Is it India’s turn?
The Indian subcontinent sits on its own tectonic plate. Around 100 million years ago, it broke free from the Gondwana super continent and moved north, ultimately crashing into the Eurasian landmass with such force that it created the world’s tallest mountain range, the Himalayas.
The Indian plate continues to push north at a rate of 5 cm per year, the fastest moving of the tectonic plates. Today, modern India is also crashing into the world economy with force.
This leads to a number of questions, one of which is whether this will happen fast enough to take the mantle from China as global growth engine in the years ahead. After all, China’s dramatic rise over the past three decades reshaped the global economy in ways large and small. But its growth rate has slowed down substantially as it faces both cyclical headwinds and structural challenges. Cyclically, China’s economy seems to be treading water. Consumers are cautious, the property sector remains under pressure and sizable government stimulus is still lacking. Low inflation is a sign of this. China’s core inflation declined to only 0.3% year-on-year in August. Another sign of weak domestic demand is the lack of growth in imports even though export growth continues to hold up. The recent weakness in the oil price can also partly be explained by demand expectations not being met.
On the structural side, unlike India’s relatively young and growing population – already the largest in the world – China is shrinking. It is also increasingly clear that much of China’s rapid growth, over the past decade in particular, was fuelled by unsustainable borrowing. As income growth slows, some will struggle to service this debt.
The International Monetary Fund forecasts that Chinese growth will downshift to around 3% over the next five years. Even this might be optimistic.
The short answer to the question posed above is not yet. India is still poor and its per capita income is where China was around 15 years ago. Chart 1 actually flatters India because it is adjusted for the cost of living, which is very low there.
Chart 1: China and India real income per head in purchasing power parity dollars
Source: International Monetary Fund
But this will change over time. India’s share of global GDP has already tripled since 1991, and with the IMF projecting growth rates of 6% to 7% over the next five years, its share of the global economy should rise to 5% by 2029, by which point it will be the third largest economy behind the US and China, but still well behind the other two giants in terms of size. However, around the turn of the decade, it should become the biggest contributor to global growth, since it will be growing much faster than the US and China.
The long answer is that India’s impact will be very different, since it follows a different growth model. China has sustained an investment rate in excess of 40% of GDP for many years. No other country in modern times has invested as much for as long. This resulted in its cities transforming seemingly overnight into glittering forests of skyscrapers, connected by modern infrastructure. Given that it is responsible for the lion’s share of global investment spending, no wonder it consumes around half the world’s commodities.
More investment needed
However, while this high investment rate made sense when it was relatively underdeveloped, it doesn’t make sense now. There is excess investment that cannot earn an economic return in infrastructure, real estate and factories. For instance, a train connecting two cities for the first time can greatly enhance activity and productivity. Adding a second, faster train between the same cities will probably only deliver a marginal improvement and not necessarily enough to justify the investment. Similarly, there are millions of empty apartments and many factories running below full capacity. And yet, China’s investment rate has not slowed much and the much-vaunted shift to more consumption spending remains elusive.
Click here to read more...
