Here's Why India Will Soon Outpace China

Discussion in 'Economy & Infrastructure' started by Srinivas_K, May 4, 2014.

  1. Srinivas_K

    Srinivas_K Senior Member Senior Member

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    Here's Why India Will Soon Outpace China

    On the face of it, the title of this article will seem absurd to many. While China's economic growth has slowed, it's still running at a brisk 7.4% annual rate. Moreover, the Chinese government seems to be successfully slowing credit in order to rein in a burgeoning debt issue. And it's implementing a plethora of reforms which should propel the next phase of growth.
    Meanwhile, India's a mess. This fiscal year's GDP will be below 5% and near decade lows, government and corporate debt is high, the current account deficit has been out of control until recently, inflation reached double-digits late last year, business confidence and investment are at extreme lows and corruption remains rampant.
    Dig a little deeper though and the picture doesn't appear as favourable for China's economic prospects vis-a-vis India's. First, it's highly probable that China's GDP growth rate is slowing much more than the fraudulent figures put out by the government (I'm not picking on China here as many governments are guilty of this). Second, credit tightening in China will almost certainly take years rather than months given the boom which preceded it. Third, Chinese economic reform will be a drag on growth in the near-term, as can already be evidenced by the crackdown on corruption and its impact on retail consumption.
    On the flip side, there are many signs that India's economy may have bottomed. The current account deficit has significantly eased, the currency has stabilised, inflation has substantially pulled back and corporate earnings are improving. With inflation down, interest rates will soon be cut, which may prove the catalyst for the next investment cycle. The election of a new, economically-friendly government should ensure an acceleration in investment and improved productivity.
    There are other positive developments which augur well for India too. For instance, there's an ongoing boom in the agricultural sector with rising investment and wages. This has resulted in India becoming a net food importer - an important development given the country's dependence on agriculture.
    For a long time, India's decentralised, often chaotic economic model has been seen as inferior to China's authoritarian, top-down model. A reappraisal of that view may soon be in order.

    How India became a mess

    Morgan Stanley's Ruchir Sharma has noted that India seems to go through cycles of economic crisis and reform every decade or so. In 1991, a balance of payments crisis preceded widespread economic deregulation which is credited for driving the rapid economic growth of the following two decades. In the early 2000s, another crisis resulted in further deregulation and privatisation of key industries.
    Here we are about ten years later and there are economic troubles again. GDP growth has slipped below 5%. Inflation peaked in double digits before marginally declining of late. The fiscal and current account deficits have widened sharply.
    The government is again largely to blame for the problems. The ruling Congress Party fell into the trap of thinking that economic growth in the high single digits during 2003-2007 was perfectly natural. But it was just the result of reforms from prior governments.
    In response to the 2008 crisis, the ruling party initiated a large stimulus package. This worked for a time as the economy recovered faster than most other emerging markets. But combined with large-scale subsidies to bribe rural voters, to the tune of 2.3% of GDP, inflation soon lurched out of control. A lack of reform driven by infighting in the Congress Party and a judicial crackdown on political corruption didn't help.
    Foreign investors and bond rating agencies became increasingly nervous about India. In 2012, the ratings agencies threatened to downgrade the country's sovereign rating to junk status. Mid last-year, the rupee tanked as foreign investors grew concerned about the current account deficit following hints of QE tapering at that time.
    These events were enough to spark the government into action. It's since liberalised foreign investment in retail and airlines. It's also started to cut back on energy and agricultural subsidies. More recently, the new central bank governor hiked interest rates to stabilise the currency and tame inflation.

    Signs the economy has bottomed

    There are a number of signs though that India's economy may have bottomed and better times lay ahead:
    1) The current account deficit (CAD) has eased significantly. The last quarter saw the lowest CAD number in five years due to improved exports and lower gold imports. Bank of America Merrill Lynch forecast India's CAD will be 2% this fiscal year compared with 5% in 2013.
    India: Current Account DeficitIndia: Current Account Deficit
    [​IMG]

    2) Inflation has pulled back. Due to lower food prices, WPI inflation is at its lowest level in more than four years.
    WPI Inflation: November 2010-PresentWPI Inflation: November 2010-Present
    [​IMG]

    3) The rupee has stabilised. Interest rate hikes and the declining CAD have helped.
    4) Corporate earnings seem to be improving. The earnings revision ratio has been rising for the past eight months. Yes, it's still not great but at least it's heading in the right direction.

