What China’s market crash means for India’s economy

It’s not that bad!
It’s not that bad!
Image: Reuters/Kim Kyung-Hoon
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Black Monday hit India hard. Really hard.

The country’s benchmark index, Sensex, saw its biggest-ever intra-day fall in absolute terms, convulsed by the meltdown in China’s stock market on Aug. 24.

The bloodbath has somewhat abated, with most equity markets across the world now recovering.

But what does the spectre of a slowdown mean for prime minister Narendra Modi and his plans to resuscitate India’s economy?

Quartz reached out to a clutch of economists and experts to help gauge the impact of China’s crisis and the volatility in global financial markets on India.

Modi’s opportunity while China is slowing down

A slowdown in the Chinese economy isn’t a terrible event when you consider that Modi is trying to attract manufacturers with his Make in India pitch.

Milan Vaishnav, an associate in the South Asia Program at the Carnegie Endowment for International Peace:

To some extent, we are already seeing that with big investments from the likes of Foxconn and others. Among emerging markets, India is still a happy story. That is not an excuse for complacency but the poor fortunes of India’s peers have provided the Modi government with a useful cushion.

Rajiv Biswas, senior director and Asia-Pacific chief economist at IHS, a consultancy:

If India can continue to pursue economic reforms and boost infrastructure investment, it has the potential to grow at 7% to 8%  per year for a sustained period. Meanwhile, the Chinese economy is transitioning from a high growth economy to a more mature economy whose potential growth rate is gradually moderating below 7% per year. Therefore, India could well assume the mantle of being the fastest growing BRICS economy over the medium to long term, which would make it a very attractive destination for investment in new factories and plants by global multinationals keen to tap the fast-growing Indian consumer market.

Radhika Rao, an economist with DBS Bank:

We haven’t seen major signs of relocation of companies from China. All this while the talk has been about inflows. Inflows can come in but there are some issues that need to be settled like regulatory issues, land allocation, coal supplies among others. Simultaneously the recovery in domestic investments needs to happen.


While investors pull out funds parked in China and other emerging economies, India still is an attractive market. And the fall in the equity markets is temporary.

DBS Bank’s Rao:

The crash has a short-term focus. The Yuan devaluation will be a short-term pain for the rupee and the equity markets in India draw a lot of direction from the US markets, so any reaction will be because of what is happening in the US rather than in China.

The Indian rupee has hit fresh two-year lows against the US dollar, which means imports will be costlier. Morever, Indian exports have been sliding in the recent months and a slowdown in China won’t help. But it’s not all doom and gloom.

IHS’ Biswas said:

India is not as vulnerable to external shocks as many other Asian countries, as exports are a relatively lower share of total GDP than many east Asian countries such as South Korea, Thailand or Malaysia. Moreover, India has a more diversified export base, being less reliant on exports of goods than many other Asian countries due to the large value of Indian service sector exports, notably information technology and business process outsourcing services.

Reforms by Modi

A substantial part of Modi’s avowed plan to kick-start the Indian economy was by way of big-bang reforms. These include the controversial land acquisition bill and the long-awaited goods and services tax (GST), both of which are still stuck in a limbo.

If the Modi government had managed to get these key reforms off the ground, India would perhaps look a little more attractive.

Carnegie’s Vaishnav:

Had the government been more successful on the reform front, investor sentiment certainly would be better. Whether or not structural reforms would have had such a large, salutary effect on the growth rate or employment in the short term is more doubtful. To that extent, I do not think the “costs” of not pushing reform are evident as yet.

Venkatraman Anantha Nageswaran, co-founder of Aavishkaar Venture Fund and Takshashila Institution:

It is not just about these two (land acquisition bill and GST) reform measures but about making sure that enough changes are made in labour and other laws such that employment generation begins to happen in a big way in the country.

IHS’ Biswas:

The Modi government’s plans to pass legislations to introduce a GST and a land acquisition bill have stalled in the Indian Rajya Sabha (the upper house of parliament) where the Bhartiya Janata Party (BJP) lacks a majority. While this is delaying the implementation of important economic reforms that would boost India’s medium term growth outlook, it is unlikely that these bills alone would have had a large impact within just one year. These are medium to long term legislative reforms that will help to boost India’s long-term potential growth rate, rather than quick fixes that will boost growth over the short term.

Disinvestment and capital infusion in banks

The biggest losers from the China crisis could be the Modi government’s ambitious disinvestment plans, and the much-needed capital infusion in public sector banks.

Carnegie’s Vaishnav on the disinvestment target:

Many public sector undertakings (PSUs), especially those involved in resource extraction, were less attractive to investors in the context of low fuel and mineral prices. If this trend continues, the government will struggle to achieve its rather ambitious target for this fiscal year—a target the finance minister has refused to back down from.

DBS Bank’s Rao:

India’s reform agenda won’t go off track due to external shocks. The only market-oriented plans are the disinvestment and capital infusion in banks. For banks, the capital requirement needs to be fulfilled from the markets, so this part might get derailed.