INDIA VS CHINA

Making an in depth study and analysis of India vs. China economy seems to be a very hard
task. Both India and China rank among the front runners of global economy and are among
the world's most diverse nations. Both the countries were among the most ancient
civilizations and their economies are influenced by a number of social, political, economic
and other factors. However, if we try to properly understand the various economic and market
trends and features of the countries, we can make a comparison between Indian and Chinese
economy.

Going by the basic facts, the economy of China is more developed than that of India. While
India is the 12th largest economy in terms of the exchange rates, China occupies the third
position. Compared to the estimated $1.209 trillion GDP of India, China has an average GDP
of around $7.8 trillion. In case of per capital GDP, India lags far behind China with just
$1016 compared to $6,100 of the latter. To make a basic comparison of India and China
Economy, we need to have an idea of the economic facts of the countries.

Facts India China

GDP around $1.209 trillion around $7.8 trillion
GDP growth 6.7% 9.1%
Per capital GDP $1016 $6,100
Inflation 7.8 % -1.2 %
Labor Force 523.5 million 807.7 million
Unemployment 6.8 % 4.3 %

If we make the analysis of the India vs. China economy, we can see that there are a
number of factors that has made China a better economy than India. First things first,
India was under the colonial rule of the British for around 190 years. This drained the
country's resources to a great extent and led to huge economic loss. On the other hand,
there was no such instance of colonization in China. As such, from the very beginning,
the country enjoyed a planned economic model which made it stronger.

Agriculture

Agriculture is another factor of economic comparison of India and China. It forms a major
economic sector in both the countries. However, the agricultural sector of China is more
developed than that of India. Unlike India, where farmers still use the traditional and old
methods of cultivation, the agricultural techniques used in China are very much developed.
This leads to better quality and high yield of crops which can be exported.

Liberalization of the market

In spite of being a Socialist country, China started towards the liberalization of its market
economy much before India. This strengthened the economy to a great extent. On the other
hand, India was very slow in embracing globalization and open market economies. While
India's liberalization policies started in the 1990s, China welcomed foreign direct investment
and private investment in the mid 1980s. This made a significant change in its economy and
the GDP increased considerably.

Difference in infrastructure and other aspects of economic growth

Compared to India, China has a much well developed infrastructure. Some of the important
factors that have created a stark difference between the economies of the two countries are
manpower and labor development, water management, health care facilities and services,
communication, civic amenities and so on. All these aspects are well developed in China
which has put a positive impact in its economy to make it one of the best in the world.
Although India has become much developed than before, it is still plagued by problems such
as poverty, unemployment, lack of civic amenities and so on. In fact unlike India, China is
still investing in huge amounts towards manpower development and strengthening of
infrastructure.

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In the inevitable comparisons that economists and businesspeople make between Asia's two
rising giants, China and India, China nearly always comes out on top.

The Chinese economy historically outpaces India's by just about every measure.
China's fast-acting government implements new policies with blinding speed, making
India's fractured political system appear sluggish and chaotic. Beijing's shiny new airport
and wide freeways are models of modern development, contrasting sharply with the sagging
infrastructure of New Delhi and Mumbai. And as the global economy emerges from the Great
Recession, India once again seems to be playing second fiddle. Pundits around the world laud
China's leadership for its well-devised economic policies during the crisis, which were so
effective in restarting economic growth that they helped lift the entire Asian region out of the
downturn. (Read "Amid Recovery, China's Property Market Soars.")

Now, however, India may finally have one up on its high-octane rival. Though India still
can't compete on top-line economic growth — the World Bank projects India's gross
domestic product (GDP) will increase 6.4% in 2009, far short of the 8.7% that China
announced in mid-January – India's economy looks to be rebounding from the
downturn in better shape than China's. India doesn't appear to be facing the same
degree of potential dangers and downside risks as China, which means policymakers in
New Delhi might have a much easier task in maintaining the economy's momentum
than their Chinese counterparts. "The way I see it is that the growth in India is much more
sustainable" than the growth in China, says Jim Walker, an economist at Hong Kong–based
research firm Asianomics.

