Comparison Between India and China Economies
China’s growth in last decade was magnificent at around 10% in real terms and it is on the verge of overtaking Japan as world’s second largest economy. It has successfully created world class infrastructure and has been able to create world class factories to feed world consumption in many areas. Compare to that India’s real growth around 7% in last decade seems rather slow and infrastructure development in India is indeed poor compare to China’s infrastructure development. However in last decade, India has successfully emerged as best outsourcing destination for IT and ITES. Though China’s growth seems much stronger compare to India on surface, study of growth profile of both the countries reveals that India’s growth is much more sustainable and real in “New Normal” world economy.
Some of the positive facts about Indian economy are:
- In many respects India’ economy seems to be the natural development of a market place under the burden of bureaucracy, and incremental but slow moving changes in policies & regulations; but boosted by pent up demand, demographic profile and entrepreneurial energy existing at grass root levels. Whereas, unlike India, China is a command economy working on top-down approach.
- China’s growth profile is more skewed towards growth in exports and growth in investment unlike India’s growth profile which is more balanced between domestic consumption, investment and exports. In China’s case, undervalued currency and global credit boom during 2002-2007 has pushed its current account surplus to record level of 10% of GDP in 2007 meaning China has to export 10% of its output to balance its domestic demand and supply. A downturn in growth of external demand has affected its economy heavily in 2008-09 with large amount of spare capacity across many industries. On other hand, India runs current account deficit meaning its growth is domestic demand driven. Though financing a large current account deficit (as in 2008 for India) can be a cause of concern, a moderate current account deficit can be easily financed through remittance from Indians working abroad and FDI.
- Gross Fixed Capital Formation (GFCF) is also a cause of concerned for China. Recently GFCF to GDP has reached 50% level unseen by any other developed economy in there respecting development stage. This is because of China’s response to recent economic crisis by effecting biggest lending surge in its history (whereas in India, banks have slowed down on loan growth to remain prudent on quality of loans). Year on year, marginal return on investment in China is falling and it shows speculative nature of China’s capital spending boom in manufacturing, infrastructure and real estate sectors. Though investment in infrastructure can be sustainable or even grow due to its massive population; for manufacturing and real estate sectors, investment boom seems unsustainable. In this scenario, China might enter a phase of permanently reduced overall capital spending activity whereby consumption growth will become an upper boundary of growth. Compare that to India where GFCF is around 35% of GDP and infrastructure spends to GDP is around 4-5% (compare to 16% in China). India’s underdeveloped infrastructure is indeed a big opportunity for virtuous cycle of capital spending/absorption and savings. India’s GFCF seems more sustainable due to its high domestic consumption at around 65% of its GDP compare to China where domestic consumption is only about 40% of its GDP. In India, it is consumer demand that is driving investments and product development to fulfill latent Indian market and these investments in turn drive economic growth, employment and incomes. It is a virtuous cycle.
- The sustainability or otherwise of economic growth rate depends on pool of real savings and price signals sent to agents who use the capital. In China, availability capital is de facto controlled by the government and capital being effectively free with real interest rate running negative for some time, there is an encouragement to invest well beyond common sense resulting in misallocation of capital and creation of excess capacities. In India, story is different. India scores well on capital pricing environment and role of private sector in investment is important in India. India’s high fiscal deficit means the cost of capital will stay high. It may be negative in some senses but then those entrepreneurs seeking capital undertake only high return quality investments. In nutshell, those who are looking for return on investment, the growth in India is more remunerative than that of China.
- India has underinvested in its infrastructure in last decade. However, with return of risk appetite elsewhere in the world bodes well for India’s infrastructure development in next decade as most of the infrastructure sectors are now to open to private sector participation and private entrepreneurs have embarked huge investment in infrastructure sector. These projects can be easily funded by foreign capital (in addition to domestic savings) in search of quality and remunerative returns.
- India’s response to economic crisis of 2008 was more skewed towards fiscal measures. It is fair to say that India’s fiscal stimulus has been somewhat more successful than in many other countries. A fiscal stimulus was already underway through revised pay of government employees and rural employment guarantee schemes even before crisis became full blown. Additional stimulus through tax cuts was also demand positive. During the process, India has successfully galvanized the demand potential of its rural area. Though current level of agro commodities inflation is alarming, a mild inflation of agro products coupled with increase in government’s support prices of some agro products has actually helped rural economy due to some wealth transfer from urban to rural economy.
Long term food and energy security is another area where India need long term solutions to satisfy demand from its growing population, rising income level, propensity to consume due to rising aspirations and low living standards compare to developed world. However, it is rightly said that a necessity is the mother of invention. New gas discoveries on India’s eastern coast side and many more such potential area still left unexplored can solve India’s energy need partially. India has potential to become a gas based economy over a long run. Nuclear energy is another area where a lot of progress is possible in India. As far as food security is concern, due to limited availability of arable land, productivity improvement is the only way India can achieve self sufficiency in food demand. Nevertheless, even if India (along with China) is not self sufficient in food requirement, once it becomes a “Developed Economy” (say after couple of decades), then developing economies like Africa, which has sufficient resources to feed world’s food demand, can be a outsourcing destination for our food demand making a win-win situation for both India (along with China) and Africa.
India’s strengths like domestic consumption driven economy, potential to grow domestic consumption multi fold in coming decades (on back of India’s demographic profile, rising income, rising aspirations against the backdrop of low living standards, and more inclusive growth with rural economy becoming a significant driving force), investment cycle supported by growing domestic consumption and huge infrastructure development potential, entrepreneurial energy of private sector, sophisticated financial system and above all a truly democratic society makes India’s case much stronger than China when it comes to long term investment. When it comes to India, put your hand on your heart and say “All izz well”.
by,
http://www.sapphireconsultinggroup.in/economy_countries_manish.html