Can the Indian market withstand effects of the Chinese influenza?

China’s stock markets spiralled down further, nine per cent on Monday alone, and this had ripple effects on the stock exchanges far and near. As the Japanese Nikkei-225, the main Japanese stock index, dropped over four per cent, and Bombay Sensitive Index (Sensex) plunged 1400 points (about five per cent), the notional wealth of about Rs3.5 lakh crore was wiped out. The cascading developments can be called the Chinese influenza effect. According to experts, the precipitous stock market nosedive is a signal warning of the slowdown of the Chinese economy; adding to fears that the yuan would be further devalued. Only last week, the yuan was devalued and the measure was described by the Chinese authorities as course correction for the Chinese currency, which everyone believes had been artificially propped up. The devaluation was seen as an attempt to let the yuan find its own market level. 

Chinese experts are arguing that the stock market fluctuations are marginal to the real economy in the country, and that the stock market transactions account for only seven per cent of the Chinese wealth. But the Chinese government is taking enough measures to fight the stock market turbulence. It has allowed pension funds to enter the stock market and is investing up to 30 per cent of its wealth. The Chinese are obviously interpreting the economic problems from their own perspective, and perhaps their view cannot be dismissed out of hand. The Chinese economy has slowed down but this cannot be taken to mean that it is collapsing. There is, however, the clear possibility that after a 30-year unprecedented and sustained growth, China could be entering a long period of slower growth. 

Will the Chinese stock exchange storm impact the Indian economy? Finance minister Arun Jaitley and Reserve Bank of India (RBI) governor Raghuram Rajan have both assured that India is in a position to weather the storm. Rajan has informed that India has enough foreign exchange reserves of $380 billion and that it would use this bounty to fend off any danger to the rupee. It might even seem that the Chinese economic slowdown is some sort of good news for India. But that may not be the case. 

The European Union and North American economies are still in dangerous shallows, and the Chinese troubles have cast a long, dark shadow on the Western economies. India cannot hope to do well until the West recovers. It is true that the Indian economy, unlike the Chinese, does not depend on exports for its growth. But that does not mean that exports are not crucial to the Indian economic story. The argument that Indian economic growth can be sustained through domestic demands alone is not realistic. Export earnings remain vital for Indian growth. 

The temporary advantage that India will enjoy is that of low crude oil prices — which have fallen below the $40 mark — because of the Chinese economy being in the doldrums as well as low demand from the West. The other relief is that the US Federal Reserve would defer the raising of interest rates ensuring thereby the continuity of the foreign fund flows. The fear is that once the Americans slash interest rates, there will be a flight of funds. India will then have to use this window of opportunity to revive the economy, and boost real economic activity, both in infrastructure and manufacturing sectors. 

There is no room to be complacent about the fact that India is the fastest growing emerging market economy, even a few percentage points ahead of China. India’s present growth rate of 7-8% is not good enough. It has to touch the double digit growth rate if the economy is to improve the living standards of the people in a significant manner.