China slips into deflation. How will this affect Indian economy?

China's economy has slipped into deflation after consumer prices declined in July for the first time since February 2021. The east Asian country and second biggest economy of the world had seen a significant slowdown in economic progress, owing to prolonged period of stringent Covid-19 pandemic induced lockdown.

According to reports, the official consumer price index, a measure of inflation, fell by 0.3% last month from a year earlier. On Tuesday, official figures showed that China's exports fell by 14.5% in July compared with a year earlier, while imports dropped 12.4%.

According to a report by CNN, the cost of food, transportation, and household goods all declined in July in China. In particular, pork prices were down 26%, and vegetable prices were down 1.5%, the media outlet reported. 

What is Deflation? 

“Deflation is when the prices of goods and services decrease across the entire economy, increasing the purchasing power of consumers. It is the opposite of inflation and can be considered bad for a nation as it can signal a downturn in an economy, leading to a recession or depression,” Investopedia describes. 

Repercussions of Deflation

President Joe Biden signed an executive order Wednesday to block and regulate high-tech U.S.-based investments going towards China — a move the administration said was targeted but it also reflected an intensifying competition between the world's two biggest powers.

Not a repercussion, but an impact - e-commerce giant Alibaba announced an unexpected 14 percent on-year increase in quarterly sales following several difficult years and in spite of a broader economic slowdown, reported AFP. 

It is to be noted that Alibaba is a key player in China's expansive digital economy and the operator of a major online shopping platform.

How China's Deflation affects India?

Positive effect: If investment in the Chinese economy is lowered owing to the increasing slowing rate of their economy, and now deflation, India could potentially emerge and take over as the manufacturing hub for the developed economies. This is also something the developed countries seem to have been pushing for in a bid to eliminate the monopoly-like hold China has over the manufacturing sector. 

For India, if economic reforms are accelerated, India can become the next manufacturing hub.

Negative effect: China remains one of the biggest importer of iron ore from India. The east Asian country imports almost 70% of Iron-ore from India. Therefore, a slower economy for China would mean the amount of import into China could fall, spelling somewhat doom from Indian's economy.

China had been registering a weak import and export numbers, raising questions about the country's post-pandemic recovery.

How does China's Deflation affect the world?

For once, the extended period of deflation China may be that it helps to curb rising prices in other parts of the world, including the United Kingdom. This is because China remains one of the largest producer of goods sold around the world. 

On the other hand, cut-prices of China manufactured goods could impact employment by way that it could hit investment by businesses. “A period of falling prices in China could also hit company profits and consumer spending. This may then lead to higher unemployment.” says BBC. 

Therefore, decreasing prices, even though lucrative for consumers initially, may lead to a vicious cycle of decreasing economic activity. Reduction in demand, owing to a constant pattern of falling prices would mean lower production, reduced business revenues, and increased unemployment, which in turn further reduces consumer spending.