The coming year is expected to be dominated by China’s declining growth scenario and its impact on the world economy. A more than expected growth decline in China will have negative effect on the world economy including India.
The way in which Chinese economy influences the rest of the world is through the trade channel. When Chinese growth comes down, its imports also will come down. This is because a country’s imports are positively related with its growth rate and income.
The equation says that imports (M) are a function of economic growth or income (Y).
This means that a slowdown of Chinese economy will reduce its imports. There are around 40 countries for whom China is the main export market. Thus, low growth rate in China will reduce exports of the developing world.
For India, around fifty percent of its exports go to developing countries. When these developing countries suffer from low export to China, their income will come down and they may reduce their imports from India as well.
Though India is not too much export dependant, exports are critical to support growth. Exports constitute to around 15% of India’s GDP. Decline of exports will depress India’s economic growth.
Thus the connection between Chinese growth decline and its impact on Indian economy occurs through third parties. Chinese slow down may not create a direct negative effect. This is because Indian exports to China are not sizable. But in an indirect way, a slow growth of China reduces exports of developing world and their low growth may reduce India’s exports and economic growth.