The People’s Bank of China on Tuesday devalued its currency by 1.9% to prop up the country’s exports, which constitute 30% of its GDP. While China is the world’s largest exporter, accounting for 14% of global exports, overseas shipments have slumped because of weak global demand and fall in commodity prices.
India’s exports, which have contracted for seven straight months to June 2015, are likely to come under further pressure. The devaluation of the yuan will hurt India’s trade competitiveness in areas such as textiles, petroleum, chemicals, leather goods and gems & jewellery, where both countries compete in the US, EU and Asean. If the rupee is not able to keep pace with the yuan, China will further dump goods into the Indian market, widening the trade deficit. India’s trade deficit with China has grown from $19 billion in FY10 to $48 billion in FY15 because the bulk of recent imports from the country has been electronic products, machinery, mechanical & metallurgic and chemicals. Moreover, Chinese demand for Indian goods will contract further due to the decline in the overall demand in the world’s second largest economy.
Through the Make-in-India initiative, the government will have to revive an export-oriented manufacturing policy and make Indian shipments more competitive in the global market.