Samuhik Nished (Collateral Damage)

In last few days you might have observe huge volatility not only in Indian Stock Exchanges but across the globe and agitation amongst investor community. Sensex crashed more than 1600 points in last week on 24th August, its biggest fall since 2008 crisis, not because of domestic factors but acknowledging the global rout triggered by Chinese policy maker’s effort of intentionally devaluing its currency by about 4 percent and worst Purchase Managerial Index (PMI) of around 47 since financial crisis of 2008. PMI is economic health indicator of manufacturing sector of any economy, if greater than 50 signify the expansionary phase in economy while less than 50 signify contractionary economy.    

Impact on Indian Economy:

1. Indian has trade deficit (imports are greater than exports) and policy makers are pushing hard to turn the table from a deficit to a surplus economy by providing various kind of incentives to exporters. China is export oriented country with a market share of around 14% in global export. As we know China is in trouble (For various reason which are out of the context of this blog) and in order to give boost to its derailed export oriented industry Chinese central bank devalued its currency, making its product/services even more competitive in global market, in turn raise trouble for Indian exporters.
2. On other hand, devaluation of Yuan make Chinese product more competitive in India as well. And if internal policy maker don’t intervene and save domestic manufacturers (electronics, machines, iron, steel etc.), may kill Indian domestic industry.
3. China is one of the biggest trading partner of India only second to UAE with total trade of ~ $80 billion at a deficit of ~63 billion dollars. Of the total export of India to china constitute ~ 53% of raw iron. And slowdown in China because of its falling internal demand will impact our iron industry and indirectly will have its repercussion on other industries as well.

Even though our fundamentals are strong, have enough reserves along with the impetus provided by “Make in India” campaign, we are in much better health than most of other emerging nations still feel the heat if dragon falls (China is second largest economy in world).