Ever since the Chinese currency was devalued last year and the stocks, both in that country as well as elsewhere, took a plunge, there has been talk of whether India can make the best of the situation. Subir Ghosh explores the issue.
The problem with simplistic arguments is that they invariably either remain speculative at best, or fail to make a point altogether. A classic example of this was the speculation that was fuelled last summer in the backdrop of the Chinese currency being devalued and stocks tumbling the world over. Considerable debates and discussions at that time featured in the Indian media, almost all of them drawing the conclusion that India would make the best of China's declining state of affairs, and forge ahead of its neighbour. Nine months later, the truth is far away from the speculative fiction that was being doled out from the television studios day in and out. Such discussions would have well attracted eyeballs among the general public, but those in the know remained circumspect-both among economists as well as industry leaders.
It is important to understand why no such thing has happened, certainly as yet: global economics is hardly about linear arithmetic equations, which is why such emotional predictions go hopelessly wrong and eventually do not make a positive contribution towards the debate. If India has not been able to make a killing, it is for two reasons: first, the importance of China as an economic monolith cannot be wished away; and second, the slowdown is global in nature, and not specific to China alone. In any case, the two are inextricably linked, whether one likes it or not. The continuous slump in India's exports over the same period bears testimony to both contentions.
A look at the trade signs and exchange rates:
The numbers have not been encouraging for a while. India's exports during December 2015 were valued at $22,297.48 million (₹148,491.18 crore) which was 14.75 per cent lower in dollar terms (9.53 per cent lower in rupee terms) than the $26,154.46 million (₹164,127.08 crore) during the same month the previous year. According to the commerce ministry, the cumulative value of exports for the period April-December 2015 was $196,603.94 million (₹12,73,322.99 crore)-a drop of 18.06 per cent in dollar terms and 12.67 per cent in rupee terms from $239,928.91 million (₹14,58,094.40 crore) over the same period a year earlier.
The Federation of Indian Export Organisations (FIEO), which looked at the figures closely, pointed out that jute manufacturing with 135 per cent and handicrafts (handmade carpets only) with 27 per cent were some of the high growth sectors amid the gloomy scenario. Apparel exports too had shown some positive growth during the month.
Yet overall, the ministry, in a statement on January 18, remarked that "the trend of falling exports is in tandem with other major world economies." The growth in exports have fallen for the United States, European Union and China by 10.30, 10.83, 6.94 per cent respectively for October 2015 over the corresponding period previous year as per World Trade Organization statistics. The numbers present a bleak picture all over, and perpetuate the trend.
Global trade has not recovered much from the 2008 financial crisis. But the entire blame for India's discouraging export performance is not to be laid at the doors of the global economy. A major domestic factor is partly responsible: the exchange rate of the rupee (which explains why the export drop in dollar terms was 18.06 per cent, and in rupee terms 12.67 per cent). The exchange rate not only determines the rupees earned per dollar of exports, it also has a bearing on price competitiveness of exports in world markets and the profitability of exports for domestic firms.
According to the Economist magazine, the rupee fell the least in 2015-4.2 per cent against the 4.3 per cent of the Chinese renminbi. In comparison, the euro declined 13.6 per cent and the Turkish lira 25 per cent, while the Brazilian real plummeted by a whopping 44 per cent. In the first half of January this year, both the renminbi and the rupee dropped by another 1.5 per cent to the dollar. Usually when declining exports are combined with an adverse exchange rate, there is a panic flight of capital. That, to India's credit, has not happened as yet.
Exports, of course, are crucial-not only because they subsidise imports to a considerable extent which in turn are vital for maintaining consumption levels, they also ramp up domestic production. India will need a major boost on this front in the next Budget, which is just a few weeks away.
As the global slowdown continues
The World Bank Group, in its January 2016 Global Economic Prospects report on January 7, warned that a broad-based slowdown across developing countries could pose a threat to hard-won gains in raising people out of poverty. While noting that weak growth among major emerging markets will weigh on global growth in 2016, it said that economic activity should still pick up modestly to a 2.9 per cent pace, from 2.4 per cent growth in 2015, as a modest recovery in advanced economies continues and activity stabilises among major commodity exporters.
The World Bank predicted that India will be a bright spot amid the gloomy outlook for developing countries in the next two years. It said that India is "well positioned to withstand near-term headwinds and volatility in global financial markets" compared with other major emerging economies and predicts it will grow at 7.9 per cent by 2018. So, India would be the fastest-growing developing-country economy, ahead of the next Bangladesh, at 6.8 per cent and China at 6.5 per cent. One of the reasons why India is able to grow faster, according to some observers, is the recalibration of the way it calculates its gross domestic product (GDP).
