beyondbrics

Sorpasso’s are like football seasons: as soon as one finishes, you start looking forward to the next. Just as China officially overtakes Japan to become the world’s second biggest economy, people are already looking down the league table.

Morgan Stanley’s latest report - ”India and China: New Tigers of Asia” – suggests that India will soon be Asia’s growth pace-setter and start rising up the economic size rankings, albeit from its current lowly position outside the top ten.

“We believe that, over the next two years, India should start matching China’s GDP growth of around 8.5-9.5%, barring another global financial crisis. More importantly, we think that, by 2013-15, India will start outpacing China’s GDP growth notably.”

“Over the next 20-25 years, we expect India to remain the highest growth economy among large countries. India could have the advantage of maintaining its high-growth phase for a longer period than East Asia did as UN data shows that India’s age dependency will continue to decline until 2040.”

So what’s behind this prediction?

First of all, unlike China, India isn’t rapidly getting older. In fact, its ratio of working-age people to dependents (children and the elderly) is actually improving.

Second – India’s government reforms, and its growing infrastructure spending, have helped create jobs, and dynamic labour market, and a vibrant private sector.

Finally, globalisation has helped India tap into both the goods export market, but more importantly, the global services exports market – which India now has a 2.6 per cent share of.

Morgan Stanley’s report (see GDP figures and forecasts left) is certainly good news for the Indian government, which has been looking for ways to achieve double digit growth.

Policymakers meeting behind close doors in New Delhi last month said that improving the country’s rural economy was the key to matching China’s economic growth rate of 10 per cent.

But the fact that China has overtaken Japan as the world’s second biggest economy – just a step behind the US – while India languishes at 11th on a GDP basis, highlights how far New Delhi is still lagging behind Beijing.

Several analysts seem to have some serious doubts over India’s ability to outpace its neighbours.

Arvind Subramanian, a senior fellow jointly at the Peterson Institute for International Economics and the Center for Global Development in Washington DC, wrote on the FT’s comment pages that India’s weak state and poor reforms would bar it from overhauling China.

“As India enters its 64th year since independence, its economic dynamism presents a paradox. On most measures of market friendliness, it lags behind Latin America, and even sub-Saharan Africa. It is still more closed to trade and foreign capital than most other countries; still hampered by extensive controls on economic activity, including onerous labour laws; and still dominated by a large public sector. In short . . . bottlenecks will make Chinese-type growth rates elusive.”

The majority of analysts contacted by beyondbrics think Mr Subramanian is too pessimistic, and that he downplays the enormous improvements – economic, political, and social – that India has undergone.

So it is sure to start moving up the league table.

KN Sivasubramanian, head of Franklin Templeton’s India Equity portfolio, told beyondbrics:

“The economic growth witnessed in India during the recent challenging phase has led to increased conviction in India’s long term story. Also various projections have made it clear that India is expected to remain one of the fastest growing economies across the globe.”

India now has to deal with the burden of great expectations. But one thing is for sure, New Delhi should concentrate on challenging itself, and not China.

Related reading:
India’s tortoise must turn on the speed, FT