Will India bear brunt of China's defaults and economic fallout?

As China grapples with a prolonged economic downturn marked by escalating challenges, financial experts are speculating on the potential ramifications for India, suggesting that a gradual worsening of China's economic situation coupled with Foreign Institutional Investors' (FIIs) calibrated outflow might offer a marginal advantage to the Indian economy.India will drive growth in the Asia-Pacific (Apac) region as the growth engine is likely to shift from China to South and Southeast Asia in the coming years, S&P Global Ratings said in a report on Tuesday.China's economic woes have deepened as defaults by Chinese borrowers reach a historic high since the onset of the coronavirus pandemic. The rising number of defaulters poses a significant challenge to bolstering consumer confidence in the world's second-largest economy.The rating agency's report projected China’s growth to slow down to 4.6 per cent by 2026 from an estimated 5.4 per cent in 2023. India is likely to clock 7 per cent economic growth from 6.4 per cent estimated for 2023. 

The spate of emerging market outflows triggered by China’s rising mortgage defaults has not hit Indian markets. On the contrary, India received foreign portfolio flows to the tune of nearly $15 billion during April-November. China, on the other hand, saw funds worth over $41 billion flying out of the country during January-June.“We expect Asia-Pacific's growth engine to shift from China to South and Southeast Asia. This shift could constrain the upside over the next few years for China's bond issuers while improving those of issuers in India, Vietnam, the Philippines, and Indonesia,” the report says.  
Amid global uncertainties, India reported GDP growth of 7.6 percent in the July-September quarter. The Reserve Bank of India (RBI) is expected to revise its FY24 GDP forecast upwards to 6.7 percent or even higher in the upcoming Monetary Policy Committee (MPC) meeting.
Experts believe that India is not likely to face the brunt of EM outflows, given its solid growth story. At present, India enjoys a "Goldilocks" scenario with a thriving corporate sector, healthy earnings growth, and a robust economy.
With India as the best-performing economy globally, and US bond yields falling, there is little incentive for foreign investors to move away from emerging markets like India.The rationale behind this speculation lies in India's attractiveness as an alternative investment destination within the emerging market sphere.While India shares economic ties with China, its relatively resilient economic fundamentals, ongoing structural reforms, and a burgeoning domestic market present an appealing proposition for investors seeking diversification amid uncertainties surrounding China.
Experts emphasize that any potential benefits for India would likely be modest and contingent on several factors, including the pace and severity of China's economic challenges and the manner in which foreign investments gradually reallocate across global markets.The spotlight on India amid China's economic recalibration underscores the shifting dynamics within the Asia Pacific, signaling a potential shift in the region's economic landscape. While uncertainties persist in global markets, India stands poised to assume a more prominent role, presenting itself as a beacon of growth and stability in the evolving economic order of the Asia Pacific region.

(Ira Singh, Asstt Editor)