Chinese Slowdown Cheers Some, Worries Many In India Inc

　　China has cast a long shadow on India’s economy. For overtwo decades now, India’s northern neighbour has been the world’s fastestgrowing economy raising global demand for everything — from industrial metalsto agricultural commodities, automobiles and construction equipment.

　　China’s economic growth, at constant prices, slowed down to 7.3 per centin the September quarter, expanding at its slowest pace since the Lehman crisisof 2008. The country now risks missing its official growth target for the fullyear, the first time in 15 years. The slowdown has been attributed to a slumpin the property market that dragged down manufacturing output and investment.This added to concerns about flagging global growth.

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　　According to International Monetary Fund’s World EconomicOutlook, released earlier this month, China is expected to grow 7.4 per cent inthe current calendar year, against 7.7 per cent in 2013. The country’s economyis likely to slow down further to 7.1 per cent in 2015 and 6.8 per cent in2016.

　　“For global commodity producers that were counting on continued rapidgrowth in Chinese demand, this has come as a rude shock. It helps explain thesharp drop in iron ore and coal prices. It might also be responsible for someof the weakness in oil prices. For many of the individual base metals, however,specific fundamentals are playing a more significant role than generic Chinesegrowth; for example, Indonesia’s ban on exports of unprocessed rawmaterials," says Nic Brown, head of commodities research, Natixis, London.

　　These changes are expected to lead to permanently slower Chinese growth,so some commodity markets might have to adjust to a materially differenttrajectory of demand growth.

　　A decline in Chinese appetite for commodities would be felt the most byIndian metal producers like Tata Steel, JSW Steel, SAIL, Sesa Sterlite andHindalco. Lower international prices would hurt realisations and profitability.Integrated players like Tata Steel and SAIL, which have own mines will feel thebiggest impact; while those like JSW, which buy coal and iron ore from openmarket would be the least affected.

　　On the brighter side, a moderation in commodity prices would provide arelief to user industries like automobiles, auto ancillaries, capital goods,consumer durables, tyres and cement. Companies in these sectors could see anexpansion in margins, as raw material costs would decline.

　　“Due to a slowdown in China, the demand from that country for naturalrubber has fallen 30 per cent. This has led to a 15-20 per cent decline inrubber prices across the world. That is a positive for us from the marginspoint of view," says Arnab Banerjee, executive director (operations),Ceat.

　　The worrying part for companies is the risk of a spike in low-costimports, as Chinese manufacturers push their excess production in exportmarkets globally, including India. Tyre and steel makers are already feelingthe pressure of a dip in Chinese prices for their respective products.

　　“As demand slows down in their home market, Chinese tyre makers mightstart exporting tyres at very competitive rates to the rest of the world. TheUS is already planning an anti-dumping duty. A Chinese tyre can be 30 to 40 percent cheaper; and it is good news for consumers. The commercial vehicle tyresegment will be more affected, as consumers there hardly care for brands; theylook for value," says Banerjee.

　　Indian steel manufacturers like JSW Steel and Tata Steel were forced tolower their prices, in line with a drop in Chinese prices. They now fear adumping from across the border. China accounts for nearly half the world’ssteel production and is facing a glut at present, as construction andinvestment has slowed down.

　　This has raised some concern about India’s growth prospects. Since theLehman crisis, China has accounted for nearly a third of incremental growth inworld economy and cushions the impact of a recession in the US and euro zone.China’s share in world gross domestic product growth is expected to fall to afifth by 2016, according to IMF data for 178 countries.

　　This might have some negative impact on India’s export growth, which hasbeen a key driver of economy and corporate earnings growth in the past threeyears. China’s share in India’s merchandise export basket fell to four per centduring the April-June period this year (from 4.7 per cent in the correspondingperiod last year and 6.7 per cent in 2008-09). This coincided with a slowdownin India’s export growth.

　　Imports from China, however, remained strong and accounted for 12.1 percent of India’s total merchandise imports in the June quarter, against 1.3 percent in the same period a year before and 10.7 per cent in 2008-09.

　　But economists rule out an immediate impact of China’s slowdown on India’sGDP growth. “There is no one-to-one correlation between Chinese expansion andIndia’s economic growth. China is still a minor export market for us whencompared with the US or Europe. If growth in the US economy recovers asexpected, the export upside to the US — both for merchandise and IT services —will more than make up for any slack from China," says Devendra Pant,economist & head of public finance at India Ratings.

　　Others see in the Chinese slowdown a stimulus for the Indian economy, witha decline in prices of crude oil and metals. “At the macro level, inflationthrough imports would tend to come down; that will improve cost structures ofcompanies and help them improve their margins — at the time when the economicconditions are looking up. This reduction in commodity prices has been quitefortuitous for India Inc. At a broader level, this can be the starting point ofseriously contemplating a rate cut by the central bank," says D R Dogra,managing director, CARE Ratings.

　　Theimpact of China’s slowdown on India Inc, it mostly appears, would depend on aninterplay of lower input prices, higher competition from cheaper imports and apotentially slower global growth.