Chinese Slowdown and Trade Turmoil: Is India Ready to Be the New Engine of Growth?

Today, the world finds itself struggling with a widespread slowdown, deflationary pressures, and the rising threat of recession in several countries. China, the world’s second-largest economy and a major exporter of goods is facing a dual challenge of a global slowdown coupled with weak domestic demand.

In this uncertain economic landscape, India is seen poised like never before to close the gap with China and raise its stature in the global economy. TPCI’s research team takes a preliminary look at India’s five-year trade performance to ascertain where it can close the gap with China over the short term.

China slowdown.India

Image source: Pixabay

China, the world’s second-largest economy and leading exporter of goods, stands on the brink of deflation. The country’s GDP was US$ 18.3 trillion in 2022 with a YoY growth of 3% (the worst on record). While its reopening gathered pace post the government’s zero-COVID approach, it was expected that the economy would quickly brush aside the post-pandemic blues. However, China witnessed lower than expected growth in the second quarter. China’s economy grew at an annual rate of 6.3% in the April-June quarter of the current financial yea, lower than the expected growth number of 7.3% as per a Reuter’s poll of economists.  

The 6.3% growth in China’s GDP from April to June outpaced a 4.5% rate of growth in the previous quarter, according to government data released Monday. In quarterly terms, the economy grew 0.8% compared to the first three months of the year. S&P now expects China to log GDP growth of 5.2% in 2023, down from an earlier estimate of 5.5%. It was the first time a global credit rating agency has cut China’s forecast this year, but it follows lower predictions including Goldman Sachs. 

China’s GDP is expected to slow further in the coming months because of the slack consumer demand in China and the slump in demand for Chinese exports to key partner economies, as their post-pandemic recoveries lose momentum.

One of the major reasons for this deflationary trend is weak domestic demand contributing to the overall slowdown, which is further impacted by falling property prices. Another factor is the shift in foreign direct investment (FDI) inflows. The China plus one strategy adopted by a number of countries, aims to diversify investments into other Asian countries like India and Vietnam, which is also one of the reason for slow down. The manufacturing sector in China has also been hit by weaker demand.

China’s debt distress is another key factor. The country’s debt is nearly 44% of its GDP, and its local governments owe nearly US$ 5.14 trillion, which is a significant amount. Lastly, China is facing a liquidity crunch with limited access to credit. The reduced liquidity has constrained economic activity, leading to reduced manufacturing and potential unemployment.

China's GDP Growth

Source: The World Bank

Impact on trade

The Chinese economy, which is a major driver of global growth, accounted for about a fifth of global trade before Covid. As a result, the slowdown in China is predicted to make matters complicated for global trade flows. The IMF has predicted that the global economy would grow by 3.6% while estimating China’s real GDP growth to be 4.4% in April 2022. However, it has been revised downward from 3.4% last year to 2.8% in 2023, before rising to 3% in 2024. 

China is a leading supplier of critical chemical and industrial intermediates and consumer goods-from electrical equipment to plastics and toys to the developed world. It is also a global manufacturing hub for consumer goods and electronics. On the flip side, it is also a significant consumer of commodities ranging from petroleum products to iron ore and copper. The slowdown will impact global trade in all these products. 

China’s exports dropped 12.4% in June 2023, marking the worst monthly decline in three years. Imports also declined more than expected, down by 6.8% YoY. A Reuters poll of economists had expected imports to decrease by 4% and imports to decline by 9.5%. According to a report by Ibis World in 2023-24, the fastest declining industries in China are Camera Stores (-7.8%), Wired telecommunications (-5.0%), Motorcycle manufacturing (-4.5%), Communication equipment manufacturing (-4.5%), Coal manufacturing (-4.2%), Ship Building (-3.0%), Newspaper publishing(-2.7%), TV, DVD & Video equipment manufacturing (-1.4%), Coal mining (-1.1%) and Camera equipment manufacturing (-0.2%).

Can India be the new engine of global growth?

First off, we must be clear that current Chinese export decline has much to do with the global demand scenario and India has a long distance to travel to replace China. However, it is also true that global companies have taken the China+1 strategy far more seriously in the post-COVID period. This has been followed up by nations as well, an oft cited example of which is the Indo-Pacific Economic Forum. With the backing of policy support, particularly measures to boost infrastructure, launch of the National Logistics Policy, liberalisation of FDI norms, PLI scheme and focus on strategic sectors like electronics and defence, India has made some promising steps towards closing the gap with China in these past few years. 