India's edge is due to the different stimulus programs adopted by the two countries to support
growth during the downturn. China implemented what Walker calls "the biggest stimulus
program in global history." On top of government outlays for new infrastructure and tax
breaks, Beijing most significantly counted on massive credit growth to spur the economy.
The amount of new loans made in 2009 nearly doubled from the year before to $1.4 trillion –
representing almost 30% of GDP. The stimulus plan worked wonders, holding up growth
even as China's exports dropped 16% in 2009.

But now China is facing the consequences of its largesse. Fears are rising that Beijing's easy-
money policies have fueled a potential property-price bubble. According to government data,
average real estate prices in Chinese cities jumped 7.8% in December from a year earlier —
the fastest increase in 18 months. The credit boom has also sparked worries about the nation's
banking system. Many economists expect the large surge in credit to lead to a growing
number of nonperforming loans (NPLs). In a November report, UBS economist Wang Tao
calculates that if 20% of all new lending in 2009 and 10% of the amount in 2010 goes bad
over the next three to five years, the total amount of NPLs from China's stimulus program
would reach $400 billion, or roughly 8% of GDP. Though Wang notes that the total is small
compared with the level of NPLs that Chinese banks carried in the past, she still calls the sum
"staggering." Policymakers in Beijing are clearly concerned. Since December, they have
introduced a series of steps to cool down the housing market and restrict access to credit by,
for example, reintroducing taxes on certain property transactions and raising the required
level of cash that banks have to keep on hand in an effort to reduce new lending. (Read
"Foreign Luxury Cars: Picking Up Speed in India.")

India, meanwhile, isn't experiencing nearly the same degree of fallout from its
recession-fighting methods. The government used the same tools as every other to
support growth when the financial crisis hit – cutting interest rates, offering tax breaks
and increasing fiscal spending – but the scale was smaller than in China. Goldman
Sachs estimates that India's government stimulus will total $36 billion this fiscal year,
or only 3% of GDP. By comparison, China's two-year, $585 billion package is roughly
twice as large, at about 6% of GDP per year. Most important, India managed to achieve
its substantial growth without putting its banking sector at risk. In fact, India's banks
have remained quite conservative through the downturn, especially compared with
Chinese lenders. Growth of credit, for example, was actually lower in 2009 than in 2008.
As a result, economists see continued strength in India's banks. A January report by
economic-research outfit Centennial Asia Advisors noted that based on available data, "there
was no sign that domestic banks' nonperforming assets were deteriorating materially." Nor do
analysts harbor the same concerns that India's monetary policies are sending prices of Indian
real estate to bubble levels. "India's growth, though less stellar, does have the reassuring
factor that the [risks of] asset price bubbles are less," says Rajat Nag, managing director
general of the Asian Development Bank in Manila.

India maintained robust growth without Beijing's hefty stimulus in part because it is less
exposed to the international economy. China's exports represented 35% of GDP compared
with only 24% for India in 2008. Thus India was afforded more protection from the worst
effects of the financial crisis in the West, while China's government needed to be much more
active to replace lost exports to the U.S. More significantly, though, India's domestic
economy provides greater cushion from external shocks than China's. Private domestic
consumption accounts for 57% of GDP in India compared with only 35% in China. India's
confident consumer didn't let the economy down. Passenger car sales in India in December
jumped 40% from a year earlier. "What we see [in India] is a fundamental domestic demand
story that doesn't stall in the time of a global downturn," says Asianomics' Walker. (See
pictures of India's "slumdog" entrepreneurs.)

The Indian economy is not immune to risks. The government has to contend with a yawning
budget deficit, and last year's weak monsoon rains will likely undercut agricultural
production and soften rural consumer spending. But rapid growth is expected to continue.
The World Bank forecasts India's economy will surge 7.6% in 2010 and 8% in 2011, not far
behind the 9% rate it predicts for China for each of those years. Indian Prime Minister
Manmohan Singh, when speaking about his country's more plodding pace of economic
policymaking, has said that "slow and steady will win the race." The Great Recession appears
to have proved him right.

