In the middle of a raging drawing-room debate on the Kashmir ‘issue’ and the Central government’s latest macho response to it, a friend remarked, what seemed back then an inane and out-of-context statement, “Aur bhi gham hai duniya mein Kashmir ke siwa... (The world has many other pressing issues besides Kashmir). The sharp depreciation of the Chinese currency Yuan can be quite disruptive and shouldn’t we discuss that too?”
My immediate response was that of annoyance at his ‘diversionary’ tactic. “How can we discuss anything but the ‘historic’ decision on Kashmir?” I asked myself. “I do not fully understand what you want to say. Will you please elaborate?” I said.
Trade War Means Sluggish Global Growth, Hurt Exports
He stayed calm, and gave me a long lecture on why the Yuan devaluation should worry us.
“When do you see key global market indices like Dow Jones, Nasdaq and S&P falling as much as 3-3.5 percent? It happened the day Yuan fell in excess of 1.5 percent. It signals further escalation in the US-China trade war,” he said.
It also means more disruption in cross-border trade that can potentially push many countries into recession. Since we (India) have already been struggling with our exports for years now, the latest escalation is going to be yet another dampener,” he further argued.
Not in the mood to give up easily, I fired yet another question: “The impact of sluggish global growth is all too obvious and we saw it coming. In what other ways will the Yuan depreciation impact us?”
He took me back to 2015.
Sometime in August 2015, the People’s Bank of China cut its reference rate for Yuan by a whopping 1.9 percent in one go, the steepest fall since 1994.
Global markets were in a tizzy and our exports nosedived in the subsequent months. In fact, our exports could never stage a recovery after that.
China is Our Competitor
There are certain sectors, textiles being one of the prominent ones, where we compete with China directly in the global market. While China rules the segment with a global market share close to 34 percent, India is its distant second with a market share of nearly 6 percent.
Now that the Chinese currency has depreciated further, it means cheaper Chinese textile items in the global market. Can our textile products survive against such odds?
I remember meeting a high-profile executive director of a leading textile company in Ludhiana right after the big slide in the value of Yuan in 2015. He was stunned and absolutely clueless about the road ahead while competing in the global market.
The day I met him, he was getting ready to rush to Delhi to have consultations with the officials of the Union Commerce Ministry. His apprehension was not entirely unfounded.
Textile exports have been sluggish since then. In fact, apparel exports have fallen in the last two years.
And with the recent round of the sharp devaluation of Yuan, things seem unlikely to improve anytime soon. Incidentally, the textile sector generates a lot of formal and informal jobs.
Trade Deficit with China to Rise Further
My friend further elaborated that sharp devaluation of Yuan is a threat to whatever life is left in the Indian manufacturing sector.
He said, “As it is, we run a huge trade deficit, to the tune of $53 billion, with China. While our exports to China are a paltry $17 billion, we import an excess of $70 billion worth of goods and services from China. Following the devaluation of Yuan, Chinese goods and services will become even cheaper. What if our import goes up sharply? Our manufacturing sector will become uncompetitive and the trade deficit will rise sharply. Can we afford that?”
At the end of it all, I felt thoroughly dejected.
If exports decelerate further and, the auto sector is down and out, the financial sector is battling unprecedented NPA crisis, rural distress is getting entrenched and the NBFC mess is nowhere close to resolution, where will the much-needed jobs come from?
I couldn’t sleep a wink that night.
The front page report the following morning in the Economic Times made me even more upset. It said that the bellwether fast-moving consumer goods (FMCG) sector too, has been witnessing a slowdown for four quarters in a row.
While the growth in value terms has dropped from 16.5 percent in July-September 2018 to 10 percent in the quarter ending in June this year, the deceleration in volume terms has been from 13.4 percent to 6.2 percent in the same period.
When people go slow in buying something as basic as soaps, shampoos, toothpaste and cooking oil, you know that an economic slowdown has taken root. And the issue certainly deserves our attention, now that we have spent a lot of time on Article 370.
After all, paapi pet ka sawal hai (Our basic needs hang in the balance).
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