Much to the surprise of many, India’s economic momentum is gaining steam. This recovery brings with it a moderation in CPI inflation, greater capital flows and reduction in the fiscal deficit levels owing to tax buoyancy. In our assessment, inflation in India will continue to be within the 2–6% range and capital flows are unlikely to reverse to the extent of creating substantial pressure on the rupee even in the event of the Fed tapering. Therefore, India’s recovery looks well on track with solid macroeconomic fundamentals that should be instrumental in sustaining this momentum.
The same cannot be said about most other emerging economies, but in this column, we restrict our focus to just one other—China. In a previous article, one of us attempted to illustrate that China’s miracle growth was nothing but a mirage. Since then, the authorities in China have responded to the Evergrande crisis by pumping in more liquidity into the system even as they have tightened the standards for credit to the real estate sector. While the immediate deal may have calmed the fallout for now, the tighter credit norms have resulted in nearly two-thirds of Chinese realtors reporting debt levels much beyond those set by the authorities.
The situation in China is not one that should be taken lightly as its real estate sector accounts for half of the world’s stressed dollar bond issuances. The impact is already visible in terms of demand for commodities as their prices are lower than the peak experienced in 2021.
An outcome of all these developments is that globally, people are no longer bullish on the China story. Or, in other words, it is safe to say that the China story is over. Despite years of many suspecting their official GDP figures, we are now at a place where most forecasters don’t believe that China can grow beyond 3–4% annually on an average over this decade. That says something, given that in the 1990s, China registered impressive double-digit growth. During the 2000s it came down to 8% and the last decade saw its annual average growth rate slide further to 6%. Thus, this is a story of three decades of decline in growth rates, which is likely to continue. This should not come as a surprise as the Chinese economy has expanded considerably since the 1990s and some amount of growth slowdown was bound to occur. However, the story in China is that it will become older before it becomes richer.
It is interesting to note that even as China grows at 3–4%, India is expected to grow at 7–8% on average over this decade. This means that India may catch up to China’s level of GDP and income per capita faster than originally anticipated.
Long-term comparisons and forecasts are tempting, and one such forecast is that existing preconditions ensure that India is destined to overtake China unless we shoot ourselves in the foot. For starters, unlike China, India does not face a sharp reversal in demographics anytime soon. Therefore, we have a chance to become a much wealthier society before we age. This is a big advantage as it means that India has the capacity to move consistently up the value chain and even catch up in productivity levels with many advanced countries. Our ability to achieve this will provide the only viable model for a large population such as India to emerge as an industrial and economic powerhouse.
Even as there are several challenges to India’s development and a long list of further reforms that are needed on the economic front, one must concede that it also has a lot of things in its favour. The biggest amongst them all is a well-functioning democracy that serves as a feedback mechanism, thereby nudging the government into undertaking policies that can help people meet their aspirations.
It is democracy that is pushing governments to ramp up India’s healthcare capacity both in terms of physical and human capital. Subsequently, we may soon have one of the world’s largest healthcare capacities, even if it appears modest when we scale it to India’s large population. There may be a need to focus on improving the quality of doctors and our engineers from several new colleges. But, again, democratic functioning will automatically deliver this feedback to the representatives, and they will undertake the necessary interventions.
It is through several of these feedback loops that we will see the public policy response that focuses on ensuring a much more balanced and holistic development. Unfortunately, the same is not available in China. Moreover, unlike India where one can publicly disagree with government policy, the same is not true in China. Therefore, it should come as no surprise that many policies that may appear to be sub-optimal are often introduced in China, such as the ill-advised crackdown on Big Tech. Since 2014, the Indian government has been far more responsive to feedback on its policies, which is why we see iterations with existing programmes.
This in turn results in a focus towards finding a balanced and sustainable development path. Further, because of the culture of discussion, debate and deliberation, India ultimately is able to adopt sound economic policies even if they come with a lag—as an example, consider the reversal of Nehruvian Socialism that continues till date.
To sum up, here’s a forecast that may appear to be either prescient or an incorrect prophecy: India is destined to emerge as the largest Asian economy as long as we don’t shoot ourselves in the foot. Our money is on democracy delivering to ensure that we don’t make any policy missteps along the way as China did with its one child policy. Therefore, the PM is right when he says democracy has delivered and it will deliver—the coming three decades will be a testament to that.
Karan Bhasin
(karanbhasin95@gmail.com)
Piyush Gade
New York-based economists