US-China Trade Spat: Where does India Stand?

• HDFC
• 21 Aug 2018
• Knowledge Centre

HDFC, Tester

With trade tensions escalating between China and the US, the impact on India is a cause for worry. The burgeoning strain doesn't only affect only the two economies. It is already spilling into other countries, including India.

 

China is a large importer of base metals. Owing to this, the fast-escalating trade war is expected to have a negative impact on the price of this commodity, which in turn could impact India. This can be seen in the case of crude oil too. Information gathered from Wood Mackenzie, a research and consultancy firm, reveals that if China stops buying crude oil from the US, the price of the commodity could fall. This, in turn, would be beneficial for India.

 

Impact on Exports

 

A CARE Ratings report states that a trade war would impact India’s exports, as it could lead to lower demand and higher costs. According to the report, “Such tariff wars come at a time when the world economy is just getting out of a slow growth phase. If global trade volumes shrink on account of this, our exports are bound to be buffeted. The expected double-digit growth in exports in FY19 might not happen.”

 

However, in the long term, there is a possibility that the lessening of China’s exports to the US could benefit India. It would be particularly beneficial in markets in which the country has a stronghold - textiles, garments, and gems & jewelry.

 

An article in the Business Standard quotes Devendra Pant, Chief Economist at India Ratings and Research as saying, “Exports depend more on global demand than the currency rate, and India's exports are broadly expected to remain stable and rise over the next financial year. But, significant global developments such as this might negatively affect the process.”

 

Volatile Currency

 

Historical data reveals that trade battles have affected currency markets significantly. However, experts predict that the long-term view for the domestic currency is positive. The previous year has witnessed a largely stable run of the Indian Rupee, which is expected to strengthen in the long run. “Apart from the Rupee and the Chinese Yuan, most other currencies of Asian competitor nations have depreciated, and are expected to continue doing so,” said Mr. Ajay Sahai, Director-General of the Federation of Indian Export Organisations.

 

In these circumstances, it is a given that the Indian economy will not be spared the ramifications of a full-blown global trade war.

 

A report titled 'India Consumer Close-Up' by Goldman Sachs says that one saving grace for India is the pattern of domestic consumption in the country. The report says, "We believe most of the new generation of India's youth will first fall into urban masses, a cohort that is 12.9 crore people today. The expansion of the urban masses, both in size and income levels, will be the key driver of India's consumption story.”