China and India – economic growth and the struggle against

inflation
India and China are engaged in separate but parallel struggles with inflation. Both have
responded by monetary tightening. Such tightening affects inflation via its effect on demand
and its interrelation with the supply side of the economy. This article, therefore, analyses
macroeconomic determinants of the supply side of China's and India's economies and its
effect on inflation and their relative growth rates. In particular it considers the relative
efficiency of investment in China and India and the consequences of this for inflation and
growth.

As this article is somewhat more statistical than most on this blog it may be useful to
summarise its conclusions - readers can turn to the article for the supporting evidence.

1. Analysis of macro-economic parameters clearly confirms other forms of study that both the
Chinese and Indian economies are up against or approaching inflationary capacity
constraints. Therefore, for example, the analysis that China is facing an overall problem of
'overcapacity' is the reverse of the truth - China is facing an overall problem of constraints on
capacity which has inflationary consequences.

2. As China is suffering from inflationary capacity constraints the argument made by some
commentators that in 2009, and at present, China's policy makers should aim at increasing
domestic demand only via increasing domestic consumption, and not also increasing
domestic investment, is false - such a policy, by increasing demand but not tackling capacity
constraints, would increase inflationary pressures. The Chinese authorities in 2009 were
therefore right to have expanded both domestic investment and domestic consumption.
This remains the correct policy.
3. India's domestic savings level combined with a policy of accepting a moderate, i.e. up to
3% of GDP, balance of payments deficit makes it credible for India to aim at a double digit,
or close to double digit, economically sustainable growth rate. The projections for India's
growth at the latest Indian Prime Minister's Economic Advisory Council, of 7.2% in the
current fiscal year and over 8% in the next, appear even moderate compared to the macro-
economic potential - indicating that either, or both, India has ample strategic margin to
contain inflation or that growth rates will exceed these projections.

4. There is not a statistical basis for the claim that India is able to make more efficient  use of
investment than China and therefore that India will be able to match China's growth rate with
a lower level of investment. India's efficiency of the use of investment, from the point of
view of economic growth, is almost exactly the same as China's and therefore, unless there is
a change in this, their relative growth rates will continue to be determined by which country
invests a higher proportion of GDP.

5. China, on the basis of the level of of investment achieved in 2009, should be able to sustain
the approximately 12% GDP growth which is likely in the early part of 2010 without
seriously destabilising  inflationary capacity constraints. However further acceleration,
without an increase in the level of investment, would be likely to produce unsustainable
capacity constraints and therefore the Chinese authorities are correct to have begun to rein in
the rate of acceleration of the economy.

The more detailed analysis of these points follows.

***

On 12 February China's central bank raised banks' reserve requirements for the second time
in a month. India raised bank reserve requirements on 29 January.

The struggle with inflation in both China and India is complicated by short term inflationary
pressures created by climatic effects which have contributed to capacity constraints in food
supply.(1) But other more general inflationary pressures are due to capacity constraints in
sectors in which additional investment can potentially tackle the problem in the medium or
short term.

In regard to capacity constraints in China Geoff Dyer noted in the Financial Times:
'According to Yu Song and Helen Qiao at Goldman Sachs, the most extreme example is in
the auto sector, where extra shifts mean factories are running at above capacity. They also see
emerging bottlenecks in electricity, coal and even in aluminium and steel which only a few
months back seemed to be suffering from chronic overcapacity. "The capacity overhang has
been quickly whittled down in major industrial sectors," they wrote in a recent report.'

Analysing the situation in particular industries, while important, is however not sufficient to
estimate how serious are overall inflationary capacity constraints. There will always
necessarily statistically be examples of 'overcapacity' and 'undercapacity' in an economy,
even when overall macro supply and demand are in balance, as it is in practice impossible to
exactly match these in all sectors. Pointing to cases of either overcapacity or undercapacity,
whether statistical or relying on anecdotes, therefore does not resolve the issue - it will
always be possible to find these cases. Only overall consideration of the balance between
demand and supply can determine whether deflationary overcapacity or inflationary lack of
capacity is dominant.

To look clearly at the root of the issue of capacity constraints it is therefore necessary to look
at the overall situation – i.e. at the macro-economy. Examination of this for both China and
India reveals major implications for short term anti-inflationary policy and for long term
determinants of growth.

