India vs China: A tale of two contrasting economies

Will India have to brace up for a hard landing, as China's growth takes flight?

Indo-China image via Shutterstock

Barely a year ago, there was talk about China’s economy making a hard landing. Around the same time, there was also chatter about a revival in the Indian economy with P Chidambaram back at the helm in North Block. But fast forward to 12 months later, and it’s astounding how this narrative has done a volte-face.

 

Here’s a study in contrast of the two economies basis key economic indicators 

 

Growth

 

Goldman Sachs this Tuesday raised its GDP forecast for China to 7.6%, even as it slashed growth outlook for India to 4% from 6% previously. Several other foreign brokerages including CLSA, Nomura, JP Morgan and HSBC followed suit, cutting India growth estimates by up to 2% as official GDP grew at a four-year low of 4.4% in the first quarter, and other macro-economic indicators deteriorated.

 

A spate of recent positive economic data from China, on the other hand has corroborated why Goldman and others are so bullish on China.

 

PMI:

 

Chinese PMI or purchasing managers index for August showed factory activity rising to a 16 month high – up from 50.3 in July to 51 in August. Services PMI at a 5 month high further adds to signs of a recovery. This has fueled expectations of strong August trade data.

 

PMI in India on the other hand contracted for the first time in 4 years in August sinking to 48.5 in August from 50.1 in July, with services shrinking at the fastest pace since April 2009 to 47.6 in August from 47.9 in July reflecting a broad-based economic slump.

 

Auto Sales

 

A signal of healthy consumer confidence in the economy is strong auto sales figures. July passenger car sales in China were up 10.5% YOY signaling that confidence was returning after a protracted slowdown.

 

Indian automakers on the other hand reported a 7.4% decline in passenger cars compared to the same month in 2012 with overall growth this fiscal expected to be in the negative territory. It is important to note that India was the fastest growing automobile market n 2010 & 2011, next only to China.

 

But it will perhaps take a long time to restore this trend. Car buyers are staying away from showrooms amid growing economic gloom, new taxes on SUVs and high interest rates.

 

And with the rupee depreciating, a high current account deficit and sticky inflation, maneuvering monitory policy has gotten trickier for India’s policy makers.

 

Inflation

 

July CPI continued to remain high in India, albeit slowing marginally to 9.64% from 9.87%, but way above the RBI’s comfort zone. Food prices continued to remain in double digits as well.

 

In China though, July data showed consumer prices rising 2.7%, well below the 3.5% upper limit set by Beijing, even as producer prices remained deflated, rising calls for a rate cut.

 

Currency

 

Sanguine calls on the trajectory of China’s currency makes cutting rates there easier.

 

A recent poll by news agency Reuters shows that Chinese Yuan will continue to appreciate as the Chinese economy improves. In fact the currency is now within kissing distance of its recent all time highs with the dollar and in line with the Chinese central bank’s decision to allow its currency to slowly appreciate. While that begs the question on what impact this would have on exports, improving economic fundamentals could aid this appreciation say some experts.

 

The rupee meanwhile, after a 20% plunge could have bottomed out but is unlikely to appreciate further this year says the same poll – which means inflation will continue to remain high.

 

The differences then are stark, but there are also serious doubts raised time and again about the validity of the data China puts out.
 

Just recently China’s National Bureau of Statistics admitted that a county government had faked economic figures. The BBC quoting Xinua news agency reports that local officials had induced companies to inflate figures in exchange for loans from state owned banks.

 

It further claims (on the discrepancies in data computation between national and local agencies) that “The gap between the national figure and the combined local figures was 2.7 trillion yuan ($440bn; £280bn) in 2009 and rose to 5.8 trillion yuan in 2012. That would have added 11% to China's total GDP last year." 

 

But data murkiness notwithstanding, and regardless of of the gross imbalances in its economy (including a massive debt burden & overcapacity) China has come in for praise from several quarters recently including the IMF for some critical structural reforms it’s new leadership has undertaken in the past few months.

 

China’s Communist Party is expected to advance this reforms drive in a November meeting, setting the country’s economic agenda for the next decade.

 

Perhaps it’s time for India to follow suit then and bridge this growing economic chasm. Else, as China’s growth takes a flight, India will have to brace herself for a hard landing.