India has to do a lot more to take advantage of China slowdown

India's Chief Economic Advisor Arvind Subramanian was in the midst of delivering a lecture at the India International Centre, New Delhi, on August 31, when he received an update on the country's gross domestic product (GDP) growth rate for the April-June quarter on his mobile phone.

A brief interruption followed, as he scanned his mobile screen to see how India had faired on the GDP front. At 7 per cent, the GDP growth was better than the corresponding quarter of 2014/15, but slower than the 7.5 per cent it had clocked during the January-March, 2015, quarter. However, he decided to ignore the subject.

Resuming his talk, Subramanian continued to revisit and analyse the key postulates of the book 'Eclipse: Living in the shadow of China's economic dominance', he had written four years ago. The discussion that followed the lecture organised by the Institute of Chinese Studies, revolved around China - whether the country, which was perceived as an economic powerhouse a few years ago, had lost steam, and how far the slowdown in China would impact the current global economic turmoil, and what it means for India's economic growth.

Immediately after the event, Subramanian had ducked media queries on how the ruling political leadership would look at the GDP numbers. However, while addressing a press conference on September 2, Subramanian said the GDP numbers suggest that India is moving towards deflation rather than inflation. The indirect hint was quite evident - the money supply should increase and the RBI should act. A demand that has been consistently made by the industry.

The broad picture emerging out of the GDP data, and other macroeconomic indicators, however, was clear. Export growth has been on a continuous decline for eight months in a row. As percentage of GDP, the share of exports has shrunk on a year-on-year basis during the April-June quarter. Factory production has slowed, as indicated by the fall in the Nikkei purchasing managers index (PMI) to 52.3 points in August from 52.7 in July.

In terms of gross value added during the first quarter of 2015/16, the manufacturing sector grew by 7.2 per cent as compared to 8.4 per cent in the corresponding quarter of last year. Official figures point out that private corporate sector growth, which has a share of around 65 per cent in the manufacturing sector, was slow, as estimated from available data of listed companies with the BSE and NSE. It was just 7.9 per cent at current prices during the first quarter of 2015/16, compared to 13.8 per cent in the first quarter of 2014/15.

In short, the numbers do not share the confidence shown either by Finance Minister Arun Jaitley or the country's chief economic advisor. They seem to be sure of India's economic resilience and its ability to hold out and grow in the midst of a China-triggered global economic slowdown. But what is the basis of Jaitley and Subramanian's confidence? Going by the responses Subramanian gave during his lecture, there could be several reasons.

One, as a net importer of commodities, the decline in commodity prices internationally, including that of crude oil can only benefit India. The fiscal leeway it provides to the government, if prudently utilised, can strengthen the country's economic fundamentals. For instance, if the money that would otherwise have gone for importing oil or coal can be channelised to develop renewable energy capacities, India would be less import-dependent when commodity prices begin to move up.

Two, India could be better placed because of its lack of development, rather than its capabilities. China is facing a problem of excess capacity in some areas. Similarly, there is a limit to which developed countries can rely on infrastructure development to trigger growth. On the contrary, sky is the limit for India when it comes to infrastructure growth, and developing manufacturing competitiveness and capabilities.

Three, India's limited presence in the international manufacturing supply chain could be an advantage. The country will not be affected as much as Taiwan if China cuts down its production as Indo-China trade is more about raw material export and finished goods import rather than component supplies. A global economic slowdown could help India develop indigenous capacity to first serve the domestic market, and then cater to the export market.

Four, India can also be seen as an alternative investment destination for countries that are facing an economic slowdown. Just imagine the push India's GDP would get if all the promised investments from China, Japan and the US are materialises.

Further, Jaitley derives his confidence from the government's expectations that its promised economic reforms are on track. It can boost investor confidence and turn India as one of the safest investment destinations. As often said, the Goods and Services Tax (GST) can boost the Indian economy.

However, none of these can happen overnight. "Even if you admit that the projected negative impact (for India) is exaggerated, the country cannot take a position that business-as-usual suits it fine," says Biswajit Dhar, Professor, Social Sciences, Centre for Economic Studies and Planning, Jawaharlal Nehru University. According to Dhar, all macroeconomic indicators suggest the vulnerability of India, rather than resilience. "India's manufacturing sector cannot take anymore shocks. This is the time to lay out a clear road map to develop manufacturing."

Incidentally, some of the isolated responses from India could be regarded as movements in this direction. At least, that is what the response of the India-US Business Council (USIBC) to the central government's decision to avoid levy of minimum alternate tax (MAT), retrospectively, suggests. Hailing Jaitley's announcement that MAT will be applicable only from April 1, 2015, USIBC said it "demonstrates Indias commitment to attracting long-term foreign investment into the country by providing greater tax certainty and ensuring ease of doing business for the global investment community".

If the MAT decision can be considered as a quick fix measure, more longstanding impact will be felt on India's decision to keep itself out of the move to expand the list of products covered under the Information Technology Agreement (ITA) of the World Trade Organization (WTO).

By doing so, India has retained its freedom to provide tariff protection (from cheap imports) to its domestic industry, which manufactures a host of new generation telecommunication products. Being a signatory to the original ITA since 1996, the Centre has no freedom to levy tariff on over 100 telecommunication products. This had resulted in the disappearance of those industries, and the reason why the government was cautious about ITA II.

There is a contrarian view on India's approach towards multilateral institutions, too. Experts, including Subramanian, say that the safest bet for India is to help build multilateral institutions. "At a strategic level, India should be strengthening multilateralism," observes Subramanian.

In fact, the country that gained most from the existence of WTO was China, because it was well prepared to defend its market and flood foreign markets with low-cost products. Therefore, the country's WTO membership enhanced its global access. Times have, however, changed, as we get to hear more protectionist voices from even the US. For India to replicate what China did would be difficult. But if it can, this could prove to be a turning point.

Until then, India will have a strong logic to remain resilient, but it may not have the wherewithal to do so.