China or India cannot increase capacity only via increased efficiency of investment

The first point revealed by examining the macroeconomic constraints is that neither China
nor India can significantly increase capacity, to overcome inflationary supply side issues, by
simply increasing their efficiency of investment. To overcome current domestic capacity
constraints they would both have to raise the level of investment in their economies.

To demonstrate this, ideally fully up to date studies on total factor productivity in the two
economies would be used to evaluate investment efficiency. However studies of total factor
productivity on India are less frequent than those for China and such analyses by their very
detailed nature are also in general not fully up to date.

Studies of total factor productivity which have been carried out for China show clearly that,
contrary to myths presumably spread by those who have not examined the figures, China's
use of investment is highly efficient in terms of international comparisons as is India's.

Given the lack of, and problem of timeliness of, total factor productivity studies a less
statistically precise, but indicative and relatively current, measure is to calculate the
correlation of the level of investment with GDP growth – i.e. what percentage of GDP India
and China have to invest to generate 1% GDP growth. Such analysis confirms the situation
found by the total factor productivity studies and casts a clear light on the situation facing
both China and India. Such analyses, in turn, can be brought more fully up to date - yielding
a less statistically precise result than total factor productivity studies but one that can be used
as a policy tool.

Efficiency of investment in China and India

Taking a five year moving average, to smooth out purely short term fluctuations, China has
had to utilize 3.7 percent of GDP in fixed investment for its economy to grow by 1 percent.
To give detail, in the five years to 2008, the latest for which there is full data, China's GDP
grew at an average annual 10.8 percent, and it invested an average of 40.7 percent of GDP –
yielding a 3.7 percent of GDP in fixed investment correlation with 1 percent GDP growth.(2)

India's efficiency in the use of investment in terms of generating growth is almost exactly the
same as China's. Over the same period India's economy grew an average 8.5 percent a year
and its share of fixed investment in GDP was 31.0 percent – i.e. India also invested 3.7
percent of GDP to grow by 1 percent.(3)

As neither China nor India during the latest five year period suffered intolerable macro-
economic imbalances it may be assumed that 3.7% of GDP devoted to investment to generate
1% GDP growth is consistent with sustainable macro-economic stability.
Figure 1 below shows the development of this ratio over a longer time frame. This data
shows the dramatic decrease in the percentage of GDP that had to be devoted to investment to
generate economic growth in China after the economic reforms starting in 1978 and as a
result of the economic opening up in India.

In the case of both China and India the percentages of GDP that had to be devoted to
investment fell from around 6% of GDP prior to their economic reforms to the present 3.7%
of GDP level – i.e. the efficiency of investment, from the point of view of generating growth,
increased by around 50%.

To take an international comparison, at the end of the 1970s China, India and the US
each had to invest about 6% of GDP to generate 1% of GDP growth.However after this
the efficiency of investment, from the point of view of generating GDP growth, greatly
improved in both China and India and it deteriorated in the US - the US, even before
the onset of the 2008 recession pushed the figure higher, had to invest 7.8 percent of
GDP to grow by 1 percent.(4) Both China and India's efficiency of investment, from the
viewpoint of GDP growth, is currently therefore more than twice that of the U.S.

The trends for the three countries are shown in Figure 1.

Figure 1

Historical examination shows both China and India have among the most efficient
sustained uses of investment in generating growth in post-World War II history – far
better than the U.S., Europe or Japan at present. China and India's economies, in short,
grow so rapidly both because they have very high investment rates and because that
investment is now used very efficiently – this interaction being multiplicative.

For present purposes, however, the significance of these figures is that China and India have
little scope for increasing their capacity, or sustaining or raising their growth rates, simply by
achieving efficiencies in capital use - both countries are already up against the boundary of
what any country has achieved in a sustained way in this field since World War II. It is
implausible that a significantly superior investment to GDP growth ratio can be achieved in
either country – although major efforts will be required to maintain what is already a highly
efficient use of investment. India's and China's growth rates could therefore only be
maintained or increased by maintaining or increasing the allocation of GDP to investment.

