For decades, the path to prosperity in Asia was paved by exports to the rich countries of Europe and the US. With the economies of both the US and Europe now contracting, that export-led model is in serious jeopardy. That’s brought out by the export figures that China released on Wednesday, which show that exports declined 17.5% year-on-year in January. That’s partly because the Chinese New Year holidays fell in January this year while they were in February last year, but even adjusting for that, export growth will be very negative. It fits in with the trend all over Asia—Taiwan’s exports declined 44.1% and South Korea’s by 32.8% in January, while Japan’s December exports contracted 35%. Reports say Indian exports fell 24% in January.
With the US consumer spend declining for six months and US consumer credit falling in four of the five months to December, the impact on Chinese exports has been huge.
But the decline in China’s exports does not mean a decline in the country’s big trade surplus. In fact, China’s trade surplus widened to $39.1 billion (Rs1.9 trillion) in January, the third highest on record. That’s because China’s imports are shrinking more rapidly than its exports. This means several things. First, with the Chinese trade surplus continuing to be high, the fears of China not having the money to continue investing in US treasurys, thus making it difficult for the US to fund its deficits, is unfounded. Ironically, in spite of the collapse of the US consumer and a sharp fall in Chinese growth, the recycling of surpluses from a comparatively poor country such as China to the US—an arrangement very favourable to the US—continues unabated. Second, many South-East Asian countries will be hurt, as their exports to China fall. And third, metal prices will be under pressure. All eyes are set on the Chinese stimulus, a large dose of which was administered by record bank lending in January.
India is supposed to be relatively immune because the country is less dependent on exports. But that sunny view doesn’t take into account the big changes in the Indian economy in the last few years. For instance, export of goods and services as a percentage of gross domestic product (GDP) at factor cost went up from 16.9% in 2002-03 to 22% in 2007-08 and is estimated to be 24.8% of GDP this fiscal in terms of the latest advance estimates. Further, Indian economic growth has also become more dependent on investment, funded to a large extent by foreign funds, in the last few years. In fact, private final consumption expenditure has gone down from 69% of GDP at factor cost in 2002-03 to an estimated 61.9% in 2008-09. The trouble is that investment growth is now falling dramatically.
Two of the engines of growth driving the Indian economy in the last few years—exports and investments—are now stalling. Since the government is already up to its neck in debt, there isn’t much scope for a fiscal stimulus.
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