Roaring Tiger and Wounded Dragon
(Author: Avanish Verma is an IIM – Ahmedabad graduate and avid Global Affairs Blogger)
The recent devaluation of Yuan and crash of Chinese composite has led to the speculation that finally the dragon has started colliding under its own weight and the growth story of China is nearing its ill-fated end. The proponents of this tragic end foresee India taking over as Asian superpower over next few years both in terms of GDP growth and Investment rate. However is all over for China and is it the dawn of Indian Tiger?
A close look at the two economic powerhouse indicate that despite similarities in issues faced, the path walked by the totalitarian communist and the republic nation have been radically different. The two countries have been long competing with each other for resources such as coal, crude and global market share. Both countries today face challenges in generating adequate “Quality” employment and mitigating the growing inequality within the nation. The social sector
has remained a non-focus area for both nations with higher living standards and good life limited to few privileged class. In addition, since both countries have agriculture as primary sector, both struggle to overcome the acute agrarian crisis. Corruption and Red Tapism is an everyday struggle for both Chinese and Indian Governments.
The primary difference is the way the two economies are oriented and function. At one end of spectrum is the Chinese economy, predominantly outward looking with major growth stimulus from public sector and subsidized infrastructure development, the other end is occupied by Indian counterpart which is more inward looking and banks on huge internal market size for its growth. While both economies started as agriculture majors , China made a sequential shift to manufacturing segment riding upon its sweat factories and ability of People`s Bank of China to offer low cost funding. India on the other hand made a transition directly from agriculture to service sector dominated economy owing to rise of its educated English speaking work force. Riding on its export oriented economy and dragon size manufacturing, China has managed to pull its majority of population out of poverty with only 4% currently below the poverty line. However India has failed to deliver on this front with almost 26% of population still struggling to meet ends and earning the infamous BPL status. However China had to pay a huge price for this growth. In order to keep the engine running, both Hu Jintao and Xi Jingping adopted a heavily subsidized infrastructure and low cost of yuan model. Although this established China as leader in exports & created world class infrastructure and jobs at neck breaking speed, this unplanned growth also led to creation of ghost cities, highways leading to no-where, malls with no buyers and limited private sector involvement. A restructuring of wage structure in sweat factories has also eroded the advantage of being a low cost manufacturer with private players now looking at South Asia and Africa as next hub for low cost manufacturing. The decrease in International trade and enhanced capital flight has reduced forex reserve of dragon nation by almost USD 94 billion in August 15’ to reach USD 3.56 trillion. This has in turn led China to proscribe its residents to invest overseas since April 15’.
Similarly India has problems at hand no less than China. While share of the primary sector in GDP fell by 35% to 25% of GDP in last forty years, the share of workforce employed in the primary sector has refused to deflate. Further with poor infrastructure and land acquisition issues, it has “almost” lost an excellent opportunity as next manufacturing hub. The ever surging Nifty and BSE are more a result of lack of options to park money elsewhere than strong fundamentals within Indian markets. Barring services and IT outsourcing, exports is still not the strength of Indian economy and the economy is primarily dependent on internal demand. The reduction in Current Account Deficit is primarily attributed to global softening of demand for crude and black gold than better management of internal demand. The recent devaluation of Rupee does not help much since it only increases export bill without counter increase in export revenues.
The GDP profiles of both nations have been changing. China has been witnessing a declining GDP with 7.5% growth for FY15 owing to reducing imports and tapering competitive advantage.
Indian GDP is expected to overtake Chinese number by end of FY2016 and has witnessed an increasing growth of 7.3% for FY15. However the new GDP numbers hide more than what they reveal. The Indian numbers are based on new methodology which takes into account Gross Value added instead of Gross Domestic Product thereby leading to an automatic jump in rate with same level of achievements. Further sectors such as agriculture, construction, banking, accounting for 60% of GDP are under performing and visible signs of improvement are still distant dreams. The growth in absolute terms for China far outpaces the absolute growth for India given the sheer size of Chinese economy. The 2013 estimates suggests that Indian USD 4.99 trillion economy is dwarfed by USD 13.39 trillion Chinese counterpart. Further investment rate, which indicates investor confidence in economy, has fluctuated between 35 – 44 per cent in China, compared to 20 – 26 per cent in India.
The curious question which both economists and Dalal street today struggle with is which nation is going to be tagged as the next investment magnet. While both countries are equipped with challenges and opportunities at plenty, India with its melody of “minimum government, maximum governance” holds an edge over Chinese counterpart whose economy is still tightly controlled by government (presuming India can rid of political logjams and lassitude).
One of the distinct advantages that India is blessed with is the favorable demographics. While China’s one child per family policy has put a brake on its population explosion, it has in the process increased the median age to 37 years compared to 27 years in India. It is expected that India will overtake China in terms of active workforce by 2028, which would give India a skilled workforce equal to current workforce of EU. A word of caution for India would be to accelerate the growth engine to ensure enough meaningful employment opportunities for potential workforce.
