Deep-Insight

Indo China Series, 1^st Article: India will overtake China 1

This is the 2^nd article in the Indo China series; in this article we will continue the last article to discuss the advantages India has over China. When we studied the World Bank summary file on China we find that in the huge GDP of US$ 2644 Billion (2006) export of goods and services forms 40.1% of this GDP. This massive amount of over US$ 968 billion (2006) forms the 8% of net world exports with major importers being United States, European Union, Japan and Korea. Also Total imports of US$ 791 (2006) billion form 6% share of the world import, this suggests that Chinese economy is heavily relying on world trade to get those magical double digit growth rates. Although this does gives China the momentum but it also exposes it to the full wrath of ups and downs of the business cycles across the globe. Also it suggests that even though large portions of the country especially eastern parts remain backward instead of consuming the goods and services in their own markets Chinese are exporting them. India on the other hand has a GDP of about US$ 1000 billion but exports only US$ 120 billion a mere 1% of the world export and imports US$ 174 billion 1.41% of the world imports. The export import data has been taken from WTO Site. This over reliance on exports to boost the economy was one of the factors which led to the Asian Financial Crisis in the 90s. Although this method promises very fast track growth but it also carries the disadvantage of less depth in the domestic markets. So when the major importers face a downturn in their economy like American Financial Crisis then there would be a potential downturn in Chinese economy too. Indian economy concentrates more on domestic consumption rather than exports, underlying philosophy being if there is a competitive market within the country then why export the goods outside.

Also if we see the major importers from China we see superpowers like United States, European Union on the top and China has a huge trade gap with these two in its favor. That is it exports to these countries more and imports less from the same parties and hence has a favorable trade gap with them. This is not seen lightly by these countries as this creates a deficit in their own current account. So India comes out as an option to neutralize Chinese march on the world trade, these countries would like to cut or at least delay China’s rise to the top and promoting India which has almost the same if not more advantages over China.

Next we move over to the blood circulation system of the economy the banking sector, Chinese banking sector. Banks in China traditionally used to finance operations of SOEs (State Owned Enterprises) regardless of the amount of risk or profit involved. Over the years this has reduced but SOEs still accounted for over half the bank credit in 2000. This situation is made worse by the fact that there is less competition in the banking sector with 4 State Commercial Banks accounting for 86% of the assets of the banking sector. The Non Performing Loans at the end of 2001 were $213 billion or about 30% of the loans. This is widely believed to be near 50% if global definition of NPL (Non Performing Loans) is applied. India on the other hand has far greater amount of competition in the banking sector with a very complex financial infrastructure in place constituting not only of banks and insurance companies but also derivative market, equity market, a number of regulators etc. India had an NPL of 12% of total loans in 2001. So compared to China India is ahead by leaps and bounds in this area.

To finish off we should also consider that India’s reform process started at least 15 years after Chinese reforms so many of the big projects with long gestating period will soon start bearing results. In China’s case a few of these mega projects are already contributing to its double digit growth. Also India has the advantage of being a democracy, so if the government policy is not correct, if the advantage of economic growth is not reaching down to the common man then most probably the government will tumble when its term ends in 5 years. Whereas in China this is not the case and the government has to follow self corrective methods.

All these factors will help India in overtaking China in the economic race.

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Indo China Series, 1^st Article: India will overtake China 1

K.V.S.