Christopher Whalen
May 5, 2015
"Innumerable analysts have predicted that the twenty-first century will belong to China, yet it seems worth considering whether the current millennium will not belong at least equally to India."
Back in August of last year, TNI described why India’s economic prospects are brighter than those of China (“Beware, China: India's Economy Could Have an Even Brighter Future,”). That judgment seems to have been confirmed by subsequent events. As we noted at the time, "When all is said and done, the difference between India and China can be summed up in one word: freedom."
India is now clearly outperforming the other emerging nations, particularly China, a nation hobbled by a command economy and one of the most corrupt political systems on the planet. “As Brazil, Russia and China hit hurdles, it’s the poorest member of Goldman Sachs Group Inc.’s emerging-market group that’s proving a darling of global investors,” Bloomberg News reported in February. “The International Monetary Fund is predicting India will next year grow faster than each of its BRIC counterparts for the first time since 1999.”
In January of this year, we noted that Western hopes of an economic “rebalancing” by China, from state-directed investment to a demand pull economy based upon private consumer activity, was without basis (“The False Hope of Chinese Economic Rebalancing”). India, on the other hand, has not needed to stoke private demand because it already has a vibrant private-sector economy, albeit one that still struggles with bureaucracy and official corruption on a large scale. Yet even with all of India’s structural problems, the fact that its people are free to compete economically and express themselves politically puts them light years ahead of their counterparts in authoritarian China.
Instead of rebalancing its economy to greater consumer consumption, China seems instead to be heading toward a “new normal” of slower growth. While China’s official statistics suggest that the country met exactly the requisite target of 7.5 percent GDP, other indicators indicate that the years of artificial growth predicated on massive government spending on infrastructure is coming to an end. With economic statistics tightly controlled for political reasons, investors and other foreign observers lack accurate insight into how China's economy will evolve as the panacea of state “investment” allocations decline.
China Beige Book, one of the few Western organizations that independently collects economic data in China, sets the scene in terms of understanding China’s deliberate pull-back in fixed-asset investments:
In the first quarter of 2015, our survey showed growth in firms' capital expenditure easing for a fourth straight quarter, to the lowest level we've seen in four years of polling. Every sector except real estate saw slower investment in quarter-on-quarter terms, and real estate was sheltered only by its dismal performance at the end of last year… The credit and investment weakness may help the Chinese economy to rebalance. But there is little sign consumption is taking the lead in driving growth.
One of the key factors driving economic growth is population, a factor that is most visible in the United States, which has seen population growth fall from 1.6 percent in the years following WWII to just over 0.5 percent today. Many experts note that the big change in the future will be the slow growth in population in many nations as fertility rates decline and the average age of the populations in these nations rises. While the working-age population of China is set to peak in a decade and then decline, India’s population is going to continue to expand.
Byron Wien of Blackstone describes how aging populations in Europe, China and Japan will contrast with trends in India, even as the global rate of population increase slows:
China’s peak employment is expected to occur in 2024. The working age population in the G19 countries plus Nigeria is expected to decline from 68 percent to 61 percent over the next 50 years. By 2064 India’s employment could expand by 54 percent, while China’s could shrink by 20 percent. The number of employees in the United States is expected to continue to rise, but at a slower rate than in the past. By employing more women and encouraging people to stay at their jobs beyond age 64, the expected .3 percent rate of working population growth could double, but that would still be well below the pace of the last 50 years.
When you combine the advantage of a dynamic free society with strong population growth, the economic case for India becomes compelling. The World Bank estimates that India will grow at 7.5 percent in 2015 vs. estimates several points lower, and that growth is poised to accelerate, as policy changes gather momentum to unlock needed infrastructure investments.
“While data constraints make it difficult to estimate potential GDP with precision, we estimate potential growth to nearly converge to 8 percent by 2017-18 from around 7 percent in 2013-14 assuming both a meaningful and sustainable pick up in investment . . . as well as a pick up in productivity growth,” the World Bank said in a report, which credits lower energy and food prices for the surge in GDP expansion.
What is striking about comparisons of India and China is that the former’s growth is constrained by a lack of investment in infrastructure, while the latter manufactures the superficial appearance of growth by building infrastructure and cities with no economic purpose. Just as many analysts never take the time to understand the differences in business models between one company and another in a given industry, so too few analysts take the time to understand the striking qualitative differences between India and China, two nations that account for a sixth of the world’s population.
In many measures, China actually appears more advanced than India. Metrics such as life expectancy, child mortality, per capita GDP and adult literacy all suggest that China’s economy has made far greater strides than India’s in recent decades, according to a survey by the Economist. But when you start to consider the qualitative differences between these two large and diverse political economies, the image of China’s relative position conveyed by these quantitative differences begins to erode.
Cheap energy and food prices may be a short-term factor supporting India’s growth, but the long-term prospects for the world’s largest democracy seem bright. Innumerable analysts have predicted that the twenty-first century will belong to China, yet it seems worth considering whether the current millennium will not belong at least equally to India. Although both China and India have known foreign domination and colonial rule, these ancient societies have also exercised great influence over other societies and will likely do so again. But choosing between China and India, the latter may well be the most significant in terms of both economic power and cultural influence.
“[F]rom about 400 AD to 1200 AD, India was a large-scale and confident exporter of its own diverse civilization in all its forms, and the rest of Asia was the willing and eager recipient of a startlingly comprehensive mass transfer of Indian culture, religion, art, music, technology, astronomy, mythology, language, and literature,” writes William Dalrymple in The New York Review of Books. “Out of India came not just artists, sculptors, traders, scientists, astronomers, and the occasional fleets of warships, but also missionaries of three Indic forms of religion: Buddhism and two rival branches of Hinduism: Shaivism, in which Lord Shiva is revered as the Supreme Being; and Vaishnavism, which venerates Lord Vishnu.”
The progress of India in the twenty-first century will not so much be the story of a newly emerging economy, but instead the reemergence from foreign domination of one of the oldest and most dynamic societies in the world. This is not to say that China will not be without great influence, but the fact of India’s economic freedom and political openness may well prove to be the decisive difference.
Christopher Whalen is senior managing director and head of research at Kroll Bond Rating Agency. He is the author of Inflated: How Money and Debt Built the American Dream (Wiley, 2010) and the coauthor, with Frederick Feldkamp, of Financial Stability: Fraud, Confidence, and the Wealth of Nations (Wiley, 2014).
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