The domino effect of the slow plunge of the Chinese yuan against the US dollar is already being felt. The Indian currency has already felt its effect — losing practically a rupee to the dollar. The Reserve Bank of India has claimed that it doesn’t predict any further slide, but the situation remains bleak.

Why the yuan was devalued by over 3 per cent by the People’s Bank of China is being debated every day by economists and analysts. But one over-riding theory and reality is that this move will help tackle a fall in Chinese exports.

A weaker currency will make China’s manufactured products even cheaper for other countries to procure. This will ultimately result in China’s exports beating out its competitors in the global market.

Impact of the gameplan While this may well be the gameplan for China, the immediate impact of this devaluation remains of great concern — both for China and India. There are concerns that liquidity will tighten in China as investors are moving capital out of the country.

There’s further concern that Beijing may start withdrawing its hitherto unquestioned support for share prices. China’s securities regulator has also announced that market forces will be allowed to play a bigger role in determining stock prices.

The immediate impact in India is beyond stock markets because of China’s imminent role in the global economy and trade.

Today, China has over 10 per cent share of the world gross domestic product. Its share is more than 15 per cent in exports and 11 per cent in imports. It accounts for close to half of the global consumption of copper, aluminium and steel, and more than 10 per cent of crude oil.

It’s fair to expect that the renminbi depreciation will lead to an increased drop in prices of commodities China exports to India. We are already suffering owing to non-market prices and often the dumping below cost of China’s exports to India. Now, a decrease in China’s capacity utilisation in products such as bulk drugs, iron, steel and chemicals will lead to a further drop in prices.

Besides imports, India’s exporters will also lose out on currency competitiveness to China in segments such as chemicals, project exports, textiles and apparels — sectors in which India competes directly with China.

Is it transient? Hopefully what our finance minister, Arun Jaitley has said, will turn out true: that the devaluation of the Chinese yuan currency may merely “have a transient impact on India”.

Yet, we cannot ignore the fact that if the yuan weakens against the dollar more than the rupee does, there is a very strong possibility of Chinese goods being dumped in India. The Indian rupee fell to as low as 66.58 a dollar this week.

Even if Chinese goods are not dumped, they will be sold either at the same price at which they are sold in their domestic market or will be sold at prices below cost of production. Neither of these are enviable situations for Indian manufacturers.

To put things in perspective, imports from China jumped by one-fifth to $60 billion in 2014-15, compared to a year ago.

Exports to China have plunged to $12 billion, leading to a huge trade gap between the two countries. And now there is the imminent fear of a China-led global economic slowdown.

Bad timing for tyres The tyre industry is not singing a different tune and for the Indian tyre industry, this depreciation could not have come at a worse time. Keep in mind that China’s tyre industry is the largest in the world. Unlike the US, we do not have stringent anti-dumping policies in place.

Without restrictive policies, Chinese tyre makers are anyway making the most of the lacunae by dumping stocks in India. Imports of Chinese tyres have increased almost 24 per cent just in the previous financial year.

It is alarming to note that in the highly competitive Truck Bus Radial segment, the lowcost Chinese tyres have cornered over 10 per cent of the market share, up from 3 per cent within two years, purely due to the advantage of making in China. Despite the slowdown, the growth of Chinese lowcost tyres continues unabated and volumes are only expected to increase going forward.

As it stands, Chinese tyres are 25-30 per cent cheaper than locally manufactured tyres. The devaluation of the yuan will only ease these prices further. At Apollo, we strongly believe in the Make in India policy.

But for us, it is impossible to cover even the raw material costs at the price we need to sell currently so as to match the Chinese tyre prices. Also, it is not just raw material costs which add to the price of Indian-made tyres. Few realise that lower costs of tyres are also directly proportionate to lower quality.

The quality tests and standards we undertake in India add to the cost of the product. To allow substandard products to enter and be sold in the Indian market will have a direct impact on road safety.

The other fallout is that there may be a repeat of what occurred in South Africa where we exited our manufacturing outfit because of the high imports from China. If steps are not taken soon to stem the dumping from China, the probability of manufacturing outfits in India exiting the manufacturing scene is very high.

What is required is for the government to realise the clear and present danger that these Chinese imports hold for the domestic tyre manufacturing industry and ultimately for the economy. We are not looking at protectionism but a level playing field. The policymakers need to take a serious re-look at policies to ensure that Indian players can have a fair pitch and they do not unduly favour just one team. Else, we can safely say that we shall be over-run by Chinese tyres in not too short a time.

Given the global auto slowdown and our current policies and now the devaluing of the yuan, it’s going to be a far from smooth road for tyre manufacturers in India.

The writer is the chairman of Apollo Tyres, and BRICS Business Council, India

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