Cooling dragon, stumbling elephant

For two consecutive years — 2012 and 2013 — the Chinese economy grew by 7.7 per cent. Suddenly, a sub-eight per cent growth seemed the ‘new normal’ for the dragon, as against an average annual GDP increase of 10.3 per cent over the last decade. But official data released on Wednesday showed year-on-year GDP growth for the first quarter of 2014 falling further to 7.4 per cent. At this rate — there are some analysts who project that will drop below 7 per cent by the third quarter — growth for the full year could turn out to be the lowest since 1990. That was, of course, the year following the infamous Tiananmen Square massacre triggering western economic sanctions and suspension of loans.

While sub-seven per cent is regarded to be ‘hard landing’ in China, for policymakers in India, though, growth anywhere close to these rates would represent a significant recovery from our current sub-five per cent levels. This highlights the different levels of expectations: any growth rate below eight per cent in China is viewed as subnormal, while anything near or above this is great for India. The truth is China is in a state of transition after growing an average 9.9 per cent a year from 1978 to 2011, thereby becoming a $9 trillion-plus economy. Much of this growth has been investment and export-led. In the post-2008 global crisis period, gross fixed capital formation to its GDP accounted for 47 per cent of its GDP, while private consumption contributed only an average of 35 per cent. The country’s policymakers are now seeking to ‘rebalance’ the economy away from investment and exports to one that is focused more on domestic consumption. This will inevitably lead to lower, but sustainable, growth in the long run.

It is the opposite in India, with 60 per cent of its GDP originating from consumption and only 30 per cent from fixed capital investment. The latter explains why India produced only 81.2 million tonnes (mt) of crude steel and 275 mt of cement in 2013, compared with China’s 779 mt and 2,410 mt. Clearly, India’s growth strategy ought to focus much more on investment – be it in roads, bridges, power, high-speed railways and optic fibre networks or building new cities and industrial corridors. Given the huge dearth of all these — in contrast to China’s highways to nowhere and unneeded aluminium smelters — there is enough scope for investment-led growth in India to sustain for at least the next two decades and help it become much bigger than the $1.9-trillion economy now. One source of financing these investments could actually be China, currently sitting on almost $4 trillion of foreign exchange reserves deployed mainly in low-yielding US treasuries. There is an opportunity here for both countries — one desperate for long-term capital and the other seeking more rewarding investable avenues.

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