The recent devaluation of the yuan will make Indian exports, which compete with Chinese items, more expensive in the international market. Also, Indian imports from China will become cheaper. This will hurt domestic manufacturing
The global recession is now official. It has been confirmed by the devaluation of the Chinese yuan by four per cent. So, are we bracing for a currency warIJ Possibly not, because there can be a currency war only when the US is hit. But this war isn’t hitting the US. Instead, the US is the biggest gainer, as China is its largest trade partner.
US consumers are dependent on Chinese imports and they will benefit the most, paving way for the US Federal Reserve to be calm on its interest rate as inflation in the US will plummet. This will be detrimental for India.
China has yet not ruffled US feathers. Rather, its action are framed as per the prescriptions of the US and the International Monetary Fund. The US had long sought this devaluation and had been insisting that the yuan was over-priced. China had been propping up the yuan. It appreciated 14 per cent against a basket of currencies. The yuan was straining China’s export sector and pushing up inflation in the US market, despite the dollar being strengthened, dependent on Chinese consumer goods.
The present downward trend is in tandem with the wishes of the US and likely to benefit the US the most, particularly on the eve of revising its monetary policy. China’s net gain will be a continuation of its exports to the US and possibly there can be an increase in the exports, as goods will be cheaper. A rate increase by the Federal Reserve, on the contrary, has serious implications for India.
If China’s devaluation deepens, the pressure to weaken currencies could become particularly intense in other Asian nations that export large amounts to China or compete with China in other markets. Asian currencies tumbled on Tuesday, notably the South Korean won, the Australian dollar and the Thai baht, as investors bet that China’s move could lead to further monetary easing in those nations. Many Asian nations have cut rates this year and could be forced to take further action in the coming months.
India needs a strategy to counter the Chinese. India imports heavily from its eastern neighbour. This may further swell the trade deficit, which is touching $50 billion already. The imports are worth $60 billion. This devaluation is likely to push up the deficit further as cheap imports will be initiated by Chinese manufacturers, irrespective of dumping safeguards, as Mr DK Joshi, senior director and chief economist at the Credit Rating Information Services of India limited points out.
India’s overall exports contracted for seven straight months till June. Domestic players, such as Tata Steel and JSW Steel, have been urging the Government to take more measures to check cheaper imports and save the domestic industry. The import-duty hike is likely to keep the prices of imported steel to the previous level, which is considered high by Indian industry. The Government may find its Make in India in a tizzy. With cheaper imports flowing in directly and through porous borders, Indian manufacturing is already hit. It will now find it more difficult to counter new assaults.
As this move may also boost the slowing Chinese economy, investors who had been mulling over putting money in India, may have a second thought. If Chinese exports to the US and the West increases, it is likely to clear Chinese warehouses of stacked goods and boost new manufacturing. It can create new jobs and may make China more attractive.
In the normal course, a falling rupee would have aided domestic exports. However, a rise in domestic exports will not be easy because of the global slowdown. The fact that China and India compete in several export items, such as textiles, gems and jewellery, bicycles, and tyres will also go against domestic exporters. The economic slowdown in China, which is among the top five countries for Indian exports, is another negative for Indian exporters.
Textile manufacturers and chemical producers might have it tougher now because in the global marketplace their goods will become less attractive than those from China. Dalal Street is reflecting these woes. Shares of export companies as well as those of tyre manufacturers are tumbling. Of late, cheap Chinese tyres have hit sales of domestic manufacturers. A further fall in price will force companies to cut corners.
The strengthening dollar and falling yuan are a double whammy of India. Apart from the hit to Indian exports, Indian imports, including petroleum, will become dearer. The little relief that Indian consumers had got through the fall of official price index may disappear. The impending fortnightly cut in domestic selling price of petrol and diesel may be put off. Inflation may return.
India has not yet created hedge against Chinese moves. It has to develop a strategy for developing an independent path for Indian economy. Mere changes in monetary policy will not help.