China raises interest, India's
hopes By Indrajit Basu
KOLKATA - Although a decade of hectic economic
growth in China has been the engine of growth for global
trade - India's included - its runaway economic boom has
also been causing quite a bit of discomfort to India's
own economy. For instance, while it is true that by
sucking in commodities from the global market China has
helped the growth of India's exports, it is also true
that the Middle Kingdom's insatiable consumption caused
an unprecedented bull run in global commodity prices
that not only raised the prices of India's own
industrial inputs, but also ushered in an era of
inflation.
Much to the dismay of its economic
planners, India's inflation rate has seen a consistent
rise in the past six months - after almost five years of
tranquility on the price front - with 2004 poised to end
with an average inflation rate of over 7%, compared to
less than 5% for the whole of 2003. So when China
recently started taking monetary steps to cool its
scorching economic growth, India's economic planners
were more than just glad, they were relieved.
A couple of weeks back, the People's Bank of
China raised - for the first time in nine years - its
lending and deposit rates. It also made some key changes
to the manner in which Chinese banks lend to
industry, which includes restricting lending to the auto, steel
and real estate industries. But even as
the International Monetary Fund fears that a slowdown in China
could slow Asia's growth (the IMF estimates that a
10-percentage-point decline in China's import growth following the
slowdown in investments would slow Asia's growth by 0.4
percentage point), Indian economists firmly believe
that a slowdown in the world's fastest growing economy
would actually help India.
China's double-digit
growth rate over the past decade has pushed up the
demand, and prices, of critical raw materials like crude
oil, steel, aluminum and copper in India. But even as
they experienced a rise in their input prices, not many
Indian manufacturers were able to raise the prices of
their products to cover the rise in costs because of
competition. So even as a part of the Indian economy
gained from China's phenomenal growth, a significant
section suffered.
But for corporate India, the
Chinese interest cut has wider implications than just
commodity prices. An analysis of second quarter (ending
September 2004) results shows that apart from higher
input costs, Indian companies are also suffering from
higher interests, or borrowing costs. Again, China's
surging economy is indirectly responsible. The Reserve
Bank of India, the country's central bank, feels
inflation in recent months has been almost entirely due
to the rise in prices of just four commodities - crude
oil, iron ore, steel, and coal. Stripped of the effects
of these, India's inflation would be a manageable 4.2% -
a rise of a mere 40 basis points compared to inflation a
year ago. Hence, in order to contain what it calls
"imported inflation" - the increased prices of these
four commodities globally is primarily contributing to
the inflation within the country - the Reserve Bank of
India (RBI) has been talking about tightening the money
supply by raising interest rates. To tighten the
availability of easy money, it raised its repo rate (the
rate of instruments that RBI sells to Indian banks on
repurchase agreements) by 25 basis points the same week
interest rates were raised in China, thereby sucking out
about US$1 billion at once from the country's monetary
system.
Though Indian banks have not started
raising their lending rates for corporate India just yet
- only retail loan rates have risen so far - RBI's
tightening of money supply and the interest rate hike in
the consumer sectors have already raised yields in the
local bond/debts, which in turn have raised borrowing
costs for Indian companies. For instance, in
mid-September, a 90-day commercial paper (a borrowing
instrument) for a company with the "highest safety"
rating came for 4.9%. By end-September, that rate rose
to 5.14% and by mid-October, it shot up to 5.3%. With
China hiking rates, corporate India is hoping the RBI
won't need to raise its repo rate again soon and that in
turn would help in keeping the country's borrowing cost
stable for a while.
A Chinese slowdown would be
good for the rupee too as lower oil prices would boost
the country's balance of payments. Moreover, higher
interest rates in China could be a prelude to the
long-anticipated revaluation of the yuan, which will
remove the pressure on other Asian central banks to
defend their currencies, allowing them to move up. That
in turn, hope experts, will bring down prices of Indian
imports even further, thus reducing costs.
Besides corporate India, the country's stock
markets see a positive spin-off as well. Market sources
say that while China slows down, India's attempt to step
up its economic growth rate to over 7% could force
global investors, who have pumped in huge funds in the
Chinese economy, pay more attention to India.
"Continuing reforms in India are mostly driving FII
[foreign institutional investors] inflows," says Vallabh
Bansali, chairman of merchant bank Enam Financial.
"India's capitalization is growing to a respectable size
too thanks to recent listing of large companies [TCS,
ONGC, NTPC]. FIIs would be forced to increase their
allocation of funds to India." Already, FII investments
in India have crossed $6 billion in 2004, which is just
$500 million short of last year's record figure of $6.6
billion. Market sources say if China slows down, this
year may witness the biggest ever inflow of FII
investments.
Still, there is a downside to the
Chinese rate hike; if China's economy softens, it would
kill India's hopes for ever-growing bilateral trade.
Experts had predicted that bilateral trade, which has
been growing at almost 100% each year for the last two
years, could reach $10 billion in 2005, instead of the
original estimate of 2010. Perhaps India will have to
push it back by a few years after all, some now fear.
But according to a study of the impact of a slowdown in
China's economy on Asia by Credit Suisse First Boston,
even if that happens, "it would hardly have any impact
on India's economy since a robust US growth of 4% in
2005 would serve as a cushion against a slowdown in
demand from China". For that matter, feels Credit
Suisse, the projected upturn in the US economy could
very likely cushion the catastrophic affect of the
Chinese slowdown on all Asian economies.
Indrajit Basu is a Kolkata-based
equity-analyst-turned-journalist with more than 12 years
of experience in business/finance and technology
journalism. Besides writing for Asia Times Online, he
also writes for US-based publications, as well as IT
companies.
(Copyright 2004 Asia Times Online
Ltd. All rights reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
