Commentary: Comparing and contrasting India, China

Taneli Ruda, head of ONESOURCE Global Trade, has examined the economies of China and India, and analyzed the economic outlook for both countries.    As the world continues to move forward from the surprises of 2016, it is worth examining how China and India, the two fastest growing major economies, compare and contrast.
   About a year ago, India was poised to stake claim to the designation. It had, by some measures, beaten China’s annual economic growth clip for the first time since 1999, and the common refrain was that it needed to spend significantly and quickly on infrastructure to meet the promises of its “Make in India” campaign.
   Three sectors – financial, real estate, and professional services; manufacturing; and trade, hotels, transport, communication, and services related to broadcasting – seem to have driven India’s impressive growth rate. Lower crude oil prices have also helped, as India is a net importer.
   However, more recently, India’s Prime Minister Narendra Modi made the unusual and controversial decision to ban most of the country’s cash notes in circulation, replacing them with new notes in an effort to combat tax evasion and corruption. The fact that the fastest-growing economy would suddenly demonetize its currency raises an eyebrow – and, sure enough, after Modi’s cash replacement plan took effect, India’s central bank downgraded its growth forecast to 7.1 percent from 7.6 percent. Many analysts expect it to fall further.
   Additionally, India’s trade deficit widened to a 16-month high in November driven partially by a slowdown in exports, and a new report issued by Morgan Stanley said India would be “relatively exposed” to changes in the United States’ trade policies.
   While demonetization seems likely to hold back a bit of growth in the near term, and external factors certainly challenge India’s exports, neither should materially affect its infrastructure projects.
   China’s infrastructure spending, meanwhile, is poised to receive a significant boost in the near term by way of a high-speed rail network expansion. It plans to invest $504 billion in rail construction projects between now and 2020, CNBC reported recently, including a network that would connect more than 80 percent of its major cities. This comes in addition to a separate three-year, $720 billion infrastructure-spending plan that China announced earlier in 2016.
   The import volume of major bulk commodities rose reliably, with iron ore, crude oil, coal, and copper all maintaining growth at clips of 9.1 percent, 14 percent, 15.2 percent, and 11.8 percent, respectively, according to China Customs Statistics.
   Looking at China’s consumers also tells a revealing story. Household income in China is substantially higher than that of the other BRIC nations (Brazil, Russia, India, and China), with analysts at McKinsey estimating it to be above $5 trillion per year. Furthermore, the firm expects growth in discretionary spending within China to outpace growth in spending on necessities, 7.6 percent to 5.3 percent, between now and 2030.
   These figures signal Beijing’s goal to transition from an export-oriented economy to a consumption-oriented one is well within reach. “[China’s economy] may be volatile. It’s also somewhat unpredictable. But you just don’t get a consumer growth story this good anywhere else,” the McKinsey analysts concluded.
   China’s exports appear to be on solid ground, as well. During the first three quarters of 2016, China’s exports to Pakistan, Russia, Poland, Bangladesh, and India grew 14.9 percent, 14.1 percent, 11.7 percent, 9.6 percent, and 7.8 percent, respectively. And the most recent figures, November’s net trade, saw dollar-denominated exports rise slightly (0.1 percent), putting a stop to October’s 7.3 percent slide.
   These statistics suggest China is sufficiently hedged against modest trade-inhibiting measures that would come from the United States.
   The bearish take on China is set forth most notably by the Organization for Economic Co-operation and Development. It believes Chinese exports will continue to lag because of weaker demand and more competition and that corporate debt will reach more than 250 percent of China’s gross domestic product by 2018. It forecasts China will grow 6.1 percent this year, while most other forecasts peg growth expectations at around 6.6 percent. These are both sufficiently strong, but still shy of India’s recently downgraded expectations.
   China’s GDP per capita is $14,300, per The World Factbook, while India’s checks in at $6,200 – suggesting India has the opportunity to play catchup by boosting its labor productivity and building basic and essential infrastructure.
   Another unique wrinkle in this comparison: data on fixed asset investments in China and India shows both countries have an obvious two-track economy in which strong growth in investment by state-owned enterprises is offsetting low growth in investment from private enterprises. One logical place for much of that capital to go is towards infrastructure.
   Few, if any, other developed economies show this amount of disparity between where investments are coming from. Generally, private investment growth can complement public investment growth, and vice versa, and there is no obvious causal relationship. However, both China and India have signaled clearly and consistently that they perceive state-sponsored spending as a facilitator of overall economic growth to some degree.
   It is safe to say that both China and India will experience a higher demand for infrastructure projects and raw materials moving forward, particularly if state investment growth continues to outpace private investment growth at a similar clip.
   As for which country grows the most in 2017, it’s still a tossup.

   Ruda heads Thomson Reuters global trade management business, ONESOURCE Global Trade. He can be reached by email at taneli.ruda@thomsonreuters.com.