NEW DELHI: The current Chinese economic crisis may not blow away India, but it certainly can cause a few scares to the policymakers, feel experts. As investors leave China, India can expect some of those investments flowing to India, but experts see depreciation of the Chinese yuan creating volatility in the currency market, posing challenges for India. India’s lower external debt and relatively strong fiscal situation may also come as a shield against the crisis playing out in China.
Lekha S Chakraborty, an economist, asserts that India’s fiscal stability is secure due to its minimal reliance on external financing, unlike other countries such as Sri Lanka and Pakistan. “With India’s deficits primarily financed through domestic bond financing, the impact of China’s economic turmoil on India’s fiscal is expected to be limited,” Chakraborty said.
Madan Sabnavis, chief economist with Bank of Baroda, believes that while the real economy may not be significantly affected, some investment could potentially flow towards India as a result. Nonetheless, he cautions that the depreciation of the Chinese yuan might create volatility in the currency market, posing challenges for India. China is facing a massive debt crisis across sectors.
“This combination of factors has created a vicious cycle of falling demand and rising unemployment, potentially leading to lost decades, similar to Japan in the 1990s,” feels Ajay Bagga, a capital market expert. Bagga warns of capital outflows from emerging markets, including China, as investors seek safer returns in US money market funds or treasury bonds.
India runs a trade deficit with China. India imported $98.5 billion worth of goods and services in 2022-23 compared to $15.3 billion worth of goods and services it exported to its northern neighbour. The economic crisis in China might help India capitalise on opportunities within the Association of Southeast Asian Nations (ASEAN) region, where China has a major role to pay as a stakeholder.
Deepanshu Mohan, Associate Professor of Economics & Director, Centre for New Economics Studies, Jindal School of Liberal Arts and Humanities, OP Jindal Global University, highlights India’s potential to boost exports to ASEAN countries, particularly in manufacturing and service-based sectors. “By implementing favourable policies to bolster service-based exports and addressing the trade deficit, India can navigate the impact of the Chinese economic crisis and enhance its economic prospects,” Mohan said.
As per experts, while the Indian economy may experience temporary ripples from the Chinese crisis, a decline in trade, and a significant trade deficit, it possesses the internal financing mechanisms, export diversification potential, and opportunities in ASEAN markets to weather the storm.