Introduction
Ever since the pandemic, Chinese borrower’s defaults have reached a record high, with 8.54 million people barred from doing business. This increase, which came from 5.7 million in 2020, accounts for roughly 1% of China’s working-age population. Meanwhile, deflationary pressures are also present in China, where consumer prices fell sharply in November. Though for a brief moment it appeared to be strongly emerging from the Zero-Covid policies, the optimism was fleeting. The world’s second-largest economy is suffering from deflation and unemployment, a massive debt load, a declining confidence among foreign investors, and a weakened consumer base due to the ongoing real estate crisis. Furthermore, consider President Xi Jinping’s restrictions on private enterprises. Although China is not in danger of collapsing, its extraordinary growth is now in the past.
According to World Bank projections, China’s economy will contract in the year 2024, reversing its previous role as a catalyst for global growth. India, which is seen as China’s replacement, needs to concentrate on steady growth through exports and manufacturing.
Background
According to recent media reports, China’s authorities have blacklisted 8.54 million people from engaging in various economic activities, such as using toll roads, buying airline tickets, and using payment applications. This represents a rise from the 5.7 million defaulters at the beginning of 2020, or roughly 1% of Chinese adults of working age. Many retailers declined cash payments after online payment services like Alipay and WeChat supplanted cash as the most popular payment method in China. Some defaulters claimed it was now difficult for them to even buy food. In the meantime, factory-gate deflation intensified and China’s consumer prices dropped for the first time in three years in November, signaling growing deflationary pressures as sluggish domestic demand raises doubts about the country’s ability to recover economically. Xu Tianchen, senior economist at the Economist Intelligence Unit identified three key causes for the crisis: a persistent supply glut, the waning of the winter travel boom, and declining global energy prices. Due to the country’s continuing medium-term economic growth and the ongoing shrinkage of the real estate sector, rating agency Moody’s downgraded China’s economic outlook earlier this month from stable to negative.
The World Bank stated in a report last week that despite a recent recovery fueled by investments in factories and construction as well as in demand for services, China’s economy will slow next year, with annual growth dropping to 4.5% from 5.2% this year.
Source: Money control
How India can gain from China’s troubles
China is facing both short-term and structural economic challenges. China’s aging population stands out like a sore thumb because it directly affects the labor supply and increases welfare spending. Given that Western nations have begun to diversify their supply chains, its growing estrangement from the US and the West at large poses a threat to its export industry.
China wants to shift from being a mass manufacturer of goods to a high-technology economy. While Xi favors more stringent controls, innovation and free private enterprise are necessary for the growth of the modern tech industry.
In a report published last month S&P stated that it anticipates South and Southeast Asia to overtake China as the region’s primary growth engine. Even though India is still a long way from accomplishing China’s economic miracle, the world now views India as China’s replacement, as China has long been the engine of global growth and the world’s factory. With an estimated 7% GDP growth in the fiscal year 2026–2027, rating agency S&P Global Ratings predicted earlier this month that India is on track to become the third-largest economy in the world by 2030. India has the potential to overtake China, but sustained growth fueled by exports and manufacturing would be necessary. India’s youthful population is its greatest advantage over China, but low skill levels limit this potential. Training its young, particularly in modern technology, will make India a significant growth engine for many years to come.
According to balance of payments data, China has experienced its first-ever quarterly deficit in foreign direct investment (FDI), highlighting pressure on capital outflows and Beijing’s difficulty courting foreign businesses in the wake of a “de-risking” move by Western governments. According to preliminary balance of payments data, the deficit for direct investment liabilities, a broad measure of foreign direct investment that includes retained earnings in China by foreign companies, was $11.8 billion for the July–September period. It’s the first quarterly deficit since China’s foreign exchange regulator started gathering data in 1998, and it may be related to both China’s interest rate disadvantage and the effect of Western nations “de-risking” their investments from China. By adjusting its policies, India can present itself to foreign investors as a viable alternative. India may have seen a decline in foreign direct investment overall, but there are still reasons for optimism because the nation is seeing interest in greenfield projects despite China’s first-ever decline. The Finance Ministry has been informed by the (UNCTAD) that India ranks among the top three countries in terms of greenfield FDI announcements. This shows that India might be bringing in new global capacity expansion as part of supply chain diversification. By 2024, India anticipates that these will result in increased investment flows, according to the official.
Source: IMF Staff calculations
Conclusion
Whether India can emerge as the next major global manufacturing hub will be a crucial test, one with enormous potential. Building a robust logistics infrastructure will be essential to converting India’s economy from one centered on services to one centered on manufacturing, according to S&P. The upskilling of workers and an increase in the participation of women in the workforce will be crucial to realizing the full potential of India’s labor market.
While reports of China’s economic collapse may be greatly exaggerated, there are indications that India is rising to replace China as the world’s most powerful nation. India needs to get ready to influence Asia’s major power shift.
THE ECONOMICS CLUB IMI 