India v China - Crouching Tiger, Roaring (or Slowing) Dragon

Comparisons between India and China have always evoked enormous interest but in recent times this has taken the top slot for discussion in economic forums and cocktail circuit alike.

The graph below (source: EIU) shows the expected growth rates of the two Asian engines of global growth and refers to a slowing growth rate in the Chinese economy.  It is important to recognise that slowing growth rate of China’s is by design as it turns its focus on the quality of its growth (balanced economy and wider distribution of prosperity). 

World Bank expects India to eclipse China’s growth rate in 2011/12 when China is expected to grow at a rate of 8.5% as opposed to India’s 8.7%.  Obviously one has to remember that India is growing from a smaller base and the absolute growth will still be higher in China. India may also outpace China’s growth rate as it is coming off a lower base. India’s income per head would have to grow at 8% a year for 17 years to match the level China enjoys today. One year of faster growth does not, then, mean that India is somehow overtaking China.

Both countries have large population and huge income disparity. Both countries are grappling with the challenge of keeping the economic growth inclusive, though unsuccessfully with increasing economic disparity. And that’s where the similarity begins and ends.

China is essentially a manufacturing powerhouse while India has focused on services to drive economic growth.  China is much bigger (about 4x of India) and stronger with much better execution of infrastructure projects compared to India (a glaring example is - Beijing Olympic Games v New Delhi Commonwealth Games).  China has the ability to execute projects within a predictable time frame and at reasonable cost as it has less legal hassles to deal with.

It is expected that both countries will continue to grow strongly, however, the future bodes well for India. The reasons are largely demographic. China’s one-child policy, introduced in 1978 will result in the number of young Chinese (15-29-year-olds) falling sharply after 2011, depriving the country’s factories of mobile young workforce. Within a couple of years, Chinese youngsters will be outnumbered by their Indian counterparts, even though India’s population will not match China’s until about 2025. In 2020 the average age in India will be 29 versus 37 in China and 48 in Japan.

China

The focus in China is moving to quality of growth rather than pursuing quantitative growth targets.  Where does this ‘quality of growth’ likely to reflect?

§         Reduce economic and social disparity – Pursue policies to help the weakest strata of society through wage support, self employment programmes and the development of health care and social security;

§         Boosting domestic consumption as a share of overall GDP growth – increasing domestic consumption is a priority for China to further insulate its economy from external shocks; India scores well in this respect.

§         Restraining the current account surplus.  China is increasingly coming under pressure from the US to revalue the CNY.  As part of this, increased flexibility of the CNY is likely to persist, including more appreciation and further steps to boost its usage. The developments currently taking place in Hong Kong are interesting as China aims to further boost the usage of CNY for trade settlements.

§         Reducing carbon footprint- steps to deliberately restrain the output of energy polluting industries.

India

While China opened up to foreign direct investment in 1978, India opened much later, in 1991 following the balance of payments crisis. India still has massive catching up to do, particularly in infrastructure. While the level of infrastructure is clearly substandard and fails dramatically in any direct comparison with China, India has planned to invest US$ 1 trillion in infrastructure projects during the plan period 2012-17. Poor infrastructure, it is estimated, knocks off a full 2% of the GDP growth.  It remains to be seen as to how much of the spend in projects is realised in quality infrastructure and how much of it is consumed in graft and scams! 

India has remarkably positive demographics. India is also turning its focus on pursuing policies to boost agricultural productivity which, if successful, might help boost trend growth considerably. The above factors will have positive influence on growth rates.

India is about to experience some years of Chinese growth rates.  It is not yet certain whether India will become the world’s fastest-growing big economy in 2011. If it does so, it will have to be thankful to China for shifting its focus to quality of growth, more than its own effort!

The debate should be India & China

The combined GDP of the BRIC nations might exceed the US GDP before this decade is over.  Below are two interesting graphs that show the composition of world GDP over time and it is quite telling.

Interesting data points: 

1) In 1700 India, China and Europe had about the same GDPs at 20% of world GDP each;
2) From early 1800s China and India are straight down hill while the US is straight up;
3) Around 1973 India and China awoke and are starting to climb back, while US and Europe fell respectively.

A peek at the history tells us that up to the 1830's, India and China were 50 percent of the world's G.D.P., and then they missed the entire revolution of industry.  It may well be time for the Asian giants to dance!

Conclusion
Both countries are expected to enjoy strong economic growth.  To put this in the context of the world economy, there is a decisive shift in the balance of economic power from the West to the East.

So if you take a long view of this game, this journey has just begun! Enjoy the ride!!