Tuesday, August 25, 2015

Effect of Devaluation of Yuan on Global Economy and India

Now as this step has been taken by China in order to maintain its export competitiveness in the global market amid decreasing demand let us have a background look in this topic. China is a mammoth economy of around $10.36 trillion on nominal basis and $17.63 trillion on Purchasing Power Parity basis. This size of China's GDP is due to both its domestic demand and export earnings. A huge part of China's GDP comes from the manufacture of those items which are exported out of the country.

Now looking at this step the biggest problem will be faced by those countries who are competing significantly with China in exports. According to the 2012 data, China is Number 1 exporter of the World, followed by the USA, Germany, Japan and France. India is at the 19th position in exports. So this step of devaluing Yuan will prompt top exporter companies to devalue their currencies and if that happens small exporter countries are going to suffer and also global financial mood will be disturbed bringing down the stock market sentiment.

Impact of devaluing Yuan on INDIA - 

Its impacts on India are varied. The Indian Rupee has devalued to Rs. 66 per dollar thereby making our exports expensive which is likely to hit hard industries like steel,tyre and auto components directly and power, telecom sector indirectly(due to increased input cost and foreign currency borrowings).

The foreign companies which are operating in India are likely to be hit hard as their profits can decrease in this situation. This is because foreign companies set up their offices in India to leverage Indian market and they import more and export less. So if Rupee is appreciated against dollar, then it can increase the profits of these companies as imports become cheaper but when rupee depreciates against dollar, imports become expensive thereby decreasing the profits of these companies and also tax collection for the Government thereby hurting the Indian Economy.

However the domestic demand and consumption is going to provide relief to Indian Economy in this period of external shocks.

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