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Home  » Business » India set to fall further behind China

India set to fall further behind China

By Una Galani in London
March 18, 2009 02:24 IST
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The tiger isn't nipping the dragon's tail anymore. In the boom, India managed a few years of 9% economic growth. That led some to imagine the tiger could catch up with the stellar Chinese economy, which was growing at double-digit rates. Not anymore.

One part of the thesis was that India would sail through a global slowdown, while China's export-centred economy would be crippled. India generates less than 20% of GDP from exports, while the Chinese share is twice as high.

Yet, India's GDP growth still lags China's -- 5% against 7% in the fourth quarter of 2008. That continues a long-term pattern: for the past decade India's growth rate was 7%, compared to almost 10% for China.

Unfortunately, India doesn't have the resources to fund a big stimulus programme. China's fiscal deficit is 3% of GDP, while India's consolidated deficit is more than 10%. The Indian government's anti-recession package could amount to a mere $8bn, or 1% of annual GDP. But that pales against China's three-year $585bn plan, equivalent to 18%.

India can't afford to inject more, for fear of losing its investment grade rating. A junk debt rating could further deter foreign investment, which would more than counteract the possible benefits of a bigger stimulus. As it is, India received just one third as much foreign investment as China in 2007.

As well as spending more at home, China's vast foreign exchange reserves also allow it to make key overseas strategic investments, buying up stakes in miners like Rio Tinto. That could help the commodity-hungry nation secure long-term resource supplies. India, which imports almost 70% of its oil, can't afford to make similar precautionary investments.

Finally, there is India's woeful infrastructure and recalcitrant bureaucracy, the nation's biggest barriers to growth. As the country lurches to a divisive election, there are precious few signs that these barriers are getting any lower. India could certainly use some of the stimulus funds China plans to plough into addressing its own infrastructure weaknesses.

Indeed, the bust shows that India's idea that it could supplant China as Asia's star growth economy was little more than a boom-time fantasy. The tiger simply doesn't have the financial firepower to contend with the dragon.

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Una Galani in London
Source: source
 

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