A medium-term vision of the Chinese and Indian economic situation



The global economy is still struggling to cope with the economic shock of the Covid-19 pandemic. This task has become even more difficult due to the fact that its main engine of growth, the Chinese economy, is in fact embracing what appears to be a policy-induced slowdown.

China’s GDP growth of 4.9% in the quarter ending September 2021 surprised analysts on the downside. One of the main reasons for the below-expected growth was headwinds on output from factories due to power shortages, which are notably the result of provinces trying to meet their emissions standards by cutting coal production. .

Then there’s the looming threat of disruption in the real estate and tech sectors as the Chinese government actively discourages profits (trying to bypass the capital gains-driven housing market) , even companies (there have been moves to ban online gaming and tuition fees, and scuttle IPOs of tech companies) in these areas.

The nature and extent of these state-sponsored disruptions in the Chinese economy are comparable, if not greater, than the disruptions caused by the policies of the National Democratic Alliance government such as demonetization and the deployment of the goods and services tax (GST) on the informal sector of the Indian economy.

While state-sponsored disruptions are common to India and China, their content and desired goals differ dramatically. The Chinese state is actively hurting big business to usher in what it calls an era of “common prosperity” even if it leads to lower growth. The Indian state, on the other hand, is trying to facilitate the expansion of the formal sector (large business) footprint in its economy, which it believes will unleash the forces of creative destruction and pave the way for rates. higher growth rates.

Here are four charts that attempt to place these developments in a broader context.

India is heading for a period of sustained growth relative to China

China has been the world’s fastest growing large economy for decades now. India’s GDP growth rate matched that of China in 2014, then increased in 2015 and 2016. However, the slowdown in the Indian economy from 2017-18 brought the growth rate down again. of India’s GDP below that of China. The difference became the highest on record in 2020, when India’s economy experienced its biggest contraction on record and China managed to escape the contraction. According to the latest projections from the IMF’s World Economic Outlook (WEO), the Indian economy is heading into a period of sustained growth relative to the Chinese economy.

But the latest WEO projections imply a downward revision of growth in both China and India in the medium term.

While India is expected to occupy the coveted position of the world’s fastest growing large economy through 2026, the latest IMF projections aren’t exactly good news for China or India. Indeed, the two Asian giants are expected to grow at a slower pace than expected in the April 2021 edition of WEO. The projected GDP growth rate for China and India was reduced between the April and October editions of WEO. The IMF also reduced its potential growth rate for the Indian economy from 6.25% to 6% in its latest Article IV consolation with the government.

China and India may have similar levels of income inequality

An argument often cited, while discussing the difference between Chinese and Indian economic performance, is that the lack of democratic pressure in the former has allowed the state to do what it needs to do to ensure growth. This is certainly true for China’s success in implementing land reforms in its initial stages and for the lack of concerns regarding issues such as land acquisition for industry and infrastructure projects in a more recent past. However, this should not be inferred to argue that the Communist Party’s dictatorship is unaffected or unaware of the biggest by-product in China’s growth history – staggering inequality.

As Xi Jinping seeks to consolidate his power within the Chinese Communist Party and extend his term in violation of the established two-term policy, he seeks to bring inequality to the forefront of politics.

“Income inequality is a major problem around the world today. The rich and poor in some countries are polarized with the collapse of the middle class. This has led to social disintegration, political polarization and rampant populism – indeed, the lessons [for us] are deep! Our country must resolutely guard against polarization, promote common prosperity and maintain social harmony and stability, ”he wrote in an article titled To Firmly Drive Common Prosperity in the Chinese Communist Party’s flagship newspaper, Qiushi. , October 15.

As ironic as it may sound, the levels of inequality in China, a dictatorship, are not much different from India, a vibrant democracy. At least that is the picture given by the latest available statistics from the World Bank (they date back a decade for India).

But Chinese per capita income is much higher than India’s

An average Chinese person has a much higher standard of living than his Indian counterpart. According to the October edition of the IMF’s WEOs, China’s GDP per capita in purchasing power parity (PPP) dollars in 2017 was 16,216.08, compared to just 6,172.05 for India. PPP is a better way to measure GDP per capita because it takes into account the difference in price levels between countries. The gap between Indian and Chinese GDP per capita levels has widened steadily since the 1980s. India’s advantage over China in terms of GDP growth rate over the next few years is not expected to narrow this gap significantly.

But Chinese per capita income is much higher than India’s

An average Chinese person has a much higher standard of living than his Indian counterpart. According to the October edition of the IMF’s WEOs, China’s GDP per capita in purchasing power parity (PPP) dollars in 2017 was 16,216.08, compared to just 6,172.05 for India. PPP is a better way to measure GDP per capita because it takes into account the difference in price levels between countries. The gap between Indian and Chinese GDP per capita levels has widened steadily since the 1980s. India’s advantage over China in terms of GDP growth rate over the next few years is not expected to narrow this gap significantly.

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The Chinese state’s push to tackle inequality, even if it has to resort to redistributing income through higher taxes on the rich, comes at a time when its growth is slowing anyway. While the policy change is clearly tied to Xi’s political ambitions, it’s equally difficult to answer the associated hypothesis – whether the status quo would have given a boost to China’s growth rates. Granted, that still doesn’t remove the fact that the global economy could face significant turmoil due to the state-sponsored economic realignment in China.

India’s situation today is perhaps more delicate than that of China. It must seek a sustained period of high growth to increase per capita income levels. Entrenched inequalities, a much lower level of per capita income and almost continuous democratic competition (there are elections every year) mean that the state must always balance populist pressures and measures that will allow long-term sustainable growth. . Electricity subsidies for farmers and a shifting agriculture policy in line with environmental sustainability concerns are a good example of such tensions. In principle, an aggressive policy of income redistribution would also have been a good idea in India. The problem is, India’s economy is too dependent on the rich to even achieve a 6% GDP growth rate at the moment.

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