The sharp
decline in the yuan could have far-reaching consequences on India’s
trade. Already, as the chart shows, India’s trade deficit with China as a
percentage of its economic output is at a decadal high of 2.4%. That
means India’s trade deficit with China is 1.5 times the current account
deficit, calculates Ambit Capital Pvt. Ltd.
“Any country with whom you trade, if the trade is lopsided, it is worrying,” says Sunil Sinha, economist at India Ratings and Research Pvt. Ltd.
The recent fixing of the yuan at progressively lower levels raises fears of further devaluation in the coming months. The yuan slide may lead to currency wars as other Asian countries rush to devalue to protect their exports and improve their competitive advantage vis-à-vis goods manufactured in China.
Additionally, the yuan devaluation could have serious implications for the Make in India campaign, pitching India as a manufacturing destination.
Saurabh Mukherjea, head of institutional equities at Ambit Capital, expects India’s trade deficit with China to increase further from 2.4% if the yuan depreciates around 10-11% in the next two years. Macquarie Capital Securities (India) Pvt. Ltd expects the yuan to depreciate by around 3-5% in 2016.
“India does not have its own manufacturing base, China is our workshop,” said Ambit’s Mukherjea. The weakening of the yuan may hurt Indian manufacturing, which has a 16% share in India’s GDP, as it faces a competitive challenge from China.
What can be done? Mainly two things. One, allow the rupee to depreciate to 74-75 against the dollar; this will boost India’s export competitiveness and prevent the trade deficit from bloating further. On Thursday, the rupee closed at 66.93 a dollar,
However, a weakening rupee could destabilize financial markets as foreign investors pull out money from India, said Mukherjea. And that’s not taking into account its impact on inflation.
The second solution is imposing punitive tariffs on Chinese imports. The Indian government has already imposed tariffs on steel products, tiles and tyres. However, this will create a risk of the Chinese imposing retaliatory tariffs, which could hurt India’s exports to China. It will also affect companies that import products from China, making it expensive for them to manufacture the final or the end product, said Mukherjea.
Clearly, dealing with this dilemma is not going to be easy.
“Any country with whom you trade, if the trade is lopsided, it is worrying,” says Sunil Sinha, economist at India Ratings and Research Pvt. Ltd.
The recent fixing of the yuan at progressively lower levels raises fears of further devaluation in the coming months. The yuan slide may lead to currency wars as other Asian countries rush to devalue to protect their exports and improve their competitive advantage vis-à-vis goods manufactured in China.
Additionally, the yuan devaluation could have serious implications for the Make in India campaign, pitching India as a manufacturing destination.
Saurabh Mukherjea, head of institutional equities at Ambit Capital, expects India’s trade deficit with China to increase further from 2.4% if the yuan depreciates around 10-11% in the next two years. Macquarie Capital Securities (India) Pvt. Ltd expects the yuan to depreciate by around 3-5% in 2016.
India’s imports
from China were around $60 billion in FY15, while exports were around
$11-12 billion, leaving a trade deficit of $48 billion. The trade gap
has widened at a time when the rupee has weakened by around 55% against
the yuan in the past decade. In FY16, from April-November, the trade
deficit with China stood at $36 billion.
Around one fifth of India’s non-oil imports are from China. India
sources products ranging from toys to high- and low-end consumer
electronics and industrial goods from China.“India does not have its own manufacturing base, China is our workshop,” said Ambit’s Mukherjea. The weakening of the yuan may hurt Indian manufacturing, which has a 16% share in India’s GDP, as it faces a competitive challenge from China.
What can be done? Mainly two things. One, allow the rupee to depreciate to 74-75 against the dollar; this will boost India’s export competitiveness and prevent the trade deficit from bloating further. On Thursday, the rupee closed at 66.93 a dollar,
However, a weakening rupee could destabilize financial markets as foreign investors pull out money from India, said Mukherjea. And that’s not taking into account its impact on inflation.
The second solution is imposing punitive tariffs on Chinese imports. The Indian government has already imposed tariffs on steel products, tiles and tyres. However, this will create a risk of the Chinese imposing retaliatory tariffs, which could hurt India’s exports to China. It will also affect companies that import products from China, making it expensive for them to manufacture the final or the end product, said Mukherjea.
Clearly, dealing with this dilemma is not going to be easy.
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