Thursday, February 02, 2006

Savings and efficiency in India and China - a tipping point in sight?

The evidence of the last three years is that India's economic growth has moved into a higher bracket, optimistically to something close to 8%. While China's rate of growth, on a large base, is still higher the narrowing of the gap is bringing the strengths of the Indian economy into sharper focus and prompting more detailed comparisons between the two countries. At a very gross level two features stand out: China's investment rate is much higher, and India's utilization of capital is much more efficient. Currently, the first effect is winning but one can wonder (and I would guess) that this cannot last for ever.

Two recent pieces shed light on these matters.

Andy Mukherjee of Bloomberg summarizes a recent Fitch report which discusses why the Chinese save much more (absence of decent returns on savings) and how India's government deficits (dissaving) are at the root of lower investment. Mukherjee himself is not convinced that the Chinese "model" is sustainable as much of the extra investment is channeled into state enterprises.

Separately, Yasheng Huang of MIT revisits his work with Tarun Khanna on the strengths of India's private sector and notes that the intervening two year have been kind to them.

What all of this suggests to the politically minded is that we look for a "tipping point" where India's rising rate of growth edges above a declining rate of growth in China. While this will not redress the actual size of the two economies, it will certainly cause a shift in perceptions of considerable consequence.


Anonymous Anonymous said...

Many economists are of the opinion that India's current GDP growth rates are a result of an upcycle in consumption fueled primarily by low interest rates. Infact, this consumption driven growth is beginning to show its limits, as further consumption is being satiated by increased imports not domestic goods. This is evident by the current acount deficit which annualized this year will probably be close to 4% of GDP.

While the Chinese investment, or should I say over-investment model is not sustainable, I don't see how India's is either. Already the reserve bank is beginning to raise interest rates.

This sweet spot we've had in the last two years, where even Indra has blessed us with bountifull rain, should have been used to initiate the next wave of reforms. Unfortunately Congress is more concerned with it's long term interests, not India's.

February 03, 2006 11:10 AM  
Anonymous India said...

Check out this introduction article on India:
* 1 Political India
* 2 Demography
* 3 Economy
* 4 Sports
* 5 Holidays

May 18, 2006 3:57 PM  
Blogger Ajay said...

India started its reforms process 10 years later and India's growth was & is primarily driven by knowledge/services sector whereas China is far ahead in terms of industrial production. Lack of infrastructure and high structure of duties as compared to China has driven the industrial sector to slower growth rates and resultant higher costs have discouraged exports. Hopefully second generation of reforms would address infrastructure reforms which could not be addressed in past due to coalition governments that were not able to continue with the reforms process and it took a back seat. Now with stability at centre hopefully we would see a wave of infrastructure reforms that would help India catch up ... I foresee higher GDP growth rates if it happens...

December 05, 2009 12:29 PM  

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