Can India capitalise on China's economic slowdown?

When the major economies around the world face challenges, the Indian economy thrives, as evidenced by the most recent GDP figures. Despite multiple speed bumps, such as rising interest rates and an uneven monsoon, India is still ranked above developing countries.

On August 31, the National Statistical Office (NSO) released the data for India's Gross Domestic Product (GDP) growth. The data showed that the Indian economy grew by 13.5 percent in the April-June 2022 quarter, with the services sector showing a strong rebound. The GVA grew by 12.7%.

In comparison, Asia’s third-largest economy grew by 20.1% in April-June 2021-22, 8.4% in July-September 2021, 5.4% in October-December 2021, and 4.1% in January-March 2022.

The April-June GDP figure, on the other hand, falls short of the RBI's projections. The Reserve Bank of India forecasted 16.2 percent GDP growth in the first quarter. The SBI was projected to be 15.7 percent, but neither projection was met. The shortfall was caused by the manufacturing sector's slow growth, which was only 4% in Q1.

However, these figures clearly show that India remained the fastest growing major economy, with China recording 0.4% economic growth in the April-June 2022 quarter. The United States economy shrank by 1.6 percent in the same period, according to reports.

In addition to that, the Indian equity markets outperformed their major Asian counterparts in August. The major Asian indices, the Shanghai Composite, the Kospi, and the TAIEX, have lost 1.56 percent, 0.05 percent, and 0.19 percent, respectively. In contrast, the Nikkei 225 and Jakarta Composite Index gained 0.72 percent and 2.99 percent in the same period, respectively.

Chinese economy is contracting

On August 18, global brokerage firm Goldman Sachs and Japanese brokerage firm Nomura downgraded China's GDP outlook, citing weak demand, uncertainties over China's zero-COVID policy, property woes, and an energy supply crunch. Goldman Sachs lowered its 2022 full-year forecast to 3.0% from 3.3%, while Nomura slashed its full-year projections to 2.8% from 3.3%, according to CNBC report.

Further, China is experiencing the most severe heat wave in six decades, exacerbating a drought that has impacted food and factory production, power supplies, and transport in a vast area of the country. Asia's longest river, the Yangtze River Basin, was considered the worst affected area, with hundreds of millions of people impacted. Experts say the heatwave could be among the worst recorded in global history, the South China Morning Post reported.

Meanwhile, on Thursday, China announced fresh lockdowns in the city of Chengdu and ordered its 21 million people to stay home from 6 pm amid the growing Covid-19 outbreak. Earlier in March 2022, Bloomberg reported that China's lockdowns will likely cost $46 billion a month, or 3.1 percent of its GDP, and the report said the impact could double if more cities tighten restrictions.

The lockdowns have forced many manufacturing factories to shut down. The continued lockdown in China's financial capital Shanghai has affected big companies like Apple and General Electric, which have warned investors about production and delivery problems and lower sales. As lockdowns extended, Apple said that it plans to make the iPhone 14 in India, which came as a big boost for India's manufacturing sector.

India best positioned?

India seems to be enjoying the TINA (There Is No Alternative) factor, as globally all countries are facing churn and India seems to be the best-placed jurisdiction in terms of growth and inflation outlook in FY23. " We share such optimism as China is also facing a bleak outlook on the back of a construction sector meltdown. In fact, "We believe the China story may now be facing clear headwinds and India is likely to benefit from such stark realities over the longer term," the State Bank of India said in its Ecowrap report titled "Frontloading Fed Rate Hikes & China’s Worsening Construction Bubble: Is India Enjoying The New ‘Tina’ Moment In A Checkmate World Embracing Plus One?

Chinese demographers are now predicting that negative population growth in China will be the dominant trend in the coming years for a long time, and improving the overall quality of the population and changing economic development plans are vital to address the problem. With ageing, the size of the family will gradually shrink. As seen in Japan, housing demand will eventually decline in the long run in China, the report said. 

Global tech major Apple’s recent decision to shift part production of its flagship iPhone 14 model for worldwide shipping from India, with a negligible time lag of a few weeks post its slated launch on September 7, bears testimony to such optimism.

The move by Apple, the most recognisable face of tech-infused innovation in the last two centuries, to capture the aspirations of an upwardly mobile population should open the floodgates for other major conglomerates to follow suit, the report added. Interestingly, even as China is grappling with a meltdown in the construction sector, housing unit sales in India in H1 2022 (Jan-June) have reached the highest level since H1 2013.

Low-interest rates and comparatively low home prices, along with the renewed need for home ownership sparked by the pandemic, have been the primary drivers of this growth. Growing by 60% in YoY terms, the sale of 158,705 units during H1 2022 was 19% higher than the preceding period of H2 2021 in seven major cities.

Development activity has risen in tandem with the improved demand despite the increasing cost of input materials and labor across markets. The report says as many as 160,806 units were launched during H1 2022, a 56% increase YoY. Even in sequential terms, launch volumes were a substantial 25% higher than the relatively unaffected H2 2021 period.

On the other hand, home sales in China have fallen for 11 months in a row, the report said quoting official data shows. That is the longest slump since China created a private property market in the late 1990s.

China-Plus-One

As India seems set to overtake mainland China in terms of population, there are also talks growing about the emergence of a new world order where the global chaebols are reinforcing, in a re-calibrated supply chain management effort, the China+1 model, shifting part of their manufacturing to competitive locations in the vicinity that offer skilled labor set and other enablers at a comparatively sweetened price while having a simplified ‘ease of doing business ecosystem, incentivizing competitiveness and innovations both seamlessly, according to the report. 

While there are many suitors for the immense opportunities that these stable investments from global majors promise in the intended geography, from Taiwan to Vietnam to the Philippines to neighboring Bangladesh, “We understand the inherent sweet spots of the Indian economy make out a stronger case for the majority tilting in favor of the largest democracy of ours”, the State Bank of India said. 

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