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India’s growth exaggerated, yet its economy well-poised

2015-04-09

By John Ross Source:Global Times Published: 2015-4-8

 

The author is a senior fellow with the Chongyang Institute for Financial Studies at Renmin University of China.

 

Recently the claim was made, including in international media, that China had lost its position as the world`s most rapidly growing major economy to India. It was stated in the last quarter of 2015 that India`s GDP growth was 7.5 percent compared with China`s 7.4 percent.

 

The IMF predicted that in India`s fiscal year starting in April economic growth would be 7.5 percent - higher than China.

 

If true this major economic development would have other consequences. If India`s economy accelerates while China`s slows, India`s attractiveness for foreign investment will increase.

 

The first point to clarify, therefore, is that India`s economy is not growing by more than 7 percent a year - contrary to these claims. Even in India, experts don`t believe it, including India`s Central Bank, according to newspaper reports. This is because these claims for India`s GDP are inconsistent with verifiable data.

 

The most reliable statistics are for trade because it is not recorded by only one country. In February, taking a three-month moving average to remove short terms fluctuations, India`s exports were down 10 percent year-on-year.

 

Industrial production can be more accurately measured than service output. India`s industrial production, again taking a three-month moving average, was 3.2 percent higher in the latest data than a year previously.

 

It is impossible for an economy with a 3.2 percent increase in industrial production and sharply falling exports to be growing at 7 percent a year - as Indian statistical experts know. Claims on India`s current GDP growth are therefore false.

 

But it would be a serious mistake to underestimate India. Prime Minister Narendra Modi is shifting India`s economic policy into line with factors creating economic development.  India`s growth should therefore significantly accelerate.

 

Modi`s new policy can be clearly understood in comparison to India`s previous economic strategy. Before Modi, India attempted to build an economy based on the service sector - exemplified by India`s software companies. In extreme versions the claim was that India would "jump over" industrial development and proceed directly to a service-based economy.

 

Modi understood such a strategy is economically incoherent. In all countries productivity development in services is far lower than in manufacturing. Economic development based on services therefore creates many jobs but these will be low productivity and therefore, on average, generate relatively low increases in living standards. For a developing country, which by definition has lower incomes than an advanced economy, service sector development necessarily means the economy will have relatively low productivity growth - therefore producing relatively low increases in national living standards.

 

Modi therefore reversed this strategy and is shifting India`s economic center of gravity into manufacturing via the main government campaign of "Make in India." As this policy is in line with economic fundamentals, it is highly coherent.

 

Modi`s main problem is that even such a coherent strategy needs investment. On average in developing economies, 52 percent of GDP growth comes from capital investment. In India it is 53 percent. But in 2013, the latest year for which international data exists, India`s percentage of fixed investment in GDP was 28 percent compared to China`s 47 percent. To move its growth rate closer to China, India will have to significantly increase the percentage of investment in its economy.

 

China is significantly affected by Modi`s top priority consequently being increasing investment - particularly infrastructure which was the focus of his government`s first budget. India sees China as a key partner for financing this, and India was therefore one of the first countries to join the Asia Infrastructure Investment Bank - and resisted US proposals to join an "anti-China alliance."

 

But Modi faces practical difficulties in delivering high investment. China could use its State-owned companies and banks to achieve this, but India does not possess these. 

 

Economic fundamentals cannot be cheated. If Modi successfully shifts the center of India`s economy from services to manufacturing, India`s growth of GDP and standard of living will speed up. As Modi has embarked on a coherent economic strategy there is little doubt India`s economy will accelerate. But practical difficulties in implementation mean it is too early to say if Modi will have modest success or will succeed in inaugurating a new era of much faster growth in India.(欢迎关注人大重阳新浪微博:@人大重阳,微信公众号:rdcy2013)

Key Words: John Ross   India  

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