Slowdown in China may aid Indian growth

NEW DELHI: China’s inflation touched a 28-month high of 5.1% in November, prompting talks that it may be forced to take steps to rein in prices, which will have implication for the rest of the world. But the impact on India is likely to be limited because of strong domestic demand.

In fact, India could even benefit from the slowdown in the world’s fastest growing major economy. As of now, India’s biggest concern is its growing current account deficit, which is set to cross 3% of GDP this year, and any sharp rally in global commodity prices, particularly crude oil, could exacerbate the situation.

"A Chinese slowdown would mean that global commodity prices may not firm up to the level they would have if China were to continue to grow at the current pace," said Sunil Sinha, head of research and senior economist , Crisil.

There are also fears of housing price bubbles, triggered by the lending spree of China’s state-run banks to spruce up the economy after the global financial crisis. Analysts believe that a lot of this lending went to the realty sector and was used for speculative purposes.

China has not lifted interest rates since October despite the high inflation, fearing a flood of capital if interest rates rose further. But it may not be able to hold on for long if prices continue to rise at this rate. On Monday, China's central bank told six of the country's largest banks that a special increase in required reserves will be extended for next three months.

“We are likely to see some slowdown in the coming months but we would still see China grow by around 10% next year with higher inflation in the range of 4%-5 %,” said Jahangir Aziz, chief economist, JP Morgan.