GDP of a country and GDP growth rate are two important metric based on which economic prowess of a country can be measured. While east is behind west in terms of gross GDP numbers, reverse is true for GDP growth rate. The center of economic power has shifted from the West to the East. World is witnessing a change in economic structure and is going through a transition .Following data shows 12 fastest growing economies. CountryGDP Growth2012 GDP Forecast
Iraq10.57% $128.094 billion
China9.52% $7,209.42 billion
Timor Leste8.63%$0.807 billion
Ethiopia 8.02%$32.3 billion
Afghanistan7.47% $19.1 billion
Source: Economy Watch
Above table shows countries having highest GDP growth rate. Many of these countries are showing exceptional growth rate because of the base effect, but this reflects that politico- economic conditions in these countries are now favorable to growth and will attract investments. From the above data , it is quite apparent that China and India are amongst the two largest emerging economic powers of world. Which country will occupy the leadership position in coming decades will also redefine – two very different political ideology. While, India is a vibrant democracy China is a one party system. China’s success is rooted in a social scientific concept of state capitalism which has helped it to grow at an amazing pace while India’s diversity and complex political system has led it to grow but at a slower pace than China. Growth Stories Of China & India
Like India, Chinese growth story also started with economic reforms and liberalization. In spite of being a communist while India being a mixed economy China liberalized its economy almost 13 years before India and opened its doors to the world. Chinese leaders implemented reforms in gradual manner. India was literally pushed towards adopting liberalization to avoid a sovereign default. Current Situation.
In times when the west is gripped with a slowdown and a threat of a double dip recession looms large, slowing economic growth in China and India can put the global recovery in jeopardy and a rare scenario where whole world will go into recession at same time may surface. A SWOT analysis of these two economies will help us understand economic prospects of these countries. SWOT Analysis India:
Demography Advantage:. We are youngest country in world thus enabling more production and consumption capacity this will keep our economic wheel turning and insulate us from foreign socks to a great extent. Rapidly growing middle class society is also an important feature of Indian Economy which is said to be agent of change as it has just enough income to allocate resources efficiently. Service based to knowledge based economy
India has proved its mettle in producing technologically superior product. Take for example Google drive is conceptualized and designed by Google’s research facility at Hyderabad . Indian expertise in IT, pharma and heavy engineering has also been accepted globally. Cars like Tata Indica (first indigenous car ) are popular across the world. Legal and Regulatory Environment
RBI has been recognized worldwide for managing a large and complex Indian economy skillfully in times of recession. Its conservative approach has helped India to emerge good in a financial crunch. Also a strong and reliable legal framework encourages foreign investment. Developed Financial System
India has a developed financial system which facilitates India INC to raise much needed capital in India and abroad. Individual Ingenuity
Good educational system which provide large pool of skilled workers. India is largest producer of engineers, doctors, professionals and certification holder
Rich natural resource base that comprises of valuable resources like coal, iron ore which provide rich energy resources. India has developed nuclear facilities that will ensure continuous power supply in future. Purchasing Power Parity:
India is 4th largest economy in terms of PPP. Burgeoning rural demand will ensure robust domestic consumption. Strong private sector
In economic theory private expenditure is considered to be more efficient than public expenditure . India has a healthy private sector contribution ie 75% of industrial GDP
Lack of Capital
There is tremendous scope for increasing industry capacity for which capital is required. Corporates have raised capital from both domestic and foreign sources in way of ECBs and GDRs
Lack of adequate infrastructure
India needs sustainable infrastructure for growth. Proper planning and strong legislation with respect to environmental clearances are need of hour .This is one area where we lag way behind China.
Bureaucracy and corruption
India was ranked at 95 in the corruption perception index released by Transparency International. Lack of transparency and difficulty in starting a business are biggest challenges India faces. Corruption has also led to emergence of a parallel economy through which this unaccounted money flows out or into India.
India still has very high percentage of workforce involved in agriculture which contributes only 23% of GDP. Mechanization of agriculture to improve efficiency and strong land laws would help to usher in second green revolution.
Although many families have graduated from poverty to prosperity still a lot needs to be done. Around a quarter of population below the poverty line. Stark inequality in prevailing socio economic conditions.
Economic inclusion can happen only if job security is provided to all.
Tapping Rural India
Rural India is next big destination for consumerism to grow with more and more companies focusing on rural population.
Infrastructure sector can be a sector for creating jobs
Tourism in India is the largest service industry, with a contribution of 6.23% to the national GDP and 8.78% of the total employment in India. Improvement in infrastructure and easing Visa rules will help attract tourist and earn valuable forex.
R&D investment in products and services which are otherwise imported will help India reduce Import burden for example India can invest in R&D in
alternative source of energy. Also laws should make it favorable for private sector players to participate in this capital intensive sector.
Health Tourism & Pharma
India’s pharmacy companies like BIOCON and Dr. Reddy have been successful in tapping large drug market in US. Corruption free administration
Scope of cleaner and corruption free administration The recent scams have agitated the otherwise indifferent common man This may be seen as a start of building corruption free and efficient system .This will ensure efficiency in sectors like infrastructure. According to recent news government has resolved to push forward economic reforms, if this happens it will increase marginal efficiency of capital and investor confidence.
