Sunil Jain: India meets China

PERSPECTIVES

Most continue to argue it will take India several years to catch up with China, even though investment rates in India are slowly beginning to catch up with Chinese ones. A recent paper by Jahangir Aziz (http://www.icrier.org/publication/WorkingPaper224.pdf) for ICRIER has some interesting findings in this context. For one, it points out while China’s investment-to-GDP ratio rose by 8.2 percentage points between 2002-05, India’s rose by 9.8 percentage points (in 2005, China’s investment-to-GDP ratio was 43 per cent as compared India’s 30 per cent); private consumption-to-GDP fell in China by 12.2 percentage points and by 10.8 percentage points in India. 

After looking at how allowing the cost of capital to rise to its true value (China subsidises capital) would reduce investment-to-GNP ratio to around 30 per cent from the current 45, Aziz’s model shows allowing India’s cost of capital to fall to its true value (India taxes capital) would increase the investment-to-GNP ratio by around 5 percentage points.This would lower China’s average growth to around 8 per cent and raise India’s to roughly a similar level. Apart from the China comparison, the study has important policy implications in the current context of India’s growth slowing and the clamour to get the RBI to reduce the cost of capital.