Tuesday, April 21, 2015

India's Economic Growth To Overtake China: Not Useful Information


INDIA TO OVERTAKE CHINA IN ECONOMIC GROWTH - Not useful and slightly misleading information.

The IMF's 2015 forecast is that India's GDP growth  will be 7.5 % while China's will drop to 6.8%. And the media has made headlines out of this. If such news is meant to convey the image that India is making great overall progress in its economy, it is misleading. You cannot really compare India with China:

1. 7.5% is from a low base compared to China. India's GDP is about US$ 2 trillion while China has a GDP of US$9 trillion. To grow 7.5 % from a lower base is much easier. South Sudan has GDP growth of 23% while Mongolia grows at 11%.

2. As an economy develops it is natural for growth to slow down. Singapore used to grow at 7-9% and now the new normal is 2-3%.

3. Good infrastructure is required for growth, and India lacks far behind China in roads, ports, railways, airports, telecommunication. Especially power generation infrastructure (electricity).

4. India's demography may be better than China's with a young population and high fertility rate. But the education and skills required for a modern economy still need much development.

5. India's democratic system. No matter what our political ideals, it is undeniable that especially in the early stages of growth, democracy slows down the economic decision-making process. Important matters such as land reforms face huge hurdles.

6. India's financial markets institutions and regulatory bodies are not yet as developed as China's. And these are necessary for capital and resources to be efficiently deployed.

For all these reasons, my opinion is that 7.5 % Indian economic growth rate cannot be sustained for more than three years if  the status quo remains.

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