INDIA DISPLACES CHINA AS THE WORLDS GROWTH ENGINE- FACT OR

FICTON?

(www.bloombergview.com)
The concept of the twinjet emerged from the proposition that if the sole engine of an aircraft
were to fail, a backup could help navigate the vehicle & deliver a safe landing while keeping
it from exploding and scattering on the land beneath. This analogy could be extended to the
realm of economics where doyens believe that amid the Chinese slowdown and the prospects
of global growth seeming bleak, India, with its demographic dividend, fairly diversified
export base and a govt that is laying down red carpets for businesses, could emerge as the
dark horse and propel the engine of global growth. On the other end of the spectrum are those
economists who believe India lacks the sheer magnitude of Chinas, relevant laws, suitable
infrastructure & the necessary political atmosphere and can never overtake it although it
continues growing above 7.5-8%. This debate stemmed from Chinas recent downturn which
has led to a reassessment of global economic growth, with analysts pointing to how India
may benefit from the slowdown. But are we truly set to chase the dragon, let alone outpacing
it?
Comparing Indias & Chinas growth
Bulls say India is the next China. Even if this proves true in the following decade, India is
fundamentally different from China on the grounds of demography and democracy. China
was built on infrastructure, investment and manufacturing, while India has barely scratched
the surface of these three. India began its economic reform in the early 1990s, a decade after
China. But in the past 25 years, China turbocharged its economy while India languished in
relative terms.
Reason- Chinese growth was dominated by worlds highest investment rates, making
possible an enviable infrastructural revolution. Its propensity to quickly and efficiently move
what it produces domestically and around the world has been a critical ingredient to its
growth story.

Between 1990 and 2015, Chinas growth averaged approximately 10%. The ubiquity of
Chinese products, be it a Nike sneaker or an I Pad, sets the country apart. Chinas and Indias
growth strategies are as similar as chalk and cheese.
GDP resting on the four legs of consumption, investment, government spending and net
exports (GDP= C+I+G+Xn), India depended on C&G, whereas China propelled its growth by
primarily leveraging two components of GDP: level of investment and exports by capitalizing
on

Lower wages- China, home to 1.35 billion people and the most populous country in
the world, took advantage of the law of demand and supply of low wage workers and
attracted capital flows from throughout the world. Moreover, China doesnt follow
Child-labour and minimum wages laws as strictly as its Western counterparts. The
huge labour pool in China helps produce in bulk, accommodate any seasonal
industry requirement, and even cater to sudden rises in the demand schedule.

Business ecosystem- China developed business ecosystems for the past 45-50 years,
where India clearly lacked, giving China a clear head start in making its business
environment more competitive by building strong networks of suppliers, component
manufacturers, distributors, government agencies and customers who were all
involved in the process of production through competition and cooperation. For
example, American companies like Apple Inc. take advantages of supply chain
efficiencies in the Mainland to keep costs low and margins high. Foxconn has
multiple suppliers and manufactures of components that are at nearby locations, and
it would be economically unfeasible to take the components to U.S. to assemble the
final product.
Lesser Compliance- with regard to compensation, child labour, shift-hours.
Environmental laws are ignored thus helping manufacturing companies cut down on
waste management costs
Taxes and duties- Export & Import tax rebate policy (1985- zero% VAT)
Currency manipulation

The gap between the two countries infrastructure spending is suggestive of the stark
difference between their growth stories

However, this high level of investment led to overcapacities & low interest rates gave rise to
a real estate boom with rising prices & wages, leading to the average annual wage doubling
between 07 and 13 and wages increased faster than productivity. The expanding bubble
finally gave out and Chinas international competitiveness declined and export-driven growth
decreased.
Whereas, Indias current growth has picked up mainly due to G(government spending) and
C(consumption). Our growth hasnt been as dynamic. After recovering from the Nehruvian
socialist hangover, our GDP averaged 7.25% between 2001 and 2016, although the IMF
predicts 7.7-8% between 2016-20, as against Chinas 6.0-6.6%. Also, Chinas growth has
been badly hit because of its reliance on external demand; whereas Indias demand has
primarily been domestic which relatively insulated us from global financial shocks.
Indias growth rate is larger than Chinas as well as emerging and developing economies,
indicating India is the fastest growing major economy in the world.

