Analysts, however, feel that though Beijing is preparing for the yuan to devalue further, the quantum may be small, in which case, the impact on Indian exporters will be limited.

Sectors where the two countries directly compete with each other in the export market will, however, be hit.

Electronic items, gems and jewelry, organic chemicals, and apparel are among the top exporting items for both countries and a Yuan devaluation will take its toll on exports out of India in these sectors.

However, sectors where India has maintained its lead are not likely to be dented. For example, India is one of the largest exporters of agricultural products, including rice, in which it has little competition from China.

“It is too early to say whether or not the devaluation of the Chinese yuan will hit Indian exporters, although sectors in which both countries compete in terms of exports could be prima facie impacted,” Biswajit Nag, Professor, Indian Institute of Foreign Trade, told The Secretariat. 

While a devaluation of the yuan will mean cheaper Chinese goods in the international markets, price is not the only factor driving trade, as many countries are now deliberately opting for a China Plus strategy, as they diversify their supply chains.

Quality, preference for a trading partner, bilateral ties and logistical dynamics are equally important factors, when it comes to international trade.

“The assumption that it is primarily the pricing that drives international trade is incorrect,” Nag pointed out. He added that India needs to focus on quality. “Along with price, quality is an important factor and here India may stand to gain,” he said.

China’s main export markets include the US, Japan, South Korea and India. New Delhi’s top markets comprise the US, Europe, Gulf and Singapore. Sources added that the respective authorities are keeping a close watch on Chinese goods coming into India to ensure that there are no instances of “dumping.”

Impact On The Indian Rupee

The State Bank of India, in its report, said the impending devaluation of the yuan will put pressure on the Reserve Bank of India (RBI), which will have to remain watchful and provide necessary support to the Indian rupee. For India, a falling rupee will make imports dearer and fuel inflation. 

A senior public sector bank executive, who handles the treasury and currency department, said the Indian rupee will have to adjust accordingly. "But to what extent the Indian rupee will be adjusted is something the RBI will have to decide, depending on the domestic and international situation," he said.

Clearly, it will not be easy, as India’s merchandise trade deficit in November widened to an all-time high of US US$ 37.84 billion from US$ 27.1 billion in October.

Ajay Sahai, the director-general and CEO of the Federation of Indian Export Organisations (FIEO), echoed the sentiment.

“We will have to wait and watch to see the quantum of the devaluation. A minor change will not be worrisome, as the Indian rupee will also adjust to it,” Sahai said, adding that if the drop in value is by a fairly large quantum, it will be cause for worry.

“We are monitoring the situation, though at this point, we do not know how things will unfold,” he said.

What India Can Do To Support Trade

Exporters feel India needs to cement its acceptance as a reliable trading partner. “India’s exports are in crucial sectors like food items, but New Delhi’s knee-jerk reactions and sudden bans on outbound shipment of these items has led to credibility issues,” said Ashish Banerjee, director of a Faridabad-based medium sized export firm.

India, which is the largest supplier of rice in the world, has repeatedly imposed sudden export bans on agriculture products, including rice, wheat and onions, in the recent past.

Recently, India’s export restrictions were taken up by the World Trade Organisation (WTO), even as New Delhi maintained the move was to protect its own citizens first, with an eye on food security. India’s exporters and farmers have registered their discontent on this issue as well. 

“We lose out on exports markets and several countries become wary of sourcing food items from India. New Delhi must be consistent with its export policies, even if it is related to sensitive items like food,” Anil Ghanwat, senior leader of Shetkari Sangathana, a Maharashtra-based farmers union, said.

Logistics challenges related to the Red Sea crisis and lack of adequate shipping lines have further impacted India’s exporters.

That apart, countries like Vietnam and Bangladesh have posed serious competition to India. While Bangladesh overtook India in garment exports, Vietnam, with its low import taxes and efficient supply chain network, has also positioned itself as a strong manufacturing hub and a viable alternative to China.

Vietnam’s largest exports comprise electronics goods, apparel and footwear. Investing in Vietnam is considered easier than in India with its complex tax structure. 

Why China Wants To Weaken Yuan

US President-elect Donald Trump, who will take centre-stage next month, has already threatened to impose additional tariffs on goods that are being sourced into America from other countries, including Mexico, Canada, China and India. Beijing is hoping to support its exporters by allowing the yuan to devalue. A devalued yuan would make Chinese goods more competitive in the global markets.

Amid the ongoing global economic uncertainties, China’s economy has been facing its own problems, despite recording a rising trade surplus. Its imports have been weakening, suggesting lack of demand in the domestic market, despite Beijing’s efforts to boost it.

In 2015 too, the People’s Bank of China (PBoC) had gone in for a devaluation of the currency. Though the PBoC claimed that the devaluation was done to move towards a more market-oriented economy, it was primarily aimed at supporting the exporters. Trump had then called it a case of currency manipulation.

What India Needs To Do

India’s total exports (merchandise and services) in 2023-24 stood at US$ 776.68 billion, which was 0.04 per cent more than 2022-23. The overall exports during the April-November period in the current fiscal year stood at US$ 536.25 billion, compared to US$ 498.33 billion in the same period in 2023-24 — a growth of 7.61 per cent. India’s total exports for November is estimated at US$ 67.79 billion. 

For China, the exports sector has been fuelling its economic growth. In November this year alone, China’s exports stood at US$ 312.31 billion.

India needs to put its act together to support its exports sector. To begin with, it needs to address the inverted duty structure — a situation when the tax on imported raw materials is higher than on the finished products — at the earliest to augment manufacturing and boost the production linked incentive (PLI) programme.

According to a KMPG blog entry, the PLI scheme, at its core, provides financial incentives to manufacturers based on their incremental sales from products manufactured in domestic units.

“These incentives are designed to make Indian products more competitive on a global scale, encourage large-scale manufacturing and attract investments in critical sectors. The scheme is targeted at sectors where India has the potential to emerge as a global leader, thereby creating significant employment opportunities,” it said.  

Many countries and multinational companies are looking at investing in India as part of their China Plus strategy. India needs to act swiftly if it has to boost manufacturing and exports.