General Awareness

April 04, 2017 @ 01:15 PM

Advantage India over a Slowing Chinese Economy

Published : Monday, 30 March, 2015 11:52 AM
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Advantage India over a Slowing Chinese Economy

A decelerating Chinese economy has enhanced both global uncertainty and expectations, particularly in relation to the Indian economy. In 2014, the Chinese economy grew at an official rate of 7.4% slightly below the official goal of 7.5%. Although any official GDP growth rate above 7% would be the envy of all major economies, the 7.4% figure represents China’s lowest economic growth since 1991.

While the trend of slowdown in Chinese economy has become inexorable, estimates coming from the World Bank and the International Monetary Fund suggest that the Indian economy will soon outpace China and it can happen as soon as 2017.

But, the key question is: can India really raise the bar and outperform China? More importantly, can India sustain the lead when Chinese economy bottoms out and revives growth?

For starters, the tide is turning in India’s favor in the short-to-medium term. Inflation is reined in although a lot of credit for that should go to a reduction in fuel prices. What may benefit India here is that the situation may not alter dramatically for at least next two years with most experts predicting that oil will not go to over $80 per barrel level.

Although there has not been a radical overhaul in economic policy since the new BJP government took over, the pro-business sentiment has become more palpable. Indian stock markets are seeing a bull run with the BSE Sensex rising almost 38% in the past 12 months. The World Bank expects Indian economy to grow 7% in 2017, up from 5.5% in 2014 while Chinese growth rate may come down to 6.9% in 2017.

However, it is the long-term future of the Indian economy that raises the hope. At present, both India and China are trying to catch-up with richer economies of the West. They are shaking off the effects of market isolation, mass illiteracy, limited access to technology, poor infrastructure, and stiff regulatory environment that stifles business development.
Once these shackles to growth wither away, the growth in the two countries will depend on taking advantage of demographics and innovation. Here, many experts believe that India has an edge. Our population is growing, while China’s shrinking. On innovation front, a democratic India with property rights (although limited compared to Western economies) and political stability offers greater hope in fostering individual entrepreneurship compared to an authoritarian model of capitalism that China is pursuing.

While a slowing Chinese economy offers opportunity, India will do well to set its house in order to seize the advantage. First, India’s appeal as a sourcing and manufacturing destination is primarily due to labour cost, but the country’s complex regulatory environment and poor infrastructure has hindered manufacturing sector growth in recent years.

A large domestic market is India’s yet another advantage vis-à-vis China. In fact, Beijing is attempting to transform its infrastructure investment driven and export-oriented economic model towards domestic consumption driven economy. In fact, a large domestic market with low labour costs is a big incentive for any investor.

India, however, needs to realize the true potential of its low labour costs and bring a lot of unorganized/informal workforce into the mainstream and engage them in more productive and gainful employment in the manufacturing sector.

The manufacturing sector, however, will not take off unless a complex regulatory environment is made simple to promote ease of doing business. Land acquisition laws need to be simplified to reduce uncertainties for investors. Although India is building roads, ports, airports, and new rail lines for its railways, the pace of infrastructure development is slow and requires a larger investment push.

To conclude, while India may relatively look better than China in 2017, the country can sustain its high growth path only by sustaining and pushing a long-term economic growth plan, which focuses on creating a manufacturing base, fostering innovation, eradicating mass illiteracy and poverty, and pursuit of democracy.
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