The yuan’s devaluation by nearly 2%, announced by China’s central bank on Tuesday with an intent to restore the country’s waning export prowess, could not have come at a worse time for India, given that its overseas shipments had contracted for the seventh consecutive month in June and some of its robust industries like steel and tyres are already reeling from cheaper Chinese imports.
The surprise decision by the People’s Bank of China might even force the Reserve Bank of India to reflect anew on its monetary policy and exchange rate stances, analysts said.
“With the Chinese devaluation that has happened, import pressures could worsen,” Koushik Chatterjee, group executive director and chief financial officer, Tata Steel, said in a call with analysts.
While a pick-up in the country’s investment cycle was hard to come by, the prospects for India’s exporters had been grim even before China’s move with world trade expected to grow only by a sluggish 3.3% this year and 4% in 2016.
Exporters said the yuan devaluation will not only hit Indian companies’ realisation from exports to China but would also make Chinese products more competitive than Indian items such as man-made fibres, garments, gems and jewellery, steel and organic chemicals in the international market. “It (yuan devaluation) should have some impact on our exports as exports from China will be cheaper. The rupee is stronger than most other currencies against the dollar,” finance secretary Rajiv Mehrishi said. He said FDI into the country could also get hurt by China’s decision.
The threat from a devalued yuan — Tuesday’s was the currency’s sharpest one-day fall since a massive devaluation in 1994 when China aligned its official and market rates — comes at a time when the Modi government, through its Make In India initiative, is trying to perk up the country’s manufacturing sector.
DK Nair, secretary-general of the Confederation of the Indian Textile Industry (CITI), said: “The devaluation of the yuan will make China even more competitive, at least in our largest export markets, the US and the EU. As such, Indian exporters are made to pay duties in the US and the EU for shipping out textile products and garments whereas many of our competitors have zero-duty access to such markets, and China’s move will just make the matter worse for us. Also, Chinese imports would now become more expensive, which will further hurt our exports of cotton and yarn, as the neighbour is the biggest buyer of Indian yarn and cotton.”
“The yuan devaluation may lead to large-scale dumping of Chinese products in India and we have to keep our trade protection measures ready to address such an eventuality,” said SC Ralhan, president, Federation of Indian Export Organisations.
India’s trade deficit with China ballooned from just $1.1 billion in 2003-04 to a whopping $48.4 billion in 2014-15, or more than four times India’s exports to China ($11.9 billion) in the fiscal. The trade deficit with China made 35% of India’s overall trade deficit of $137.4 billion in the last fiscal. The yuan devaluation will lead to higher imports from China (it was worth $60.4 billion last fiscal) and swell India’s trade deficit further, warned Ralhan.
Commerce ministry data show that China leads the list of countries against whose products India has initiated anti-dumping investigations and imposed anti-dumping duties. Between 1994 and June 2014, there were a total of 166 initiations against products from China (the European Union came a distant second with 80) and duty was imposed on 134 products (EU was second with 64).
However, there is a silver lining. According to Joe Thomas Karackattu, assistant professor at the China Studies Centre at IIT Madras, “As for India’s resource-based exports (largely) to China, there is a greater push in China to stimulate infrastructure construction and other projects as the Chinese government plans to issue 1 trillion yuan worth of bonds over the next three years. Unless the Chinese economy weakens considerably there is no threat of our exports trailing in the medium term.” He added, “Of course, rebalancing the trade between India and China and expanding the trade basket as a medium term goal remains imperative.”
New Delhi has time and again taken up with Beijing the issue of burgeoning trade deficit, the innumerable barriers faced by Indian companies in getting market access in China and the delays in the assured Chinese investments into India. Total FDI flows from China to India during April 2000-February 2015 were just $1.1 billion (or a minuscule 0.44% of the total $256 billion worth total FDI inflows into India during the 15-year period).
After decades of export-led growth and enthused by the Modi government’s Make in India initiative, China had promised to shift some of its production to India. During his India visit in September last year, Chinese President Xi Jinping had committed investment of $20 billion in India over five years and agreed to provide greater market access to Indian products. However, there has been no major headway on this; during Modi’s visit to China in May, the Indian side took up the matter with Beijing.
As for the Indian steel and tyre industries, a devalued yuan would mean a further squeeze on their margins and sales as imports from China could surge further to an extent even protective measures like anti-dumping duties will have little effect. In FY15, India’s steel imports stood at 10.1 million tonnes (mt), which was not only 71% higher on a yearly basis but an all-time high. During April-June this fiscal, imports at 2.5 mt were up 52%, with imports coming mainly from China. Industry executives said that of the total steel imports, the share of Chinese imports is around 30-35%, which could go up now. Chinese steel is cheaper by around $80 per tonne compared to Indian steel.
Seshagiri Rao, joint managing director and group chief financial officer, JSW Steel, told a business news channel that the government now needs to take swift action against imports as the yuan devaluation is only adding more fuel to the fire.
Similar is the demand from the domestic tyre industry. “The tyre industry is faced with serious problems of cheaper imports from China. We see this turning into nothing short of an alarming situation,” said Rajiv Budhraja, secretary general of the Automotive Tyre Manufacturers Association.
The domestic textile industry, CITI’s Nair said, was reeling from volatile raw material prices, poor demand and the withdrawal of certain export incentives in the foreign trade policy for 2015-20. China typically makes up for roughly 40% of India’s yarn exports and around 70% of its cotton shipments. Indian yarn, fabrics and made-ups and garments attract export duties of 4%, 5% and 12%, respectively, in the EU, while in the US, Indian yarn attracts a 7% export duty, while a 10% duty is imposed on fabrics and made ups and 17.5% on garments.