Core difference- China entered the WTO to cater to consumer demand of advanced
economies since its domestic demand was too meek to serve as a growth engine. Indias
primary growth engine has resided domestically.
Public debt- A beacon of hope
Indias debt-GDP ratio has been declining consistently as against developing and advanced
economies, whose debt ratio has been steadily rising, post 2008/09, in some cases exceeding
100%. IMF doesnt expect these conditions to improve until 2020. India can ramp up

investments in education and R&D, realizing higher increases in productivity and growth.

Strengths and Weaknesses of the Indian Economy

Additional points:

CFO and IMF numbers indicate that although India is the fastest growing major
economy; IIP, export figures & corporate profits indicate Indias growth may have

suffered as much as Chinas

India was less dependent on global demand than China in 2007, exporting 20% of its
G&S, compared to Chinas 40%. But by 2012 Indias ratio rose to 24%, while Chinas
had declined to 27%. Indias adjustment to the global demand compression was more
imbalanced than that of Chinas.

Summary
While experts suggest India has the potential to leverage its strengths and take advantage of
the changing global scenario to take over China as the global manufacturing hub provided the
govts sustained efforts are implemented, economists like Raghuram Rajan deemed the
current state of the Indian-economy as the one-eyed-king in the land of blind, mainly because
things are just falling into place-investment picking up, a fair amount of macro-economicstability, structural reforms beginning to take place.
Yet the question remains as to whether India would be in an advantageous position if it were
to become the New China.
Opinion on Strategy- Should the Tiger abandon its home-a cultivating wilderness in
search of the tropical rainforest?

In the past, the global strategy was to depend on demand in advanced economies to
augment growth. But this model is being eroded by unfavourable demographics and
plummeting returns to labour, triggering stagnant real wages. These factors were
subdued pre-2008 by a discomforting increase in leverage, enabling economies to
record high growth rates through global turbulences.
Come 2016, no amount of leverage can subdue these negative forces. Protuberant
private debt and tight fiscal policies post-2008 have led to deleveraging and demand
compression in developing countries. Experimental monetary policies havent been
able to revive demand, with liquidity doses returning to Central banks balance sheets,
commonly known as liquidity-traps. Governments levering up to unparalleled
levels has only caused fiscal multipliers to turn astonishingly weak.
The hopeful revival of consumer demand has not occurred, causing a concord
amongst G20 that solid structural reforms are required to revert to the high-growthtrajectory. Such reforms are a nightmare for democracies if theres little space to
absorb its impact.

Chinas share of the global economy when it entered WTO was less than what Indias is now
(4.5% against 7.5% at PPP). The 3 problems in replicating the Chinese model:
1. Weak external demand; global trade in reverse gear.
2. Environment for manufacturing in India is not competitive given its constraints in
infra, land and labour markets
3. The political atmosphere lacks a cohesive approach to development
Given the scenario mentioned above, the following surmises arise:
1. India, in its present structure, is improbable to be the new engine of global
growth.
2. It needs to enhance its export competitiveness via structural reforms rather
than presuming the monetary policy to do so.
3. Due to the uncertainty of revival of external demand, the focus of Make in
India and Skill India should be on influencing domestic demand.

The success of the Modi govts initiatives will still hinge on their global
competitiveness, no matter how enthusiastic the response.

In conclusion, the Tigers primary focus should be on cultivating its home, which is still quite
a wilderness instead of migrating to the tropical forests, whose strategy would be high-riskhigh-return.
Leveraging its internal strengths and focusing on

Financial integration
Skill development and education
Disinvestment
Infrastructure improvement
Structural reforms
5F formula
Reducing subsidies

would ensure Indias path on a sustainable, steady growth trajectory and would prove to be a
low risk value method to high returns, albeit relatively gradually.