China has seen a prolonged phase of economic boom over the last few decades, but has been losing its comparative advantage. India’s latest trade numbers are also showing the impact of the global slowdown, but analysts are confident that the domestic market story will stay strong. Ratings agency Fitch raised India’s growth outlook in 2023-24 to 6.3% by the end of June from its earlier forecast of 6%, with profit margins widening by around 220 bp. 

India is regarded as a ‘bright spot’ in the global economy. The country’s GDP has reached US$ 3.75 trillion in 2023, up from around US$ 2 trillion in 2014, moving from the 10th largest to the 5th largest economy in the world. According to Goldman Sachs, India will surpass the United States as the world’s second-largest economy by 2075. It is expected to be the fastest-growing major economy in the world and an engine of global growth, despite global headwinds. With this, experts are confident that it is time for India to enter the league of the “flying geese” in a new era of strong growth this decade. 

A variety of factors, like a stable political dispensation, a focus on reforms, a simplification of tax administration, and schemes like PLI and ‘friend-shoring’ put India in a sweet spot over the next decade, according to a Nomura report. However, a mix of slowing global growth and lagged effects from monetary policy tightening are likely to impede India’s growth prospects in the near term. Nomura notes that banks and corporates in India have ‘significantly’ deleveraged in recent years to clean up clogged balance sheets that had stalled private capex.

A few months ago, India pipped China as the world’s most populous country. This includes one of the largest cohorts of youth (below the age of 15) among the G-20, while 67% of the population is in the working age bracket.

India’s performance in China’s key sectors

Even though we hear a lot of opinions that state how much the needle is shifting towards India when it comes to manufacturing, it is pertinent to see what data says in this regard. TPCI’s research team did a preliminary analysis to ascertain possible sectors where India could focus more intensely in the short term to close the gap with China. For this, we first analysed India’s export performance in the top 20 exported chapters by China at the 2-digit level.

India’s and China’s Common Exported Products 
HS Code Products China’s 5 years CAGR between 2018-2022 China’s Rank in World Exports India’s 5 years CAGR between 2018-2022 India’s Rank in World Exports
29 Organic chemicals 14.3% 1 9.0% 7
84 Nuclear reactors, boilers, machinery 6.4% 1 4.7% 24
85 Electrical machinery and equipment 9.5% 1 17.9% 21
87 Vehicles other than railways 18.9% 2 -1.6% 22
72 Iron and steel 13.3% 1 8.4% 14
76 Aluminium and articles thereof 11.7% 1 18.7% 5
73 Articles of iron or steel 13.9% 1 6.2% 14
62 Articles of apparel and clothing accessories, not knitted or crocheted 1.8% 1 2.2% 6
61 Articles of apparel and clothing accessories, knitted or crocheted 5.5% 1 2.7% 7
39 Plastics and articles thereof 15.7% 1 -4.0% 25
63 Other made-up textile articles 7.8% 1 6.1% 2
38 Miscellaneous chemical products 27.2% 1 0.7% 17

Source: ITC, Trade map

In these export commodities, China has outpaced India in export growth in all but HS 85 (Electrical Engineering & Equipment), HS 76 (Aluminium and articles thereof) and HS 61 (Articles of apparel and accessories, not knitted or crocheted). From another perspective, China is ranked number 1 in all the sectors except for HS 87. Among these, India is ranked among the top 10 in Organic chemicals (#7), Aluminium (#5), Textiles (#2), Apparel and clothing accessories, not knitted or crocheted (#6), and Apparel and clothing accessories, knitted or crocheted (#7). A brief overview of India’s competitive position in these sectors is as below:

