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India, China and our growth forecasts

Kaushik Basu's picture

Last month, the World Bank and IMF both put out predictions that, this year, India would overtake China in terms of GDP growth rate. This caused a flutter and was widely reported around the world. How robust is this prediction and what does it really mean?

First, this is not as monumental a milestone as some commentators made it out to be. China has had one of the most remarkable growth runs witnessed in human history, having exceeded an annual growth of 9% from 1980 to now. Four decades ago its per capita income was close to India’s, but now it is four times as large as India’s. None of all this is going to change in a hurry.

With this caveat in mind, it is a year in which India deserves to feel good. It is expected to top the World Bank’s chart of growth rates in major nations of the world. This has never happened before. Before 1990, India did occasionally grow faster than China, mainly because China’s growth gyrated wildly during the pre-Deng Xiaoping period. It was, for instance, minus 27% in 1961, when Mao Zedong’s Great Leap Forward resulted in the world’s biggest famine, and it was 17% and 19% in 1969 and 1970, respectively--a relief in the wake of the Cultural Revolution. Fluctuations of this magnitude would be intolerable to India’s polity.

Since 1980, China has grown rapidly without interruption.  Since 1990, its growth has continuously surpassed India’s. Hence, the World Bank’s forecast of India growing faster than China this year is a once in a quarter century occasion.

The resulting high expectations for India lie not in the GDP growth crossover (which is not as significant as some make it out to be), but in the dynamics underlying the country’s aggregate numbers.

An initial dynamic to consider relates to the steadiness with which growth in India climbed over the past five decades. The accompanying bar chart makes this clear. The chart breaks up the last half century into four periods: from 1961 to the arrival of Deng Xiaoping at the helm of China; from 1979 to India’s reforms of the early 90s; from 1994 to the start of a growth spurt in India in 2005; and from 2005 to recent times. Over these four periods, India’s growth has increased steadily. Annual growth was 3.9% from 1961-78; 4.7% 1979-94; 6.2% 1995-2004; and 7.7% 2005-2013. And within the latter segment, there was a remarkable sprint from 2005 to 2008 when India grew annually by over 9%.

All this is also borne out by India’s GDP. The last two rounds of purchasing power parity (PPP) computation for the world occurred in 2005 and 2011. It turns out that in terms of PPP-adjusted GDP, India overtook Japan and Germany between 2005 and 2011, and stood behind only the US and China. (Note: As of October 2014, China’s PPP-adjusted GDP has overtaken that of the US).

The expected growth of 7.5% this year is worse than India’s performance in many past years, but it is quite remarkable given today’s subdued global prospects.     

Growth in China and India


A second dynamic relates to several important policy initiatives laid out in the Union Budget presented in February 2015. The most important is the Goods and Services Tax (GST), which will create a unified national taxation system, cutting down transactions costs for businesses and the movement of goods. Data collected by the World Bank show that, when Indian trucks carry freight between cities, 60% of the time is spent stationary, mainly at check points to pay taxes and get permits. The GST can cut down this colossal wastage. Indeed, India’s biggest stumbling block has been its large transactions and bureaucratic costs. Several reforms at the time of the last Union Budget raise hopes that these costs will be curtailed, and optimism is a powerful driver of growth.

Third, the fall in oil prices since June 2014 has turned out to be a boon for oil-importing India.  The high cost of oil has caused India’s current account deficit to be large and created a heavy fiscal drag for decades. This has eased greatly over the past 9 months and the Bank’s projections suggest that oil prices will be low — somewhere between 55 and 70 dollars—over the medium term. This is a great opportunity for India to reform, deploy resulting savings to boost spending on health and education, and promote shared prosperity.

Finally, democracy presents an interesting dynamic for India. On the one hand, it can be a drag and often is. A democracy like India’s makes it difficult to experiment with new policies and to make policy switches of the kind China could make easily and even Korea made in the 1970s. On the other, it does provide a stability and basis for sustained development. India is fortunate that, through the rough and tumble of economic life, it has managed to hold on to democratic traditions and a vibrant media. I remember in my last job, every time I stepped out of the Ministry of Finance in Delhi after an important meeting, there would be dozens of journalists accosting me with aggressive questions, and, though that would often put me in a spot, there was something energizing about this, and, in the long run, this is a strength that should stand the country in good stead.

Comments

Submitted by Rajatashuvra Adhikary on

It is an excellent summary article. I fully agree with Dr Basu that we should not too over excited about India's higher growth rate (compared to China) just in a single year. It will take a LONG time for us to be on the same trajectory. Anyway, we need to be always very careful in comparing India with China. The comparison may be unfair as well as unnecessary. We two have a completely different background, culture, economy and political system. And surely our progress and happiness does not only depend on GDP.

Submitted by RG on

I think it is a good idea to compare India with China. These are the two countries which have always led the world in terms of ideas and progress. They are both ancient civilizations and have had an impact on the world - even though China has been mostly inward looking and India has suffered periods of decline regularly throughout its history.

The comparison is important not to see who is doing better and who is bigger but to understand how each country's (very different)character influences its future. And therefore to understand each country's mood and outlook, and to understand how the world will engage with them.

India cannot do many things which China has achieved in the past. Equally important, India will never want to do many of the things China has done in the past.

I believe the larger picture for India is not numbers and graphs - growth rate, per capita income, number of billionaires etc.; rather it is that people by and large are happy and satisfied and permitted to pursue their future the way they want to. India's diversity and contradictions will ensure that it will never be a roaring tiger in terms of growth; equally India's tolerance and multi culturalism will ensure that India absorbs what is good from around the world and remains (or reemerges) a thought leader for the world.

I doubt China will falter badly any time soon notwithstanding the concerns about its state managed economy; banking and real estate crisis waiting to happen etc etc. I doubt India will ever overtake China in terms of GDP or growth rates but I agree that India today gives the world more cause to be optimistic than China does.

Finally I hope India and China continue to inspire each other as they have done for the last three millennia. These countries are too important globally to have any relationship other than mutual respect and cooperation.

Submitted by Alok on

Dr Basu's points are relevant. But he misses a very important reason behind India's economic resurgence. The strong , honest and pro active leadership of Sri Narendra Modi has turned things around. The PM's determination to push through reforms , be it insurance ,coal or mining sector and his efforts on reducing red tape and the Make in India campaign has started yielding dividends.I am sure as long as PM Modi is at the helm of affairs , double digit growth is guaranteed. The PM is creating an environment in which industrialist will compete on the basis of their competence and not on connections as has been the case since ages.
PM Modi's encouragement of the public sector is to be seen to be believed. He has asked the coal sector behemoth (where I work) Coal India to double the production in the next four years to 1 billion ton.The growth in FY15 was the highest in CIL's history.Appointment of efficient persons like Piyush Goel ( Coal , Energy and Renewable energy ) and Suresh Prabhu ( Railways) as ministers is also responsible for the turnaround.

Submitted by Karla Gonzalez on

In full alignment with the second argument in Mr Basu article is the steady investment that India is doing in Multimodal transport, adding Freight Corridors in Railways and pulling waterways agenda to ease the large transaction costs by focusing in logistics and connectivity.

Submitted by Kannan Ramaseshan on

Excellent presentation and valid one. The present government is aggressive on several important policy and having excellent team to execute it. There is big room for infrastructure growth. So we will see more growth in Indian in the coming years.

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