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

Tongue in Cheek: The cost of Climate change

ADB in a recent report on the economics of climate change in South East Asia has indicated that the cost of adverse impacts of climate changes would be 6% to 7% of Southeast Asia’s income each year by the end of the century.

Tongue in Cheek: Asia and Global Warming

Developing Asia already accounts for one third of global greenhouse gas emissions. It is expected to increase this contribution to 40% by 2030,making it the main driver of global warming.

Will Monsoons spook Economic Growth away?

The biggest driver of Indian Economy numbers through the downturn was a bouyant domestic demand. This helped it tide over the economic doom better than most of the countries around the world. However, the spectre of a bad monsoon actually is more insidious to the Indian economy than anything else. And this is one threat the Indian economy is somewhat less prepared to coast over.

The crisis
World Meterological organization warns of greater than average chance of El Nino thus having profound impact on the Indian Monsoons. As it stands, the Indian Monsoon has barely progressed in the last two weeks (2nd/3rd week June).The annual June-September monsoon generates nearly 80% of the annual rainfall over the country and is vital for the economy, being the main source of water for agriculture, which accounts for around 17% of India’s gross domestic product (GDP). Other than the 60% of the country’s workforce that depends on agriculture, the rains are also important for traders dealing in food and cash crops.As of 17th June, the latest estimate shows a 45% shortfall in rainfall.28 out of 36 meterological sub divisions have recorded scanty rainfall as against 4 divisions last year. Read Could El Nino dry up the economy's green shoots? http://www.livemint.com/2009/06/08003141/Could-El-Nino-dry-up-the-econo.html?d=1

The Reason
A full fledged El Nino was only expected around August, commented Mr. Madhavan Rajeevan, meteorologist at ISRO.The only ray of hope is the fact that not all El Ninos are bad: 1997 El Nino led to excess rainfall. 2002 and 2004 El Ninos associated with severe droughts. However statistics favours El Ninos association with droughts: Between 1880 and 2006, 12 out of 18 El Ninos have corresponded with drought like conditions/below normal rainfall.

The Impact
Drought is the most eminent risk of the El Nino fall out with Khariff crops being at risk.Technically speaking a Rainfall deficiency of 10% or more is defined as a drought. Since, 55-60% of the Khariff crop is dependent on Monsoon, a small variation in the rainfall totals can impact the crop very adversely, There has been a drastic dip in water reservoir levels across several states. In nearly 80 national reservoirs, the water stored is 1/3rd less compared with the same time last year.and if not replenished during monsoons, irrigation water will be deficient, because drinking water needs would come first.

Long Term Damage and Control
The current year’s monsoon is considered to be crucial for the economy as buoyant rural consumption has been a key driver of growth amid an economic downturn (read http://www.livemint.com/2009/04/17234039/Monsoon-booster-for-rural-dema.html?d=1). While the country has sufficient food stocks to tide over any crisis this year, the macro economic pressure is expected to accrue on account of food price inflation.

In Orissa, Industries have been asked to cut down their production levels, because of low reservoir levels resulting in low electricity generation. Power deficit levels are expected to be 20 – 30%, even in a power surplus state like Orissa. Elsewhere in Chattisgarh, the Government has already purchased and stored 370,000 tonnes of rice and is ready to procure rice from outside as well. Madhya Pradesh is worst off in terms of reservoir crisis. Reservoirs which were full last year, are all running empty.

A shortfall in rainfall could also impact the power generation in the country. Agricultural demand for power would go up and power availability from hydroelectric projects would come down. This would impact the power supply position in the country.

Source: Truant rains could nix nascent recovery: http://www.livemint.com/2009/06/22235043/Truant-rains-could-nix-nascent.html?pg=1

Also Read: Changing Monsoon trends: http://www.livemint.com/2009/04/30222403/Changing-monsoon-trend-forces.html?d=1

http://www.livemint.com/2009/05/25092131/Monsoon-hits-Indian-coast-ear.html?d=1

Tongue in Cheek: What a waste!

A new section in Newspaper Posts, Tongue In Cheek, is about interesting facts and annecdotes concerning the world around us. Your comments as always are welcome.

Approximately 40% of the farm produce (Fruits and Vegetables) in India is wasted in the absence of organized cold chain network in the country.