The new decade will belong to India; when will this reality be recognised by Indians?
Surjit S Bhalla / New Delhi Dec 26, 2009, 00:41 IST
End of the year, end of the decade. Time for assessment, rumination, and forecasts. And if it is the year after the greatest financial crisis, what else can the forecast be about other than GDP growth? Oh yes, it could be about climate, but after hope and Dopenagen, that assessment can wait.
Two key conclusions emerge about Indian GDP growth. First, that this growth is now at a plateau level of 8-9 per cent. Second, that very soon, analysts and punters will have to change their Word documents to “India is the fastest growing economy in the world” rather than, “excepting China, India is the fastest growing economy”.
There are three separate reasons for this, all of which have been outlined numerous times before in these columns (and a detailed assessment was provided in Bhalla-2007*). The reasons refer to the broad determinants of economic growth — capital, labour and productivity. On the first, India is investing at the same rate as China (approximately 40 per cent of GDP), on the second, India’s labour force growth is about 1.8 per cent per year faster than China, and on the third, China has outpaced India by about 2 per cent per annum (for the last five years). Most of this outpacing has had to do with the deep and deeper currency undervaluation practised by the Chinese authorities which led to two unsatisfactory outcomes: the great financial crisis of 2008, and now the largest and fastest growing polluter of the world. For how long will the international community stand idly by? Not very, and this is the first big forecast for the ensuing decade: China’s exchange rate will appreciate significantly starting 2010. How significantly? A first year appreciation to about 6 yuan per dollar from the present 6.8 level.
This scenario will have predicted effects — China’s GDP growth should moderate to a less polluting 8.5 per cent in 2010 and then proceed on a declining trend for the rest of the decade. This will mean jobs for the rest of the world. The other side-effect of the China growth rate decline will be on carbon emissions. They too will decline, and allow China to reduce its carbon intensity of output to at least the world average. In stark contrast, India does not have pressure from the world community to mind its currency or emissions. The productivity growth advantage of 2 per cent a year that China currently enjoys will soon disappear, leaving India with a GDP growth rate in excess of China, and in excess on a sustained basis.
I realise I am going out on a limb, because no one has even dared to project India to grow at even the same rate as China — and I am saying that India exceeds the China growth rate as early as 2010 (as it happens, this is the exact year forecast in Bhalla-2007). But I have good fortune on my side — my forecast of 8 per cent plus for Indian GDP growth for 2009-10 (made on April 18, 2009, “V–shape of things to come”, Business Standard) got an “endorsement” from India’s Finance Minister Mr Pranab Mukherjee when he claimed a few days ago that India’s growth could top 8 per cent this fiscal year.
What Indian policy-makers have not realised, and their counterparts around the world, especially China, do recognise, is that what international organisations say affects perceptions of the world, and affects our own negotiating positions. Take for example the assessment of poverty in India. We keep coming out with poverty lines and expert committee reports whose only terms of reference is to increase the rate or poverty to somewhere around 80-90 per cent (why they don’t reach 99 per cent poor is a mystery). China, on the other hand, refuses to let the Asian Development Bank even mention the word China in its poverty assessment report for all of Asia (presumably, China is situated in Europe). China does not ask for money for climate control, and Jairam Ramesh gets berated for sacrificing India’s interests by not begging for more aid.
As you mistakenly perceive yourself, so do others. For example, the IMF comes out with “respectable” forecasts of GDP growth for China but, low ball estimates for India. (Haven’t you heard — India has 50 per cent poor, China does not have any poor). The first low attempt by the hallowed (hollow?) institution was 4.5 per cent GDP growth for 2009. Recognising the error of its ways, the IMF has revised this forecast sharply upward to 5.4 per cent. For 2010, the forecast is even higher at 6.4 per cent; presumably, that comes with an admonition that the Indian economy is overheating.
The IMF is in Washington, and its thinking is still respected by many government officials. But one might justifiably ask, a la the Joker, “Why so Low” for India? In a revealing contrast, the IMF forecasts for China are a lot closer to reality, and at least 3 percentage points a year higher than those for India. And here am I, ordinary mortal, daring to contend that GDP growth for India will be higher. Goliath vs David?