    [​IMG]
    India: Earnings Revision RatioIndia: Earnings Revision Ratio
    5) Nomura's composite leading index for India suggests growth is bottoming out.
    Composite Leading Index for IndiaComposite Leading Index for India
    The key to an economic recovery though is business investment. There are tentative signs that this may be set to turn around:
    Business confidence, while low, has improved of late in anticipation of a new government coming into power.
    Regulatory constraints for new projects should be eased post election. A Cabinet Committee on Investments has already started to reduce bottlenecks, but this should soon accelerate.
    Higher interest rates are forcing Indian companies to reduce leverage by shedding assets. The process of decreasing debt, particularly among infrastructure companies, is necessary for businesses to be in a position to accelerate investment.
    Asia Confidential doesn't foresee a quick turnaround in capital expenditure given high corporate debt levels. But with the prospect of sharply declining interest rates and a new economically-friendly government soon in power, the conditions are in place for a gradual pick-up in business investment.

    [​IMG]

    Modi: friend or foe?

    The big question is whether the almost-certain-to-be new leader, Narendra Modi, can deliver on the inflated expectations of him. India's stock market is certainly answering in the affirmative as it hits new highs (though it's noteworthy that small caps have significantly lagged).
    Modi's economic track record is undoubtedly impressive. He's been chief minister of Gujarat, a state with 60 million people, for 12 years. During that time, he's cut red tape, built substantial infrastructure and contained corruption. Business and investment have thrived. Gujarat GDP has grown 3x under Modi's leadership. The state now produces 25% of Indian exports yet accounts for just 5% of the nation's population. Most social indicators in the state have also improved under his watch.
    As leader, Modi has promised to replicate his Gujarat policies of improving infrastructure, reducing regulatory hurdles for businesses and ultimately achieve higher growth rates. Granted, he's been vague on how he's going to finance some of his promises. Given the fiscal situation, there's not much room for a substantial boost in spending.
    The big blight on Modi's track record is his hardline Hindu nationalism. In 2002, Muslims in the Gujarati town of Godhra set fire to a train carrying Hindu pilgrims back from a town in Uttar Pradesh. 59 people died on the train. After the attack, Hindu groups called for a protest. This resulted in several days of violence directed at Muslims. 1,000 died and 200,000 were displaced.
    Being chief minister at the time, Modi had the option to ban the protest or call in police, but he chose not too. This was condemned at subsequent investigations. And Modi's refusal to apologise for the incident continues to anger Muslims. The US actually revoked Modi's visa, suggesting "he was responsible for the performance of state institutions" in the riot.
    The facts of this incident are damning but must be weighed against his economic track record and leadership qualities. They must also be weighed against the ineptitude and arrogance of the governing Congress Party over the past decade and for much of the past 50 years.
    What matters most though is the opinion of the Indian voter. There's a chance that Modi could win an outright majority of votes in the general election, which would allow him to rule without coalition partners. The most probable outcome is that he'll win a near-majority and will be able to build a coalition with a small number of partners.
    By voting for Modi, Indians will be clearly saying that they're tired of the Congress Party's policies of protectionism, the bribes disguised as subsidies and corruption which goes along with these. They're demanding policies to promote economic growth, development and jobs. And they want decisive leadership rather than bumbling and infighting.
    It may be a stretch to suggest that voters favour market-driven solutions over government-driven ones. But the tide has certainly swing in that direction.
    Ultimately, Modi is expected to be given a strong mandate for change and his business-friendly credentials bode well for the country's economic prospects.

    Broader, ignored positives

    Besides a bottoming economy and new, potentially improved leadership, there are also several other positive developments which point to a brighter future. India's much-maligned legal system and decentralised political system have proven strengths of late.
    It's the judiciary which has led the way in fighting corruption. There's little doubt that corruption remains a huge issue in India. There are some estimates that it's cost the country US$80 billion over the past decade. According to Transparency International, India ranks 94 of 177 countries in its global corruption perception index, behind the likes of China and Brazil, both hardly paragons of clean administrations.
    The courts have been central to curbing some of the rampant corruption. The cancellation of 122 mobile phone licences and jailing of the telecommunications minister in 2012-2013 being but one example.
    It'll be up to Modi to accelerate the crackdown on corruption. It's crucial that he does as corruption takes valuable money away from productive investments which can boost economic growth and keep inflation in check.
    Undoubtedly, political decentralisation has helped the spread of corruption. But the upside from decentralisation is that India's growth has been shared by rural areas as much as the cities (unlike in China).
    In fact, rural areas in India are booming. Wages have risen by close to 15% per annum over the past ten years, compared to city wages which are down more than 2% over the same period.
    Decentralisation provides part of the answer for the boom. Urbanisation - people moving from country to city - has also played a role as it's resulted in a tightening in the rural labor force and contributed to the rise in wages and investment.