A further implication of this data is that as an approximate guide to the macroeconomic

situation the 3.7% of GDP investment to 1% GDP growth ratio indicates a macroeconomic
balance compatible with overall stability - including avoiding excessive inflation. However if
the actual growth rate for China or India is not supported by a level of investment sufficient
to maintain the 3.7% of GDP to investment for each 1% GDP growth then macro-economic
instability, including inflationary capacity constraints, will occur.

As these ratios have not fluctuated greatly for twenty years they therefore give a rough but
relatively robust guidance as to the level of investment required to support any given growth
rate.

As both China's and India's efficiency of use of investment, from the point of view of
economic growth, is already very high India's and China's growth rates could therefore only
be maintained or increased by maintaining or increasing the allocation of GDP to investment.

India's Investment and GDP in 2009

Turning to estimating the implications of the above data for the present situation of capacity
constraints in China and India no figures for the breakdown of GDP between investment and
consumption are available for either country for the whole of 2009. However for India data is
available for the first half of that year and China has published data allowing indirect
estimates to be made for the whole of 2009.

For India fixed investment in 2008 was 34.8% of GDP. Given the correlations above, this
would sustain a 9.4% annual growth rate. However the 2008 figure was the highest level of
investment in GDP recorded.  IMF International Financial Statistics data indicates that the
proportion of India's economy devoted to fixed investment fell in the first and second
quarters of 2009 - no more recent data is given. In the 3rd quarter of 2009, the latest available
figure, India's GDP growth was already 7.9% and accelerating. India's economy was
therefore probably already approaching the rate of growth that was the maximum that could
be sustained by its level of investment - acceleration of economic growth was shown by the
fact that industrial production in December, for example, was up 16.8% year on year.

Such a combination of accelerating GDP growth of around 8%, and a level of fixed
investment which had fallen as a percentage of GDP, at least during the first half of 2009,
clearly indicates that India's economy was moving up towards its capacity constraints by the
end 2009. To maintain a target of a 9% a year growth rate, for example, India would have to
invest 33.3% of GDP – a level achieved in only two years (2007 and 2008). While the Indian
authorities stress that at present serious inflationary pressures are confined to food, and are
not appearing in manufacturing, nevertheless the economy is beginning to approach its
overall capacity constraints.

These benchmark parameters therefore indicate that a 9% a year growth rate is just
achievable for India at the highest levels of investment it  has reached, but it is right up
against the economy's investment constraints – confirming the recent view expressed by
Nobel prize winner Michael Spence that: 'it will be hard to get to 9% and stay there.'

Policies envisaged by the Indian government that would allow sustaining a higher rate of
growth by inward investment to finance an increased investment level are considered below.

China's investment and growth in 2009

In the case of China no data for the distribution of GDP between consumption and
investment have been published for 2009 but an indirect calculation yielding ballpark figures
can be carried out as figures for the contribution of different components of GDP growth in
2009 have been published.

China's year on year GDP growth in the 4th quarter of 2009 was 10.7% and accelerating
strongly – projections of 12-13% year on year growth in the early part of 2010 are not
unrealistic. 10.7% GDP growth, using the correlation between GDP growth and investment
given earlier, would already require 39.6% of GDP to be invested to be consistent with
macroeconomic stability. A 12% GDP growth would require 44.4% of GDP to be invested
and 13% GDP growth would require 48.1% of GDP to be invested.

The latest year for which measured data for the proportion of China's GDP devoted to
investment are available is 2008 at 41.1% - which would already leave little margin for even
a 10.7% year on year growth rate and is quite insufficient to sustain a 12% or 13% growth
rate.

It is clear that the proportion of China's GDP devoted to fixed investment increased in 2009
but not by enough to maintain the very high levels of GDP growth that are likely to be
reached given that acceleration beyond 10.7% growth is almost certain in the first part of
2010.

The published data is not sufficient to make a detailed calculation of the proportion of
China's economy devoted to fixed investment in 2009 - as the figures for the contribution of
the share of different components to GDP growth that have been issued do not give a
breakdown between fixed investment and accumulation of inventories and are in constant
and not current price terms, However the published figures are adequate to give an overall
grasp of trends.

