Thursday, January 15, 2015

India set to overtake China?

Optimism about the Indian economy is alive despite 2014-15 being largely washed out. We have commentators again talking of India overtaking China in the second half of the decade. They were saying so at the beginning of the decade as well. At that time, however, China was growing at over 8 per cent. What commentators meant then was that India would inch towards 9 or 10 per cent and thus overtake China.

Today, the overtaking, if it happens, will be at a different level. And it will happen later than commentators had predicted. Chinese growth is poised to fall below 7 per cent. The World Bank sees the Indian economy growing at 7 per cent - in 2017, a good two years later than forecast at the beginning of the decade.

Still, becoming the fastest growing economy in the world is no mean prize. Is the prize within reach? Most commentators would say - yes, if the government could push through "big ticket reforms". An article in today's FT makes this point:
Reforms aimed at boosting manufacturing or encouraging capital investment may prove tougher to implement at national level than they did when he was running Gujarat. Besides, some reforms, such as relaxing the rules on foreign ownership of insurance companies, may not prove to be the magic bullets that industry lobbyists claim. Second, and perhaps more fundamental, democratic India is still caught in an ideological battle over where to strike the balance between pursuit of growth and protection of the environment and land rights.  

This is the sort of thing we have been hearing for two decades now. Reforms didn't happen in UPA-I and growth soared to 9 per cent for at least a three year period, thanks to the global boom. I don't believe India's growth is contingent on the familiar set of "reforms". I think the Indian economy can hit 7 per cent if two things happen. First, banks need to be recapitalised. This, as readers of this blog would know by now, doesn't mean "big ticket" reforms in banking. It means a few simple things like reducing the government's stake to say, 52%, getting the right people into top management, strengthening boards and improving risk management.

Secondly, the world economy needs to get better. Will it be by 2017? All bets are off at the moment. But if the improvement did happen in the world economy, we have a good chance of being the fastest growing economy in the world in 2017.


shishir sharma said...

While not arguing against the views, it is to state that it might be a good idea to compare growth rates of per capita income too, which show no such trend thereby leading to a probable conclusion that the expectation and the very basis of comparison of growth rates of GDP might be not be correct ignoring the vast differences in GDP aggregate and populations of the two country as a quick analysis of world bank data of China and India shows.
China grew at
22.87 11.86 11.72
Percent in 2011, 2012 and 2013 resectively over previous years as compared to India’s
8.68 -2.40 -0.27

shishir sharma said...

Contd....2 earlier comment
"I fully agree with Prof’s view that solutions have to be found first within existing institutional structures while attempting to bring gradual improvements. After all, development is a very slow process in democratic country like ours with many distinct centre state subjects such as land, cooperation etc., quite unlike such highly controlled economies like china. Many times one is forced to admit that comparisons between Indian and Chinese economy are a bit irrelevant. It might be alright if a comparison is made in case of sales strategies, custom duties, dumping of poor or better quality goods, etc., but comparing the growth rate of economies of these two countries and take it as an achievement in isolation needs to be reassessed. Thus if a country with smilar democratic setup and cultural background is compared with India, then even conceptual comparison of growth rate could be considered to be followed with more comprehensive analysis).