But the IMF is in good company — in India. We have more than a smattering of the nattering nabobs of negativity (in homage to the recently departed William Safire) to supplement the dark IMF view. Most notably, practically everybody outside of Oxus, Ministry of Finance and the Planning Commission is targeting weak GDP growth for India (should make the poverty investors at the World Bank and the UN very happy). All of this was all too apparent on November 30, when GDP growth figures for July-September 2009 were released. The official estimate for year-on-year growth: 7.9 per cent (Oxus’ seasonally adjusted annualised rate calculation: 11.5 per cent). Most forecasters (including the prestigious PM Council of Economic Advisers headed by former Governor of the central bank C Rangarajan) had an estimate of growth a full 2 percentage points lower at 6 per cent. It is not easy to get a forecast that far off. Especially interesting was the excuse made by most for getting it all wrong — Oh, the drought effects of the summer kharif crop were not factored in. But the last time the kharif crop got harvested by September was in historic cooler climes of a few hundred years ago.
This has been a structural change decade for India. Sadly, this reality hasn’t quite seeped into the psyche and mind-set of a large body of Indian policy-makers and opinionrattis. This should, will, also change in the new decade.
*Bhalla, Surjit S, Second Among Equals: The Middle Class Kingdoms of India and China, May 2007, available at www.oxusinvestments.com; revised version, forthcoming 2010, Peterson Institute for International Economics, Washington, DC.
The author is Chairman of Oxus Investment; all the past articles (and forecasts) are available on www.oxusinvestments.com.
Dear Sir,
Excellent Article, As China's plight becomes India's oppurtinity, is the Indian government and the corporate sector in india ready for this oppurtinity. i would like to thank you for your laying out your wisidom in simple words.
nice article. In every country the law and lawmakers have alway played catchup with the people and their aspirations. Bharatiyas have moved aggresively into the world stage through various channels - industry, music, sports,etc but the babudom is slower and is left behind. They will eventually wake up.
Another point is that the apreciation of the RMB or yuan or whatever one calls it, will not result in loss of chinese jobs and slowdown of Chinese economy in the long term. This will be only a temporary phenomena. Appreciation of the yuan will make chinese goods more attractive for chinese who will probably be more than happy to buy stuff they make themselves. There will be pain but only till China disengages from the US and finally decides to walk away from the 2 trillion $ reserve.
Sir, is it a write up on China ? Two films, namely Lagaan and Gadar - Ek Prem Katha were released on same day. Both were popular and both did good business. But strangely while Lagaan was all over, Gadar - Ek Prem Katha was hardly discussed in media. Please remember its main character was the hero of the much loved film - Soldier. It was produced by a media house. If you analyse, the reason is obvious that you can not rise up just by dragging others down ; no matter whether the others are good or bad. We must hope for the best but we must work hard to ensure that we arise.
Good optimism. Your article is full of envy - drag China down, that lifts India. Not necessary. And, by the way, go see China. Then write again. Every one, Indian and non-Indian, who has seen the countries says, "no comparison".
By the way, that quote about nattering nabobs is not Safire. It is from that corrput US Vice President, Spiro Agnew.
The biggest single missing ingredient in India - accountability.
Economic growth of an economy usually slows as the economy become mature. India, behind China, has a greater portential for higher growth as a result.Since India has a higher population growth than China, India has to grow faster than China for the standard of living to rise at the same level as China. In 2010, if India grow at 9% and China at 8%, the gap between India and China is still widening. Say India's GNP is $ 1.4 trillion. 9% of $ 1.4 trillion is $ 126 billion. India will add $ 126 billion to its economy. China's GNP is $ 4,6 trillion. If China's growth is 8%, 8% of $ 4.6 trillion is $ 368 billion. China will add $ 368 billion to its economy.
Dear Surjit,
I have been following your columns and shows and views for quite some time now. I like your spunk and forthrightness. I teach economics at post-graduate level and I completely agree with your prognosis for the Indian Economy. The need for a change in our policy-makers' mind-set is absolutely necessary. We must engage with the world as winners. This is already happening... Pick up any field - services (I.T.), manufacturing(Nano) and even sports(cricket). We have emerged as world-beaters and we behave like such. It is only in the corridors of policy-making that we still have third-world-country mindset. Hopefully, that too will change..!!!
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