The Indian economy is facing some serious challenges on the external front. It relies heavily on ‘external demand’, evidenced by the fact that slowing global economic growth has resulted in fifteen consecutive months of export contraction in the country. This is despite the fact that India’s trade with emerging and developing countries has been growing faster than its trade with developed economies. The IMF estimates that the aggregate growth in emerging and developing economies would work out to around four per cent in 2015, the lowest since the financial crisis.
There is growing suspicion among analysts that this subdued growth, along with the slowdown in the commodities cycle, represents a ‘new normal’. In such circumstances, it can be argued that there has never been a better time for India to reach out to China. There are at least three arguments to support this premise.
First, Chinese growth is expected to slow to around 6.3% in 2016 and 6.0% in 2017 (IMF). This in turn has two critical implications: the slowdown in China’s trade and investments will continue to be a significant drag on the global economy and commodity prices, and Chinese businesses and policymakers will be forced to look for unconventional solutions to their economic woes. A few years ago, when Chinese policymakers first realized that this slowdown was on the cards, their economic strategy began to evolve rapidly. From a strong focus on the external economy, Chinese policymakers began to focus on the ‘domestic demand’ narrative. However, this has not quite managed to pull the country out of the docks. Excess production capacity remains a challenge for almost all manufacturing industries in the country.
Meanwhile, the Indian consumption demand is perhaps the only story worth telling in the context of its faltering economy. Industrial growth is nothing to write home about, and the pace of real GDP growth is a source of worry to many who observe the economy closely. Of course the fact that consumption is growing from a low base helps. It is no surprise then that India remains a hotspot for venture capital and private equity deals in consumer driven businesses ranging from ecommerce to transport solutions. And this growing consumer demands presents a ready market for China. This is a bargaining chip for India with no parallel. It is time for Indian policymakers and businesses to also think out of the box and strike lucrative deals with China.
Second, the corruption crackdown led by Xi Jinping is unprecedented in its scale and impact. With hundreds of thousands of officials under investigation, the businesses running through their patronage are also under the scanner. Consequently, many Chinese elite are busy liquidating assets, from private jets to factories and buildings. The corruption crackdown will not last forever. Xi Jinping has used this as an opportunity to control opposition within the Communist Party, and not necessarily to revisit structural flaws in the functioning of the state. However, while it lasts, there are opportunities aplenty for Indian businesses to acquire Chinese assets across the world. The key would be to assess the value proposition correctly.
Third, the downward spiral of the commodity cycle has led to a sharp reduction in investments in the extractives sector in China. The spillover effect of this is being felt by many of the state owned enterprises (SOEs) that are focused on resource extraction. A key incentive for large investments by Chinese SOEs in geographies such as Africa has been the large natural resources that can be secured for the State. Now that the value of natural resources is being rebalanced through a ‘new’ cycle of demand and supply, many SOEs will have to look to diversify their business interests abroad. Moreover, many such SOEs are saddled with large cash reserves that will depreciate over time.
This need to diversify can be leveraged by Indian industry, particularly the infrastructure sector. Infrastructure companies in India are over-leveraged and have been the primary contributors to the non-performing assets (NPAs) in the banking sector. Stressed assets on banks’ books are estimated at Rs. 4,00,000 crore. Which in turn has resulted in a liquidity crisis in the infrastructure sector. The large NPAs owe their origins to pervasive crony capitalism and poorly managed companies that grew rapidly in the years following the liberalization of the Indian economy. Given this liquidity constraint in the Indian banking industry, the timing is optimal for select well-managed Indian firms to raise funds from Chinese SOEs, and solicit their participation in building critical infrastructure assets.
It goes without saying that some of what has been suggested here comes with its own set of challenges, philosophical and real. The philosophical challenges relate to how the Indian state views its relationship with China. This is bound to change over time. Those who have grown up and earned their stripes in the post-liberalization era would not tend to think of China as the ‘enemy’, or the national border issues as something that should impact business ties. However the point is that India has often missed the bus in terms of timing its economic moves in the past. It cannot afford to overlook an enhanced commercial engagement with China, even as it courts the United States, Japan, South Korea and other partners from beyond its neighbourhood.
The real challenges relate to the trust deficit that businesses from both countries need to work on. Chinese businesses do not trust Indian conditions – while they are happy to pay fixed sums of money ‘to get things done’, the fact that nothing seems to be time bound in India is deeply concerning to the Chinese businessman. Conversely, Chinese service standards are infamous in India. Anecdotes of Chinese equipment failure, operational opacity and the lack of a service ethic are fairly commonplace. The way around these issues is to ‘partner’ in every sense of the word. The two countries must begin to do business on equal terms, with equal stakes and with a clear sense of their shared future. And there are enough mid-sized, professionally-run companies that can benefit from this relationship on both sides, as long as their governments let them.
Vivan Sharan is Partner at Koan Advisory Group