According to a study by economists at Rabobank International, India could be the victim of a combination of a global tariff war and the US Federal Reserve’s monetary tightening cycle.
China seems to be staring at a huge and unprecedented economic and financial crisis.
According to an article published in the Jing Rong Jie (Financial World) website, and reported by the chinascope.org website, a vast 15 to 17 per cent of China’s gross domestic product (GDP) each year goes into meeting its interest payments.
The website quotes Mao Zhenhua, the Founder and Chairman of the China Chengxin Credit Management Company, who is reported to have said at the recently held Tenth Chinese Mulan (Women) Entrepreneur Annual Conference, that with the enormous outgo towards reducing interest-related debt, Beijing has made prevention of financial risk one of its top priorities.
Mao is further quoted as saying that that while China has emerged as one of the world's economic powers post the global financial crisis of 2008, it also has acquired the notoriety of printing the most money in the world.
The websites report that a majority of businesses in China are wrestling with a huge amount of debt. Additionally, surplus production has created a business scenario where supply is greater than demand, and stock-related pricing and real estate are skyrocketing.
Meanwhile, a report on theguardian.com says the IMF has warned that the postwar global trading system risks being torn apart, as the world watches with concern the escalating tariff tiff between the US and China.
The IMF has sounded a warning over protectionism that it says is being stimulated by voter scepticismand cautions policymakers that they must address the public’s concerns before good times for global growth come to an end.
For India, the China-US tariff stand-off could have some surprising fallouts. According to a study by economists at Rabobank International, India could be the victim of a combination of a global tariff war and the US Federal Reserve’s monetary tightening cycle.
The study points out that a tariff war will reduce exports and lead to imported inflation, which will hurt Indian purchasing power and investments. This could lead to as much as 2.3 percent of missed GDP growth for India by 2022.
China may target Indian exports as India is widely perceived to be America’s ally. However, in case India chooses not to take sides with the US, the US may then target Indian exports. This may lead India to retaliate against the US.
The study says that the third scenario could be the worst for India.
This study thus debunks the theory that India is relatively insulated from a trade war, given its low share of total world exports of just 1.7 percent.
Besides the threat of trade war, what could further damage India, is a faster-than-expected tightening of US monetary policy which will lead to capital outflows. The study estimates India will be losing $22 billion in capital flows by 2022.
The economic growth could further be sabotaged by a possible political instability a it heads into its general election in 2019.
If this happens, the Rabobank model sees the rupee depreciating sharply and the missed capital flows will amount to $32 billion by 2022
Further, the study says that in case India uses its foreign reserves, interest rates could rise sharply as liquidity decreases and despite the fact that India’s reserves are substantial, markets might still become concerned about the prospects of further declines.
According to the report, there could be major speed breakers ahead in India’s growth path.
(Source: Media reports)