India and China: Growth Construct

The return of global liquidity is a welcome sign in the recession and downturn strife economies of the world. Amidst the recoveries, India and China have been the earlier ones (alongside Russia and Brazil). The economy growth patterns and road maps of both the economies have been diametrically opposite. While China’s growth has been a function of the demand in consumer markets in the west and its export surplus, the Indian market is domestic demand led. The liquidity crisis affected both these economies in different manners: For China it reduced the export demand and for India, it reduced the external funding and investments.

Two interesting studies, one by Morgan Stanley and the other by World Bank seem to indicate the return of liquidity will benefit India more than China as India and China will pare off in growth rates with India nudging ahead of China.

Even more interesting is Morgan Stanley’s prediction of annual GDP growth for the period 2011-15. While India’s GDP growth under the baseline scenario during these years is predicted to be 7.5% per annum, China’s too is pegged at 7.5%. Similarly, under the bullish scenario, both Indian and Chinese growth during 2011-15 is forecast to be 9% per annum. But in the bear scenario, India is expected to do even better than China, growing at 6.3% compared with China’s 6%.

Even the world bank in a report released on 22nd June ,2009 forecasts that India’s GDP growth in 2010, at 8%, will be higher than China’s growth rate of 7.5% that year. Further, in 2011, both India and China are expected to grow at the same 8.5% rate.

The Tiger is for the first time looking to outrun the Dragon. So, what could be the reason of the Indian Surge/Chinese Slowdown?

China is more exposed to the vagaries of the world market because of its high trade intensity. A Japan style secular slowdown in the US and Europe over the next decade will hurt China more than India unless China moved beyond its admittedly successful mercantilism.
The FDI boom in China since the mid 90s pushed its investment rate, enabled technology transfer and plugged the nation into global supply chains. All this took China closer to the global efficiency frontier, but it now seems that diminishing returns are setting in.
Future growth in China will have to depend on domestic demand and local innovation, which means China will have to change its growth model.
The fast ageing Chinese society will increase the dependency ratios and social costs.
Concern arises from the fact that growth in China will taper off once the push from the Chinese stimulus package runs out of steam and its loan push slow.(In the chart, China’s GDP growth spurts in initial quarters as the result of the stimulus but decelerates as the effect dissipates)
Cost based Chinese manufacturing may be over-rated. Albert Edwards, global strategist  at  Societe Generale, writes: “Most areas in the markets have now discounted a V-shaped recovery. Any doubt will trigger a rapid reversal in prices. I continue to be extremely sceptical and see recent events as part of a 1930s-like long march to revulsion. Talking about long marches, nowhere in the world fills me with more scepticism than the Chinese economic recovery. The continued enthusiasm for all things Chinese reminds me so much of the way investors were almost totally blind to the fact that the US growth miracle was built on sand. China could be the biggest disappointment yet.”

The challenges that both these economies will stand up to fuel their growth stories are again very diverse:
For China, it will be a transition to domestic led growth
For India, it is going to be building infrastructure and its fiscal woes (owing to a bad governance and the quality of national leadership)

Reference:

Catching up with China on Fast Growth Track:

http://www.livemint.com/2009/06/24001454/Catching-up-with-China-on-fast.html?h=B

Can India run ahead of China

http://www.livemint.com/2009/06/24221512/Can-India-run-ahead-of-China.html