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Can Chinese Slowdown risk Indian Economy?
In the year 2014, Chinese economy clocked its slowest growth rate of 7.5% in the last 24 years. Coupled with slower growth rate was thecrash in the Chinese stock market which aggravated the woes for dragon. According to the World Economic Outlook report published by International Monetary Fund (IMF), “Slower growth in China will also have important regional effects, which partly explains the downward revisions to growth in much of emerging Asia.” Since China was one of the most significant engine of growth for global economy, its impact would be felt across the globe including India.
Already the global markets have started feeling the ripple effects of developments in China but India has so far remain untouched by these developments. However, being India’s one of the largest trading partners and second largest economy of the world, sooner or later, slowdown in Chinese economy is bound to affect the Indian economy. Chinese economy has deep financial linkages with the global economy and therefore spill-over effects of its stock market crash will be felt. But indeed the bigger worry than the stock is the slowdown in world’s second largest economy.
While the driver of Chinese growth was the manufacturing boom for the last three decades, over the last few years, Chinese economy was transforming into a consumption based economy. Investments have started falling but consumption is yet to reach that level to make the growth sustainable. Added to this, one child policy is also signalling an upcoming demographic crisis as effective working age population in the country is slowing. Apart from this, the bursting of stock market bubble made the matters worse for the dragon.
Asian Development Bank (ADB) has now reduced the expected growth rate of Chinese economy to 7.0 from earlier estimate of 7.2 in the year 2015. To counter the slowdown, China took measures to contain financial vulnerabilities and remove the excess capacity including in construction, shipping, and renewable energy sectors which had a negative impact on investments and thereby growth.
As far as India is concerned, slowdown in China is a major concern. Some major Indian exports to China include iron ores, slag and ash, iron and steel, plastics, organic chemicals, and cotton. Sluggish demands from China would affect these exports ultimately effecting the growth of these sectors in India. Moreover, in the event of slowdown, China may devalue its Yuan. In such a situation, Indian exports may take a further beating widening the country’s current account deficit. Pharma, IT, auto components, agro products, tourism are other sectors which started showing encouraging results may also see less than expected returns. Weakening of aluminium and copper demand in China may also have some impact on domestic growth of these industries.
However, some benefits are also expected from the development taking place in our northern neighbour. For instance, global manufacturers have started looking for bases in other countries as Chinese growth already reached a saturation point. Provided conducive policy environment and good infrastructure base, India can attract a substantial foreign investment which would fuel the future growth of the country.
Also, sluggish growth in China would mean sluggish demand for oil which may further reduce the global oil prices. It is indeed a good news for India which will not only keep inflation in check but would also reduce the current account deficit. In coming years, when China’s growth rate is expected to fall while India’s will keep on accelerating, the regional power structure may also witness a change where India can see en enhanced role in the region.
Thus the Chinese slowdownalongwith some bad news would also bring several opportunities to fuel its global geopolitical aspirations. It is in India’s interest to insulate the vulnerable sectors and made some serious efforts to make the best use of opportunities arising out of the turbulence in China.
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