  • Organic Chemicals: India is the sixth-largest chemical producing country in the world and the third-largest producer in Asia. The chemicals and petrochemicals market in the country is worth US$ 178 billion and is expected to reach US$ 300 billion by 2025. The country ranks 7th in the global exports of organic chemicals (excluding pharmaceutical products), with a 2.5% contribution to global chemical sales. In FY 2022-23, exports of organic chemicals stood at US$ 21.37 billion and imports stood at US$ 28.97 billion. The lack of availability of raw materials such as feedstocks that include naphtha, natural gas, and power is crucial for the organic chemicals industry. The costs of the aforementioned raw materials are also high in the country.
  • Aluminium: India is the fourth-largest producer of aluminium in the world, with a share of around 5.3% of the global aluminium output. Total aluminium (primary and secondary) demand in India in fiscal 2022 is estimated at 3.9 million tonnes, logging a CAGR of 4-5% over fiscal 2015 to fiscal 2022. It has nearly 10% of the world’s bauxite reserves and a growing aluminium sector that leverages this. India is ranked as the fifth-largest exporter in the world. In FY23, Its exports stood at US$ 9.59 billion and its imports stood at US$ 7.23 billion.Aluminium industry’s major issues associated with the environment include high energy consumption with associated high global warming potential, handling and disposal of huge quantities of solid waste generated, and consumption of large volumes of raw materials (bauxite ore, coal).
  • Textile: The Indian textile industry contributes 2.3% to the country’s GDP, 13% to industrial production, and 12% to total export earnings. The industry stood at US$ 152 billion in 2021, growing at a CAGR of 12% to reach US$ 250 billion by 2025, which ranks second globally. In FY23, total imports accounted for US$ 629.44 million, and exports accounted for US$ 5.65 billion in the same period. Apparel and clothing accessories, not knitted or crocheted, rank sixth-largest in the world’s total exports, and Apparel and clothing accessories, knitted or crocheted, rank seventh-largest in the world’s total exports.The textile industry is facing issues like chemical hazards, a shortage of quality raw materials, rising costs, supply bottlenecks, overdependence on manual effort, Infrastructure problems, and the Issues of an unorganised sector. The government is implementing various

    schemes like the Amended Technology upgradation fund scheme (A-TUFS), PLI, scheme for the development of the power loom sector (Power-Tex), scheme for integrated textile parks (SITP), SAMARTH and national technical textile mission. 

  • Electrical machinery: The electronics market in India is valued at US$ 140 billion, with domestic production accounting for 62% (US$ 87 billion) in FY22. It is segmented as Mobile Phones (43%), IT Hardware (5%), Consumer Electronics (12%), Strategic Electronics (5%), Industrial Electronics (12%), Wearables & Hearables (0.3%), PCBA (0.7), Auto Electronics (8%), LED Lighting (3%), and Electronic Components (11%). The export of electronic goods from India increased from US$ 5 billion in FY17 to US$ 15 billion in FY22, growing at a CAGR of 22%.Rapidly changing technology, short product life cycles, increasing competition, price pressure, access to raw materials, environmental regulations, and changing consumer preferences are the challenges the electrical industry is facing. It is a

    highly R&D intensive industry dominated by few lead firms in few countries and requires consistent innovation. Moreover, India lacks a comprehensive component ecosystem and labour force with the desired skill sets.

The future ahead

India’s position in the world economy is “bright.” It may take coordinated efforts and strategies to help India unlock its potential and create an environment that is conducive to sustainable and inclusive growth if India is to become the world economy’s growth engine.

The above sectors need to be further analysed down to the tariff line level to ascertain more specific product lines where India should focus. While each of the sectors have specific challenges, there are some common ones we find in various research reports. These include:

  • Lack of mega manufacturing clusters.
  • Cost and availability of capital for large-scale investments.
  • Inadequate investments in R&D restrict movement above the value chain.
  • Cost competitiveness issues due to various factors like infrastructure and logistics impediments, certification issues, labour laws, etc.
  • High incentives being offered by competitor countries.
  • Lack of requisite brand equity and matching quality standards.

While progress is made in improving its business environment and mitigating the above challenges, further reforms are necessary to attract investments in areas like information technology, artificial intelligence, biotechnology, renewable energy, and digital services that can create new opportunities and contribute to India’s economic transformation.

India has a labor force that has the potential to fuel economic expansion.  To leverage this advantage, India should invest in education and skill development programs to enhance the productivity and employability of its workforce. This will encourage economic growth, draw in foreign investment, and produce job opportunities. 

Government of India should focus on expanding its trade relations and establishing stronger economic partnerships with other countries. By diversifying its export markets and attracting foreign direct investment, India can enhance its global competitiveness and contribute to the growth of the world economy. 

Additionally, India has the opportunity to lead in sustainable development and green technologies. Investing in renewable energy, sustainable agriculture, and environmentally friendly practices will prepare India for the growth industries of the future, while also protecting its existing ones from new and restrictive legislations like the CBAM.

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