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China’s and India’s Economic Performance After the Financial Crisis: A Comparative Analysis
R. Nagaraj
Indira Gandhi Institute of Development Research, Mumbai, India
Introduction
In 2015, as per IMF data, nominal GDP in current dollar terms, China and India are world’s second and seventh largest economies, at $11 trillion and $2.25 trillion, respectively. In per capita terms, in global ranking, China stood 74th with $8,141, and India at 141th position with $1,604. In geo-political terms, though China carries considerable heft, it is as yet an emerging market economy (EME) as per the Morgan Stanley index for emerging market index (MSCI). These countries are the leading members of the ‘BRICS’ economies — a short hand for fast growing industrializing nations accounting for a quarter of world’s land mass and 40% of population — a grouping of non-western nations that Goldman Sachs created in 2001 for the purpose of developing financial products. Though the financial firm ceased to use the country grouping for selling financial products, BRICS as a category has stayed in policy discourse and in financial markets.
Just prior to the global financial crisis (GFC) in 2008–2009, China was world’s fastest growing large economy expanding annually at 9–10 for over 20 years; India was seen as a close second growing at about 9% annually (though for just 3 years). If China had emerged as world’s factory, India was getting to be reckoned (at least for a while) as its back office. The GFC and the great recession thereafter probably hit China much harder, given its much higher export/GDP ratio (at 30.7%) in 2008, compared to India’s share at 23.6%. Moreover, financial flows into China were much higher than in India. As part of the G20 initiative, both the countries undertook fiscal and monetary stimulus to prevent a repetition of the great depression — China did it on an enormous scale compared to India, given its greater external exposure, and to prevent large-scale unemployment and the potential political backlash domestically.
Economic growth in both the countries recovered quickly, giving rise to (instant) theorizing of ‘de-coupling’ of the EMEs (especially BRICS countries) from the developed economies, signifying the autonomous nature of their growth. Soon, it was realized that growth in China and India were sustained by large-scale short-term capital inflows on account of the QE in the advanced economies, that is, capital flowing into these economies in search of higher yield (or rate of return). However, the hint of a tapering off of the QE in August 2013 led to panic known as ‘taper tantrum, putting breaks on the capital inflows, adversely affecting growth in these countries. Thus, China’s annual growth rate got nearly halved, from 13% to 14% immediately prior to the financial crisis to less than 7% last year. In a slight contrast, India’s growth rate which also went down sharply to less than 5% in 2013–2014, has reportedly climbed back to over 7% — now claiming to be world’s fastest growing large economy. Among the BRICS nations, China and India are perhaps the only ones to maintain positive growth in the last few years.
With the advanced economies still gripped by the great recession (despite visible signs of improvement in the US), and a bleak IMF growth forecast for 2017 at 3.4% (as per July 2016 report), global economic performance seems to hinge on how these two large economies perform. Can China and India — accounting for 18% of global GDP in 2015 and one-third of population — emerge as a significant node for global economic recovery? This short chapter seeks to offer a tentative and speculative answer. The chapter is structured as follows.
Careful scholarship on Chinese economy has long been concerned about the quality and veracity of official economic statistics. Hence, it is useful to briefly review the data concerns to be able to make a reasonable assessment of its economic performance and prospects. Indian macroeconomic statistics have lately come under cloud with the latest revision of the base year of GDP in 2015. So, the chapter will begin in Section 1 with an assessment of the economic statistics of both the countries. Section 2 will briefly review China’s and India’s the economic performance after the financial crisis. Section 3 will make a comparative assessment of the prospects their economic revival — necessarily a speculative effort. Section 4 will conclude the study summarizing the main findings.
Section 1: Concerns About Quality of Macroeconomic Data
Chinese official statistics are widely believed to overstate economic growth rate systematically. One of the known inconsistencies is that the sum of the provincial output is systematically higher than national GDP estimates. Apparently, the overestimation happens because the official have an incentive to record the plan targets as achievements, since their career prospects often depend on performance as measured by output growth (Wu, 2002).
The long-held scepticism about Chinese the growth value got confirmed in WikiLeaks by Li Kequing, when the then Party Committee Secretary of Liaong province in 2007 told the US Ambassador in Beijing that Chinese GDP numbers are for reference only (NYT, February 26, 2016). The true measures of Chinese economic growth are rail cargo volume, electricity consumption, and bank credit. Taking cue from this, private financial firms (including The Economist) have created a Li Kequing index as a proxy for Chinese GDP growth.
Questioning of the Chinese official growth estimates intensified after the financial crisis, when critics claimed that growth could be considerably lower than official estimates (Figure 1).1 There are also concerns about the true state of the real estate economy with questions about the accuracy of property price index, bank credit accruing to the sector, and data on sale of property.
The scepticism got recently confirmed when a top Chinese official admitted to data falsification. To quote the official: “Currently, some local statistics are falsified, and fraud and deception happen from time to time, in violation of statistics laws and regulations,” Ning Jizhe, director of the National Bureau of Statistics, wrote in a column for Communist Party mouthpiece the People’s Daily on December 8, 2016 (as quoted in The Financial Times, December 12, 2016). All this goes to show the need for caution in using Chinese official statistics.2
India’s macroeconomic statistics has come under cloud after the recent revision to the new base year in (2011–2012) in 2015, when the growth rates got inflated compared to the previous series (Figure 2). Since the revised growth estimates are quite at variance with other macro correlates — such as flow of bank credit or industrial capacity utilization — there is a growing scepticism of the new series of National Accounts Statistics (NAS).3 The problem can be illustrated with respect to manufacturing sector growth. Since 2013–2014, while GDP manufacturing steadily rose from 5.6% per year in 2013–2014 to 9.3 cent per year in 2015–2016, the Index of Industrial production (IIP, the leading indicator of physical output) shows dismal improvement — from (−) 0.1% per year in 2013–2014 to 2.4% per year in 2015–2016. Surely, IIP is underestimating the growth as its base year is outdated (2004–2005), yet the gap between the two series is too wide to be attributed only to the dated base year. The change in the methodology of estimating gross value added in manufacturing in the new series is probably responsible for the discrepancy in considerable measure (Nagaraj, 2015).
Figure 1: A comparison of China’s official GDP growth with Li Keqiang index.
Source: China GDP Delate gate, by Tom Orlik, Bloomberh Intelligence Economist, September 15, 2015.
Figure 2:Disaggregated GDP growth rates for 2013–2014.
Source: http://www.ideasforindia.in/article.aspx?article_id=1728.
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