How The Eastern Slowdown Could Sting The GCC
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How The Eastern Slowdown Could Sting The GCC

How The Eastern Slowdown Could Sting The GCC

With a combined GDP of over $9 trillion, China and India were poised to offset slower growth in the West, but recent developments have proved otherwise.

Gulf Business

The world had placed its bet on the economic prowess of India and China to save it from the financial crisis. Flush with capital and double- digit growth they were the antidotes for unprecedented global problems. With 36 per cent of the world population, a mammoth demand base of 2.5 billion people, control of around $3.5 trillion of global forex reserves, the darlings of investors even managed to tilt the power base from the West to Asia.

But 2012 has ushered in challenges that threaten to unhinge this fairytale.

Growth has levelled off, inflation has become rampant and the much-glorified demand is fizzling down. For the first time in 13 years, the partially-convertible rupee has posted its biggest decline, while the Yuan has fallen after being partially deleveraged. Funds dedicated to China and India are roughly 30 per cent below pre-crisis levels, with offshore funds recording net outflows. By itself a slowdown like this may not raise alarm, but straddled with Europe’s widening economic malaise and tepid progress in the US, it seems that the light at the end of the tunnel is slowly dimming.

So, what exactly went wrong?


The country, touted to give China a run for its money, is being crippled by its economic fundamentals. Fiscal deficits are ballooning, primarily due to fuel subsidies, while the current account deficit has widened to $72 billion from $49 billion in early 2011, which is an unmanageable 4.5 per cent of GDP. The government, in turn, is passing the fuel bill on to the consumer with a relentless increase in petrol and diesel rates. Subsequently consumer prices – also beaten down by irregular monsoons and a lack of storage infrastructure – are increasing by more than 10 per cent, and in a zealous bid to rein in this inflation, the Reserve Bank of India (RBI) has raised interest rates 13 times since March 2010.

This vicious cycle of policies and counter- policies is wrecking havoc in the country, as reflected in the 46 per cent loss in value of the rupee since January 2008.

According to a business and financial services analyst at Frost & Sullivan, “India does not have the cushion it had when the world slid into recession in 2008. At that time, India’s reserve as a percentage of foreign debt was over 110 per cent. Currently, it is less than 100 per cent, placing the democratic country in a difficult position.”

In the first quarter of 2012 growth fell to 5.3 per cent, its slowest pace in almost a decade. This, along with infrastructure bottlenecks and an errant economic policy, is causing a dramatic decline in investment. To add to its woes, credit rating agencies, S&P and Fitch Ratings, have downgraded India from stable to negative.

“To attract offshore investment India needs foreign investors’ confidence. But the current government has been flip- flopping on policy initiatives, such as retail access, to the extent that confidence in India’s policy-making machine is at its lowest point in 15 years,” says Mark McFarland, chief investment strategist – private banking, Emirates NBD.


The second-largest economy in the world is also witnessing slowdown that analysts say is more deeply entrenched than earlier anticipated. The export-oriented country’s domestic demand is declining under pressure from slowing demand for goods and services in the US and Europe, as seen in six consecutives quarters of GDP growth slowdown, that at 7.6 per cent in Q2 was the lowest in three years. Even Premier Wen Jiabao has cut the 2012 growth target to 7.5 per cent, the lowest level since 1990.

Growth in the manufacturing sector has also slowed over the last seven months, while the Purchasing Manager’s Index (PMI) has been on a downward spiral for almost nine straight months. In May alone, home prices fell in 54 of 70 cities. Exports as a percentage of GDP have declined from 38 per cent in 2007 to 30 per cent in 2010. With external demand going down, growth rates and exports may fall even further.

In accordance, the central bank cut interest rates for the first time since 2008, and twice in a span of a month between June and July. The result of tightened conditions for lending has meant that small to medium enterprises are starved of capital. Banks have been refusing them capital as they are a higher credit risk, while companies have started lending to other corporates at high interest rates, often in double-figures.

China is also heading into a once-in-a-decade leadership transition that makes any changes in policy difficult to implement. This has sparked speculation that economic data may be falsified in a bid to disguise the true picture. Many studies, including those by Goldman Sachs, suggest that Chinese statisticians understate growth during boom years and overstate it during lean periods.

The National Bureau of Statistics, which compiles most of the data, denies this.

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