D) Decelerating Productivity: Productivity growth is slowing.

E) Aging Population: The demographic shift towards an older population is impacting economic growth.

2) External Challenges-

A) China’s export sector is facing obstacles like tariffs and trade restrictions, especially from the US and Europe, which are affecting its global trade.

B) China’s steel sector, the world’s biggest, is struggling. Steel prices have dropped to their lowest in years, numerous mills are reporting financial losses. This situation is aggravated by decreased investment in real estate and increased export duties, such as those imposed by the EU on Chinese electric vehicles.

Read more- Strengthening China-India Relations

What are the Economic Implications for India?

1) Steel Industry– Domestic steel prices in India have hit a three-year low, even though consumption rose by 12% in 2023-24 due to increased government spending and private investment. This drop threatens recent growth trends and could impact government programs like the Production Linked Incentive (PLI) for specialty steel.

2) Chinese Imports on India’s Trade Deficit– Increased imports of subsidized Chinese steel and a rising influx of cheap Chinese manufactured goods are likely to widen India’s trade deficit with China. This growing trade imbalance may also reduce demand for Indian goods and services in the Chinese market

3) Potential Chinese Stimulus Effects- If China launches a stimulus program with subsidies and low-cost loans for its manufacturers, it could lead to tougher competition for Indian businesses due to a rise in cheaper Chinese products.

Way ahead- The Economic Survey’s suggestion to boost Chinese foreign direct investment (FDI) needs careful thought. The government should create a practical FDI policy that focuses on real benefits and uses the opportunity to tackle ongoing border issues.

Question for practice

What difficulties is the Chinese economy encountering? And how might these issues impact India’s economy?