The published data show that the shrinkage of China's trade surplus in 2009 meant declining
net exports deducted 3.9 percent from GDP growth. China's domestic consumption
contributed 4.6 percent of GDP growth and domestic investment contributed 8.0 percent. The
two together mean China's domestic demand increased by 12.6 percent in 2009 – one of the
highest increases in world history.(5) While exact translation of these figures into current
price terms cannot be made, if it is assumed that inventories remained constant as a
proportion of GDP, and that the consumer and investment price deflators did not diverge
excessively, then they imply that consumption probably rose to around 49% of China's GDP
and fixed investment to around 45%.

Such an increase in the level of fixed investment in China, as it came on stream, would be
counter-inflationary as it would increase supply by removing capacity constraints and
increasing productivity. However it is clear that, on the basis of earlier data, such a figure for
investment would be scarcely enough, or insufficient, to maintain the likely rate of expansion
of China's economy at the beginning of 2010 - to recapitulate the figures above, to sustain a
12% growth rate would require investment of 44.4% of GDP, a 12.5% growth rate would
require fixed investment of 46.3% of GDP, and a 13% GDP growth rate would require fixed
investment of 48.1% of GDP. China is therefore clearly already approaching, and may soon
exceed, the rates of GDP growth consistent with macroeconomic stability even after the
increase in investment that occurred in 2009.

Conclusions

What conclusions, therefore, flow from the situation in China and India noted above?

1. The macroeconomic examination of capacity constraints evidently clearly underlines the

correctness of the Indian and Chinese authorities estimates that they face significant
inflationary pressures.

2. Claims made in 2009 that China faced a decisive problem of 'overcapacity', as outlined for
example in a European Chamber of Commerce in China report that was picked up in an
editorial in the Financial Times, were the reverse of the truth. The dominant situation
emerging in China's economy was capacity constraints and not overcapacity – as the
Goldman Sachs report noted earlier rightly outlined.

3. Regarding China,the proposal made by some economists that China should concentrate
simply on increasing domestic consumption, without also increasing domestic investment, is
clearly wrong and would significantly increase inflationary pressures.

Both increased domestic investment and increased domestic consumption achieve the
desirable goal of reducing China's exposure to fluctuations in international demand/reduce
China's trade surplus. However consumption, by definition, does not add to supply whereas
investment does – thereby lessening capacity constraints. Increasing China's domestic
demand only by increasing domestic consumption, without increased domestic investment,
would therefore fail to lessen domestic capacity constraints and, other things being equal,
would thereby increase inflationary pressures.

China's actual economic policy in 2009, which increased both domestic investment and
domestic demand, was therefore a superior policy to one of only increasing domestic
consumption both from the point of view of the short term struggle with inflation and from
long term growth. The Chinese authorities were correct to have implemented a balanced
development of consumption, investment and trade. The 2009 stimulus package, which
increased domestic demand via both consumption and investment, has left China better
placed to confront inflationary pressures in 2010.

4. In India Prime Minister Manmohan Singh has frequently stressed the investment level as
the decisive determinant of growth and it is therefore almost certain that India's economic
policy will be oriented to ensuring that the lowering of the investment level in GDP,
compared to the previous year, seen in the first half of 2009 is reversed. The general
consensus behind such a policy is indicated by the editorial call in the Economic Times,
India's most influential financial newspaper, for the government to 'reallocate expenditure
away from consumption towards investment.'
Discussion with Indian authorities confirms that a policy instrument to achieve a higher level
of investment, to sustain a higher growth rate includes an acceptance of a moderate balance
of payments deficit. As  such a deficit is necessarily equivalent to a net inflow of savings
from abroad it would raise the total finance available for India's investment. Ballpark figures
indicate that double digit economic growth should be achievable on this basis of India's
domestic savings plus such a sustainable balance of payments deficit.