    A moment in the sun

    All of the above isn't to suggest that India will displace China as Asia's next economic giant. Far from it. With GDP per capita of just US$1,250, India still has an enormous way to go to catch up with China (GDP capita of US$6,700) and the rest of the developing world (GDP per capita of close to US$10,000).
    What Asia Confidential has sought to demonstrate instead is that India has more scope to surprise than China on the economic front. Part of that is because India's coming from such a low base.
    Moreover, this author can foresee a time in the not-too-distant future when India's economic growth matches, and likely surpasses that of China. The media may then be lauding the superiority of the Indian growth model over China's!
    AC Speed Read
    Despite slowing, China's economy is still growing at a much faster clip than India's.
    But that may be about to change with signs that India's economy has bottomed while China faces serious downside risks.
    With inflation falling in India, interest rates there are set to drop and this, combined with a new, business-friendly government, should provide the impetus for the next business investment cycle.
    For a long time, India's decentralised economic model has been viewed as inferior to China's authoritarian, top-down model. A reappraisal of that view may soon be in order.

    Here's Why India Will Soon Outpace China | Investing.com
     
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  3. jus

    jus Senior Member Senior Member

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    Authoritarian (centralized CPC) rule has many Flaws
    No one believed Once Super Power USSR will COLLAPSE LIKE That (Mostly internal)till 1991 CPC hide the information/No freedom/No rule of Law/No Representation/No Checks & Balances
    every country face difficult Phases But only Authoritarian rulers will COLLAPSE My Bet on 2019:thumb:
     
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  4. CrYsIs

    CrYsIs Regular Member

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    There is a fundamental difference between Soviet Union and China.

    Soviet Union was an multicultural,multi ethnic,diverse union and an impoverished superpower where as China is largely a monolithic capitalist oligarchy.

    In Soviet union people outside of Russian SFSR had no feelings for the Union where as Chinese are very nationalistic and take immense pride in their country and it's economic rise.

    Besides Soviet union was a very repressive regime just like North Korea where as Chine is comparatively much freer.
     
  5. jus

    jus Senior Member Senior Member

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    Ha ha ha
    TIBET
    XINXIANG
    INNER MANGOLIA
    TAIWAN (it's a big issue)
    these r very Big issue there is no Media to cover in side &not allow out side media

    U MEANS CHINA is not Repressive they Banned Ramdan beard,Burka/Buddhist r Horrible positions/Recently started demolishing Churches also (simple Google search)
     
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  6. jus

    jus Senior Member Senior Member

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    USSR has a Huge land mass & Natural Resources with less population
    they always improved their Sc&T (comparable to US) not like Made in China goods(Brand how people perceive :lol:)

    Ok let be clear i'm not against CHINESE they r Intelligent/Tolerant/Pro Development/Great Culture/Innovative ppl etc now they r making 2nd hand sh** in HIGHLY POLLUTED ENVIRONMENT THANKS TO authoritative CPC their Wages r increasing now MNC will shift their location over night next what ............. u will never see anything in media until SHOCK like 1991
     
    Last edited: May 5, 2014
  7. CCP

    CCP Senior Member Senior Member

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    U will die my bet on 2014:thumb:
     
  8. CrYsIs

    CrYsIs Regular Member

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    Thats why i said "they are comparatively much freer".Soviet Union was an absolute repressive regime where they didn't even have freedom of buying a car of their choice,leave alone stuffs like freedom of speech and expression.

    In China the only freedom you don't enjoy is the freedom to criticize or question the government,otherwise they are as free as Indians.
     
  9. CrYsIs

    CrYsIs Regular Member

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    Soviet union was an artificial socialist union,a balloon waiting to explode.China is no soviet union,it's a very old civilization.
     
  10. jus

    jus Senior Member Senior Member

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    I'm only comparing Authoritative structure in that particular time frame(1960-70 people thoughts different 2010 ppl thoughts different ) every village is different to other in same district how can i say both r same :rolleyes:
     
  11. CrYsIs

    CrYsIs Regular Member

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    China is following a model which is very typical of east asia. Have an authoritarian regime when your country is poor so as to ensure high growth and development without any resistance and when people become prosperous only then you give them things like democracy.They think that implementing ideologies like democracy from the very beginning leads to a mess like India.
     
  12. Julian

    Julian Tihar Jail Banned

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    Right, with all difficulties Russian people did not break up as they were Russian speakers, similarly China will not break as 92 percent Chinese are Hans . USSR was an artificial nation, China is not.
     
  13. Julian

    Julian Tihar Jail Banned

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    Xinjiang has lot of Hans too, and if you think 2 million Tibetans can take on 1.2 billion hans, they you are wrong.
     
  14. Julian

    Julian Tihar Jail Banned

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    You can criticize government for local issues like pollution, only you can not question its authority.
     

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