China devalued yuan by 1.9 percent, surprising the world. However, the attempt for devaluation was not unexpected to the world. It was the timing, which surprised the world. It was inevitable for China to go for devaluation after the Shanghai Stock exchange crashed in June-July and China’s lackluster effort to save the deflation.

Against the media’s raising alarm, an insight of the current situation from the perspective of bilateral economic relation between India and China, reveals a different picture altogether. India’s export may be tapered by the Chinese yuan devaluation, causing Indian goods costlier for the time being. But, it does not warrant a major or permanent threat to India’s total export. This is because China accounts for a small share in India’s total export. In contrary, devaluation causing cheap Chinese goods may impart a favourable impact on India’s wide trade deficit with China.

China’s share in India’s total export is 3-4 percent only, whereas its share in India’s total import is 13-14 percent. India’s import from China is six times more than its export to China. During 2014-15, India’s export to China was US $ 11, 935 million and import from China was US $ 60,408 million. Given the import outsmarting export, the cheap imports from China will result lesser outgo of foreign exchange, which will help to offset the losses of export. Further, since the magnitude of import surpassing export is high, the cheap imports will not only offset the loss in exports to China, but will also help in offsetting the wide trade deficit partly between the two countries.

The fear on export front by yuan devaluation is exaggerated, if the Indian basket of export to China is seen. Cotton is the major item of India’s export to China. It accounted for 19 percent in India’s export to China in 2014-15. There are few competitors in the world to Indian cotton, which can meet China’s requirement. In this sense, China is unlikely to curb import of cotton substantially from India, even though Indian cotton becomes costlier.

Paradoxically, the cheap imports from China, owing to yuan devaluation, will likely bolster Indian electronic industry. Currently this industry is buoyant with spurt in domestic demand. It received a big pat from Modi government after India is envisaged to be digitized and the concept of Smart city has been inducted.

Electronic industry depends on components and parts. China is the biggest supplier of components, parts and equipment to India. Over 50 percent of the imports of electronic parts, components and equipment come from China. The revolution of mobile manufacturing was spearheaded by China, through imports of component and parts. Cheap imports from China is likely to gear up the electronic industry in the country. More importantly, the cheap imports will make mobile phones and computer more cheap and viable even for the poor people in the country. At present India is the second biggest market for mobile phones.

Paranoia (fueled by media) griped the country that devaluation would increase Chinese imports and hurt Indian manufactures. This has to be viewed from dual angle. Over one-fourth of imports from China includes mobile phones and electronic component and parts. Cheap imports of electronic component and parts will accelerate India’s manufacture of electronic equipments instead, as India lags in manufacturing these items. Almost the entire requirement of integrated circuits is imported. As regards final products, such as mobile phones, whose requirement is largely met by imports ( about 67 percent), the big investments will help India.

China is on the brink of deflation. The capacity utilization in major sectors fell to 70-72 . percent. Concerns are looming large that the prices will dip further with the excess capacity widening. In between November 2014 and May 2015, People’s Bank of China dropped interest rates thrice. But, it failed to re-jig the demand

Bleak hope lies on the resurrection of the Chinese domestic demand, owing to yuan devaluation. China is an export base economy. The rise in domestic demand is commensurate to export. It is unlikely that yuan devaluation can make any breakthrough in China’s export, which was languishing after Lehman shock. The major markets EU is engulfed by deflation. The USA is under the grip of uncertainty. The contagion impact of the global recession will continue , leaving less room to resurrect the export despite the Chinese currency dips .

China is the world’s biggest importer of industrial intermediates and material to support its growth in manufacturing. China’s import tumbled since past two years, owing to lackluster growth in export. In China, import declined by 15 percent in 2014. Devaluation of yuan will add to the woes of the Chinese manufacturers, who are dependent on imported industrial intermediates and material.

Saddled by the sagging domestic demand (due to deflation), China is feared to face an economy of hollow investment, similar to Japan. Bolstered by huge cash reserves, Chinese investment is on the binge for overseas investment. China has emerged as the third biggest foreign investor in the world in 2013. So far, Chinese overseas investment has always been concentrated in natural resource sourcing countries, such as in Australia and Africa. Now, with the lackluster international demand and sagging domestic demand, China is looking for investment in manufacturing overseas.

India is the target country for Chinese investment. China pledged US $ 20 billion investment in Indian infrastructure development in the next five years. Chinese yuan devaluation will open up a new gate for Chinese investors in India to set up assembly type manufacturing facilities after procuring cheap parts and components from China. It will gear up it’s offer for high speed trains, bullet trains and development of Indian railway make Modi’s dream of “Make in India” a success. (IPA Service)