The World Bank said India would benefit because of a reduction in external vulnerabilities, a strengthening domestic business cycle, and a supportive policy environment. "Progress on infrastructure improvements and government exports to boost investment are expected to offset the impact of any tightening of borrowing conditions resulting from tighter US monetary policy."
Similar predictions came from the International Monetary Fund (IMF) on January 19. The IMF's World Economic Outlook (WEO) Update felt the pickup in global growth has been weak and uneven across economies, with risks now tilted toward the emerging markets. Advanced economies will see a modest recovery, while emerging market and developing economies face the new reality of slower growth. The IMF projected 7.3 per cent GDP growth for India in 2015-16 and 7.5 per cent in 2016-17, levels unchanged from its outlook released in October.
In contrast, the IMF maintained its previous China growth forecasts of 6.3 per cent in 2016 and 6.0 per cent in 2017, which nonetheless represented sharp slowdowns from 6.9 per cent in 2015 and 7.3 per cent in 2014. Brazil is down too, and will remain so with declining Chinese demand. Russia is being pulled down by China as well. With oil prices down from $100+ to almost $30, Russia, which quenches 15 per cent of China's oil demand, is more than feeling the pinch. Overall, the IMF forecast that the world economy would grow at 3.4 per cent in 2016 and 3.6 per cent the following year- both down 0.2 percentage points from the previous estimates made last October.
Growth estimates themselves are shrinking.
The US remains better off, but only marginally. "Overall activity remains robust in the United States, supported by still-easy financial conditions and strengthening housing and labour markets. But there are also challenges stemming from the strength of the dollar, which is causing the US manufacturing sector to shrink marginally," the IMF said.
What's China up to?
Many observers suspect that the situation in China is far worse than it is widely believed. Officially speaking, the growth rate for 2015 is 6.9 per cent, with a target for the coming year of 6.5 per cent-down considerably from the 10.6 per cent of 2010. Actual figures may be still lower. A poll published recently by Financial Times of the Chinese members of global macroeconomic survey firm Consensus Economics put the growth forecast for 2016 at a measly 4.8 per cent.
According to a business sentiment index released by Caixin Media in December 2015, factory employment in China had fallen for 25 months on the trot. The official manufacturing purchasing managers' index (PMI) for December was up slightly at 49.7 compared to November but still below the figure of 50 indicating growth. Caixin's own PMI for December was just 48.2, down from 48.6 in November-the 10th straight month below 50.
China's currency reserves fell by $500 billion last year, and almost $1 trillion has said to have been wiped off share values in the first week of January 2016 alone. The country's debt to GDP ratio has risen by nearly 50 per cent over the past four years, and an analyst even wrote in the South China Morning Post newspaper, "China may have overinvested up to 40 trillion yuan ($6.1 trillion) since 2009. Its physical manifestation is in empty buildings and industrial overcapacity." And according to the Hong Kong-based China Labour Bulletin, the number of strikes and protests more than doubled last year to 2,774 incidents, compared to 1,379 in 2014. Most of the strikes were on account of non-payment of wages. This does spell bigger trouble ahead since the Chinese working class is estimated to number around 400 million.
US stocks, meanwhile, kept tumbling all through January this year. Stephen King, chief economic advisor to HSBC, explained in the Financial Times that contrary to previous experiences-when falling oil prices provided a boost to the global economy, enabling the lowering of interest rates as inflation fell-this time around, with oil prices falling for 18 months, "evidence in favour of an economic nirvana is sorely lacking." He wrote, "These outcomes (the slump in global growth) suggest that falling oil prices are less about shale production or the Machiavellian machinations of oil ministers and more about weaker-than-expected global growth."
Taking this argument forward, another recent article on the BBC website best summed up China's importance to the global economy, "If you're working for a European or Japanese car company and China is an important market, it matters how much spending power the Chinese middle class has. If you live in Nigeria and China is planning a massive infrastructure project, it matters how much money Chinese companies have to spend on that investment. If you're down in a mine in Australia or Indonesia and the iron ore or coal you're extracting is sold to China, it matters whether demand is increasing or slowing. And if you're working in a steel plant in Wales, it matters whether China is flooding global markets with steel too cheap for you to compete with."
The textiles front
The tale of financial woes for China carries well into its textiles and apparel industry.
The statistics released by the country's ministry of industry and information technology (MIIT) in January indicated a decline. The sharply-depreciated yen and euro had a direct negative impact on textile exports, since Japan and Europe have been China's main textile export markets.