In 2007, the latest year for which full data is available, IMF International Financial
Statistics figures show that India's measured savings level was 37.7% of GDP – although
indirect calculation shows this is likely to have slightly fallen in 2008. If a 3% of GDP
balance of payments deficit is added to the 37.7% peak domestic savings figure, creating a
domestic and international savings rate of 40.7% of GDP then, based on the correlations of
investment and GDP growth, this would theoretically support an 11.0% growth rate. Given
India's likely inflow of foreign investment a 3% of GDP balance of payments deficit should
be sustainable. In short, India's attempt to achieve a double digit growth rate would appear to
be realistic if it can regain its previous peak domestic savings level and supplement this by a
containable balance of payments deficit.

Interestingly the latest Indian Prime Minister's Economic Advisory Council projected growth
rates, 7.2% in the current financial year and exceeding 8% in the next, which are
significantly below these which appear possible from this macroeconomic data. This
indicates either that India has ample margin to control inflation or that the projections will
turn out to be conservative and India's actual economic growth will be higher than these
projections.

5. China is able to finance all its investment on the basis of domestic savings. A 45%
investment rate of the type that probably existed in 2009, on the basis of the correlations
previously given between investment and growth, would equate to a 12.2% growth rate.
Given the extreme recessionary pressures at the beginning of 2009 it is unsurprising that such
a growth rate was not achieved last year but it will be interesting to see if this approximates
to the growth rate achieved at least in the first part of 2010. Preliminary projections indicates
that China's growth rate in likely to be relatively close to this figure – which would confirm
that the macroeconomic correlations indicated above continue to operate.

6. There appears to be no statistical basis for the claim that India utilises its investment more
efficiently than China. The statistical data shows that the efficiency of the use of investment,
from the point of view of economic growth, is almost exactly the same in India and China.

A consequence of the preceding point is that India will not be able in a sustained way to
match or exceed China's levels of growth without matching or exceeding its level of
investment. If the efficiency of the use of investment, from the point of view of growth, is
essentially the same in China and India then the growth rate of GDP depends on the relative
levels of investment in the two economies. Unless the efficiency of use of investment in
China declines, or its level of investment in GDP decreases, then as long as India continues
to invest a lower proportion of its GDP than China its growth rate will be lower.

7. The final conclusion is evidently that, on the basis of the above data, both India and China
have sufficient macroeconomic room for manoeuvre to contain inflationary pressures while
maintaining their high growth rates. Any inflationary threat appearing to seriously threaten
the ability to contain inflation would seem to have to be one coming from the international
arena. Even if China's growth rate in the first quarter of 2010 is around 12% this would not
appear to seriously threaten, on the basis of domestic pressures, a level of inflation that was
not containable - although acceleration beyond that point would hence Chinese policy
makers are clearly correct to be taking measures to rein back inflation and further economic
acceleration. India is locked in a short term struggle with food price inflation but the present
predictions for economic growth at the Prime Minister's Economic Advisory Council appear
even rather modest compared to macroeconomic fundamentals and it would be unsurprising
to see India attain a higher rate of growth in the next financial years than these projections.

Notes

1. In China severe winter weather helped increase vegetable prices by 16 percent in a single
month in December. Within the 1.9 percent increase in the consumer price index in the year
to December the highest rate of increase – 5.3 percent – was for food. China's annual
consumer price index fell in January to 1.5% but food supply constraints still exist. China's
producer price index rose by 4.3% in January.

In India the worst monsoon since 1972 helped produce a 18.0% year on year increase in the
main staple food prices in the week to 6 February. India's benchmark wholesale price index
was 8.6% in January, with India's chief statistician projecting that inflation could reach 10%
by March.

In regard to short term food shortages only a limited amount can be done to lessen the effect
of these domestic capacity constraints - India, for example. has been allowing duty free
imports of certain items and releasing food from stocks.

2. Calculated from China Statistical Yearbook 2009.

3. Calculated from IMF International Financial Statistics.

4. Calculated from IMF International Financial Statistics.

5. This is higher even than the 11.2% increase in domestic demand this blog had estimated
using earlier data and very conservative assumptions. The fact that China's domestic demand
increased in 2009 even more than such preliminary and conservative calculations of course
confirms even more strongly the points made in the post 'China's dramatic surge in domestic
demand' of the huge scale of China's increase in domestic demand in 2009.

Posted at 15:07 in China, India | Permalink