Slow down Global economy
Economies around the world are so interlinked with each other that theory of butterfly effect can be seen in real . Flap of a butterfly’s wings in Brazil set off a tornado in Texas . Default of an institution can set off a sequence of defaults by organizations and end up in defaulting countries. Foreign currency risk
Bretton wood’s agreement linked a nations financial position to dollar reserves. In recent times cost push inflation was triggered higher crude prices which can be brought only in dollars
High fiscal deficit
According to FRBM act passed in 2003 fiscal deficit should be around 3% which is now hovering at 5 to 6% of GDP .A sizable portion of Government expenditure is on repayment of debts rather than investment . Subsidy and State Control
Government controls most of the PSU which are making losses because of subsidy program. Case in point is Coal India which was recently sent notice by TCI(The Children’s Investment) Fund which is a minority shareholder in
Coal India. According to their report if CIL sells its coal at market price levels, its profits will increase by $19 billion and Indian households consume close to 200 billion units of power per annum, which can entirely be paid for by dividend from Coal India. .
SWOT Analysis Of China
Liberalization in China was a planned and gradual process there was a political consensus and single minded approach towards economic growth.
Large population and country size:
China has largest population which provides cheap labour for its export oriented manufacturing economy .China is also rich in land and other natural resources.
The key reason behind success of Chinese Economy.
Once absent middle class society of China can form a large consumer base.
China is one party state therefore there is no scope of opposition , Dharna’s ,arguments or strikes while they are common in India thus ensuring fast decision making process.
China’s public expenditure is Crowding out efficient private expenditure .
High local municipal debt.
In China political growth of party members is strongly linked with
infrastructure development and growth in their area. Municipal bodies borrow heavily from public and banks to fund their projects. Many of these projects were stalled due to recession and inadequate funds thus leaving a risk of default by municipality and increasing NPAs in banks.
China as a country is not relied by world . In spite of pressure from world it has kept its currency devalued . It is also claimed that the rosy picture that China paints of its economy may not be real .Many litigation is pending against China where it has been accused of arm twisting borrowers.
Legislature, press, Judiciary and executive all are controlled by Communist party. Thus to share the pie of Chinese economic growth, good ties with ruling party is necessary and sufficient criteria.
Export oriented economy
As China adopted an export oriented strategy for economic growth global recession impacted it adversely.
Growth invites inflation due to sudden surge in demand for limited resources. Both India and China are grappling with Inflation . Labour Intensive
China’s manufacturing units (growth drivers of economy ) are labor intensive. Where in people work in inhospitable conditions. Labour intensive nature also makes it inefficient and error prone thus reducing the quality of goods manufactured.
Encouraging domestic consumption will ensure sustainable growth.
China can enter into free and fair trade agreements with eastern countries ,
Middle east and Africa’s that would serve as a large market for its products.
It’s high time that China starts investing in its R&d activities and better processes because today’s consumer is for quality products .
Politic economic environment
Chinese politic economic environment is bad for growth corporates have expressed their concerns over lack of transparency.
Chinese have been reported to have rebelled against the government and demanded democracy in recent past. Such unrest can totally collapse the base on which this mammoth of Chinese economy was built.
It is said that if a product sold anywhere in world there sure would be a Chinese version of same product . Enforcement measures taken to date have not been sufficient to deter massive IPR infringements effectively. Absence of independent judiciary can be one reason Protectionism
China has adopted capitalism to its own advantage while exports happen to an extent that it is also called dumping there exist import barriers Conclusion
India and China are symbolized as Dragon and Tiger but Hare and Tortoise would be more apt. China’s fast growth is imbalanced and unsustainable due to disregard to environment and unrest amongst its people. Chinese and Indian started their growth story with liberalization. Opening of economy to foreign countries is based on a simple economic theory that propounds that any form of foreign direct investment pumps in a lot of capital knowledge and technological resources into the economy of a country. Both countries took on different path towards economic growth . While China followed a planned approach towards growth India was pushed to open its doors to world. GDP and growth rates are just numbers which are supposed to reflect state of well-being of people of a country. Relevance of these figures to well-being was challenged by Bhutan’s King who first coined the term of human happiness index. India ranked 71 while China was ranked 92. China falls behind India in all the metrics that determine happiness of nationals of a country. Possibility of a rebellion cannot be over ruled in China. State sponsored economic activity or infrastructure development does not require any environmental clearances that has led to exploitation of nature leading to submerging of land and desertification.
In some cases whole villages have to be rehabilitated. Ryan Streeter, a senior fellow at Legatum Institute noted that” Because India’s entrepreneurs have succeeded amid dysfunctional government and financial institutions by developing a kind of independent and experimental ingenuity, it stands to reason that the enterprising class would prosper even more, were India to reduce barriers to business and clean up corruption. In China, it is unclear what will happen if state efforts are no longer sufficient to entice and groom the entrepreneurs its economy needs” Excessive planning by Chinese government may cause it to lag behind India. China’s one child policy and selective abortion has caused a demographic shift towards aging population and skewed sex ratio. Therefore china will grow old before it grows rich thus while India has time to implement its reforms and taste fruits of economic growth China does not have this luxury . Nitish Kumar (chief minister Bihar) who just returned from a tour from China was all praise about the Chinese growth and infrastructure. “They didn’t have to learn English to take their country to such great heights! They did it in Chinese. They took knowledge and turned it into their language. We mistook language for knowledge”. But he still prefers Indian economic growth model to Chinese. He goes on to tell a story. During the Emergency, when they were all in jail, also with them was a beggar who had been rounded up on charges of vagrancy. “The beggar had no family. He sometimes couldn’t get two meals a day. And yet, of all us in jail, he was the one most anxious about when he would be released. He was getting two full meals, two sets of clothes, and yet all he wanted was to be free. This is why I am an Indian. I am independent. There is nothing beyond liberty,” he says.
Economy watch: http://www.economywatch.com/economy-and-business-slideshow/12-fastest-growing-economies-of-2011.17-06.html?slide=9