Between January and October 2015, the industry saw a positive growth in exports only to the United States, some African countries, South Korea; while exports to other markets dropped. Textile exports to the European Union were $44.86 billion, down by 10.6 per cent year-on-year, exports to Japan were $18.8 billion, down 12 per cent, and exports to ASEAN countries were $29.03 billion, down 1.7 per cent. The reason for the decline is being attributed to labour costs. Many labour-intensive Chinese industries (which includes textiles) have been shifting to Southeast Asian countries where the labour costs are 4-5 times cheaper than in China.
The decline of China's textile exports is being attributed to two factors: stagnant demand in world markets and, because unit prices are down. The latter is on account of wages. When China went on a manufacturing overdrive shortly after joining the WTO in the early 2000s, the wages in mainland China were more or less the same as in, say, Vietnam. But now, according to the country's National Bureau of Statistics, the average wage in 2014 was the equivalent of $8,300 a year. The comparable figure for Vietnam was about $3,000 and for Bangladesh around $1,000. Herein, Vietnam is expected to make the best of the situation, but only after the Trans- Pacific Partnership (TPP), of which it is a signatory, kicks off in a couple of years.
China is already said to be working on a fire-fight plan to stem the rot. The MIIT is expected to release its development plan for the textiles industry in the first half of 2016, coinciding with the 13th Five-Year Plan period (2016-2020). According to the China National Textile and Apparel Council, "China's textile industry will focus on industrial transformation and upgrading and move towards a high-end direction. Given the rapid growth of the automotive industry, textiles for automobile use will embrace huge development in coming years."
Moreover, China is a country known for its aggressive expansion policies. The prospects of an ominous TPP and a sluggish textiles market is making it look outwards. An indication towards this was given by an industry leader to Fibre2Fashion. Frances Chan, chairperson of the Sunshine Group told this magazine her group "is planning to set up its own overseas plant to transfer low-end manufacturing, reduce production cost and avoid tariff and currency risk in export markets." Chan said it was worthwhile to launch a project in Ethiopia, which involved the entire value chain from growing cotton to garment manufacturing. In fact, Chinese businesses have been active in Africa where land is cheap, and labour even cheaper. This, of course, goes beyond just textiles.
Besides all this, China's cotton imports have dropped to their lowest in nine years. Imports by the world's top consumer of the fibre have been slowing as the gap between domestic and international prices narrows and after Beijing reduced the availability of low-tariff import quotas to boost consumption of domestic supplies. China shipped in 188,200 tonnes of cotton in December 2015, down 28.85 per cent from the same month in 2014, trade website cotton.com reported in mid-January citing customs data. The December number brings imports for the 2015 calendar year to 1.48 million tonnes, the lowest level in at least nine years.
The US department of agriculture (USDA) estimates that Chinese cotton imports for 2015-16 would be 1.2 million tonnes, down from 1.8 million in the prior crop year. Others feel this could be lower still, especially with cotton under tremendous pressure from lower synthetic fibre prices. Falling crude oil markets have pushed down synthetic fibre prices by 30 per cent since December 2014.
All this has made China contemplate releasing its massive cotton stockpile. Officials are said to be deliberating the issue, especially since an auction last year had failed to meet its target of 1 million tonnes. The government-administered prices failed to attract buyers beyond a point. China is estimated to hold around 11 million tonnes of cotton stocks, about half of the global total, after a three-year stockpiling programme aimed at supporting farmers. The timing, pricing and volume of future sales are still being worked out. The International Cotton Advisory Committee (ICAC) has forecast China's production of cotton at 5.3 million tonnes for 2015-16, down 19 per cent from 2014-15 and as much as 35 per cent from the record of 8.1 million tonnes of 2007-08.
The bearing on India
One of the reasons why China's slump has not affected India directly (though it certainly has had an adverse impact indirectly) is that Indian businesses are not that intricately linked with operations in that country. This is a factor that will remain in India's favour. Exports, however, will have to depend on global demand. The decline in exports has not so much pinched India as a percentage of imports primarily because of the continuing drop in oil prices. Many oil industry experts believe the rates could well drop to $16 to the barrel in 2016.
What, however, few dispute about is the contention India will need to make its domestic front more robust so as to withstand shocks on the exports front. The department of industrial policy and promotion (DIPP) says foreign direct investment (FDI) surged by about 35 per cent in the last 17 months ending December 2015 compared to the same period a year ago. But manufacturing is not enough; consumption has to go up too. This is probably where a lesson from China lies. Over-capacity and a frenzied export-obsessed strategy have eventually been its undoing.
Overall policies are fine, but what India's textiles and apparel industry badly needs is a set of guidelines and principles: the much-awaited National Textiles Policy. Whether India will overtake China, at least on the textiles-apparel front, is a speculative question. But it could surely do well with a resounding kickstart, which can come with a pro-active National Textiles Policy.