China's Growth relative to India's

   I have predicted since the early 2000s, that China's Growth rate will decline below that of India's around the middle of this decade [ Figures & Tables ]. Both the World Bank and the IMF have come around to this view in their latest forecasts.

The projections were based on the theory and emperics of "Catch up" growth. Very succinctly the reasoning is that with the right policy poor economies(low per capita GDP) can grow much faster than the advanced economies(high per capita GDP) and thus close the gap between them. Maintance of the higher growth rate requires further policy and institutional reforms. However, even if appropriate policy reforms are made, the  growth rate will still slow down gradually, though it can remain higher than that of the developed countries.

China, with its unprecedented growth rate which averaged close to 10% over 30 years, seemed to continually violate this rule. Nevertheless, I had projected that it would start slowing down in the 2010s. The advent of the Global Financial Crisis, increased my confidence that it would happen. The fact that it recovered quickly and continued to grow faster than India, was easily explained by pump priming, through large injection of credit, given its party controlled banking system.  My judgement in 2010 was that such pump priming could be maintained comfortably for 3 years and would start getting dangerous after 5 years. Five years have now passed since the huge injection of credit started, and the dangers of a debt default related melt down with keep rising, unless China stops the excessive pump-priming.

There are two views about its future growth trajectory. One is that China will undertake the needed re-orientation in the economic policy framework (from investment to consumption and from manufacturing to services) and growth will slow to the 5,5% to 7% range. The other view is that if it continues the credit fueled growth (some say even otherwise) its growth could collapse to the 3-4.5% range. I continue to believe that the former is the more likely scenario.

Indian economic growth averaged about 7.7% for the decade from 2002-13 to 2011-12.  However, as I had warned in 2009 [in my last economic survey(June 2009) as CEA and in follow up interviews], India's high growth shouldn't be taken for granted. Unfortunately this warning (and subsequent ones) were not headed and growth collapsed from 2011 to 2014.  With the reform steps taken and in process since last year, I expect growth to recover steadily to its full potential by 2018-19. The trend growth rate of India will therefore exceed that of China by the end of this decade.  However, at the growth rates that I have projected (till last year), India.s economy will be only be half (1/2) the size of China's by 2025 (in real PPP terms).

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