Mumbai: India is unlikely to benefit much from the ongoing trade frictions between the United States and China due to the stark difference in the nature of commodities exported by India and China to the US. For instance, pharmaceutical products, and gems and jewellery accounted around 30 per cent of the Indian exports to the US, while electronic goods and capital goods accounted 47 per cent of the Chinese exports to the US in 2018.
According to India Ratings and Research, the rise in trade tensions between the US and China could lead the latter to guide its exports towards emerging markets (EMs). In the past, China has showcased such tendency and dumped its products at predatory rates in many markets including India. This could potentially disrupt the demand-supply dynamics in the Indian domestic markets, especially for products such as electronic goods, iron and steel and organic chemicals.
The agency said that in particular, India's share of imports from China in total imports of steel, polymer and capital goods could potentially increase as Chinese exports to the US start losing traction. The impact could percolate through lower international prices, thereby putting pressure on domestic prices due to diversion of supply from China to other importing countries. The agency expects demand-supply dynamics in these sectors to get skewed unfavourably over the medium term. Nonetheless, the impact is difficult to quantify at this point in time and will be contingent on the Chinese production/capacity utilisation levels, global demand-supply scenario and a host of other evolving factors.
Rise in US inflation could affect capital flows—Chinese exports accounted about 18 per cent of the total US imports in 2018, representing 2.34 per cent of the US GDP. Given the substantial share of Chinese imports in comparison with the size of the US GDP, lower imports or a rise in the cost of imported goods could stimulate inflationary pressures in the US. This could provide fillip to the US credit market yields, which in turn could push up discount rates and reduce the arbitrage opportunity for US investors, resulting in weaker foreign portfolio investment (FPI) flows to emerging markets including India said the agency.
Rupee could weaken—A fall in Chinese exports to the US could potentially put downward pressures on the Chinese yuan. A likely devaluation of the yuan could stimulate a competitive depreciation in the Indian rupee, failing which the competitiveness of Indian exports could be affected said the rating agency.
The rupee has lost just about 0.3 per cent so far in 2019 as the currency had gained on the back of large foreign portfolio inflows earlier in the year.
With Chinese industrial production continuing to grow at around 5 per cent and Chinese exports to US contracting persistently, over the last few years, Chinese exporters have started penetrating into alternate markets. Hence, imports by other
Asian emerging markets from China grew 20.70 per cent in 2018 vis-à-vis 12.75 per cent in 2010. This has been catalysed by the Chinese manufacturers' ability to undercut domestic manufacturers in these markets, resulting in lower market share for the domestic players in the EMs.