In order to walk the talk, the rejuvenated Indian Government has taken up series of big bang reforms to bring about structural changes in Indian economy and investment ecosystem. The public sector banking system is being revamped with setting up of Bank Board Bureau thereby bringing corporate governance in their functioning. This should help in bringing down NPA levels in the country.
To create an infrastructure push, GoI has set up National Investment fund with a $3 billion a year contribution. Further in order to enhance Investment sentiment around Indian ecosystem, the government has brought about transparency in auctioning of natural resources such as coal and telecom. The Government is trying to rectify the energy backbone of country by revamping financially distressed discoms and gencos through reform linked subsidies and grant.
Such structural changes has brought about an active interest among foreign investors who have started relooking at India with new zeal and interest. The recent announcement of Sequia Capital to set up VC fund of USD 800 Million dedicated for India Specific investments is an indication of renewed interest among investors in otherwise dull global markets. The huge Domestic market
in India has led VC funds and PE funds such as Blackstone, KKR, TPG capital to knock on Indian doorsteps through India dedicated funds.
A game changer in Indian Economy would be introduction of Goods and service tax (GST) which would replace state level taxes and place a single jacket formula with single nationwide goods and service tax. GST implementation, committed to be implemented by April 2016, would help to increase GDP and growth by almost 1- 1.5% and help in resolving various Indirect Taxation issues
Policy changes such as entry to foreign investor in railways, raising FDI in the defense and insurance sector to 49% and liberalizing diesel prices have been welcomed by Investors and economist alike. Campaigns such as Smart Cities, Swachh Bharat and National Skill Development Program have created an ecosystem conducive to private sector investment. Above reforms have had a desired effect reflective in the reduction of inflation to 4.87% for April 15’ (from 8.33 percent in May 2014). Also the CAD narrowed to 1.4 percent of GDP at the end of 2014 from 2.6 percent a year earlier.
A key for India to succeed will be its success in the financial services. The Indian demographics provide a huge internal market for financial products. The Debt market of India at retail is still not fully leveraged and offers huge growth opportunities for foreign investors. Both housing finance and consumer finance segments have tremendous growth potential with last few years witnessing a 15-18% annual growth in each segments. With success of Govt. Induced Jan Dhan Yogja which led to inclusion of 150 million new accounts in the Indian Banking System, the banking segment is poised for new level of growth with no more leakage in subsidies and end user benefits.
With more than 30 crore Internet users and expected Indian market to bulge to 137 billion USD by 2020, Digital Space is emerging as vital cog in economic wheel. The fast growing e-commerce market has caught the eye of Venture capitalist and Private equity funds. The Valuation of Digital companies such as Flipkart ( USD 16 Billion ) , Snap deal ( USD 5 Billion ) & Paytm ( USD 2 Billion) far exceed some of the globally renowned Indian majors such as Indian Oil ( USD 14 Billion’ ) and Vedanta ( USD 4 Billion ).
Similarly healthcare segment has put India on radar of global investors. Health Insurance and medical tourism have gained significant role in economic development in recent years. With an 11% CAGR, the healthcare segments is expected to reach 100 Billion by 2020.
However not all is over for China in this rat race. It still holds gross competitive advantage over India in all major strategic aspects. India is still ranked a low 142 among 189 nations in ease of doing business owing to lack of single window clearance, bureaucracy and rambling corruption. In contrast China is ranked relatively higher at 90 creating a more attractive environment for entrepreneurs and startups. With similar population size, size of Chinese economy outpaces Indian economy by factor of almost three and market capitalization by five. This means even a
lower growth rate would ensure larger economic gains for China as compared to high growth Indian economy with similarly sized population.
Chinese Bank and policy makers have realized that cheap money won’t solve the fundamental issues and have started giving leeway to align its monetary policy to rates determined through market force. With an urgent intent to reignite the growth engine of China, Xi Jingping has started to liberalize Interest rate and Yuan convertibility. This would also give strength to Chinese long pending demand for inclusion of Yuan into reserve currency and having special drawing rights. Further relinquishment of the global image of yuan being steered by government controls, would certainly lead to more investor confidence after the initial correction phase.
Beijing has realized that it cannot drive economy further without maintaining a balanced economy driven by consumption and service industries. This transformation has been initiated by communist party in November 13’ through a 360 point road-map under Third Plenum charter with a target turnaround period of 7 to 10 years. Such transformation shall have its own price in terms of slowdown of economy, increased unemployment rate, reduction in Forex reserves. However in case China manages to overcome this hurdle and successfully transform itself, the wounded dragon is very much on path to overcome the roaring Indian Tiger.
(The Views expressed are personal and do not represent views of any organization )
Article originally posted at indianiris.com