What separates India from China

Tue, 26 Apr Pre-Open

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There is one thing that China and India have in common. Both are emerging economies which have been recording strong growth in GDP at a time when the West is reeling under recession. But both countries are different in many ways. For starters, China is an undisputed behemoth in manufacturing while India has a strong services sector. What is more, the events post the global financial crisis also paint a different picture.

For instance, Fitch Ratings has stated that India is better placed compared to China in regulating the flow of bank credit. Readers would do well to note that the RBI's regulations have ensured that flow of credit has been controlled. In fact, that was one of the primary reasons why Indian banks did not meet the same fate as that of their Western counterparts due to strict vigilance by the RBI. China's economy, by contrast, has expanded post the global crisis largely on account of expansion in bank credit. This money especially found its way into the Chinese real estate market, inflated prices and thereby raised fears of a bubble being formed there.

On the other hand, RBI regulated the credit flow to the local corporate sector with prudence. This helped the country's banks in managing their asset quality better during the recent global economic downturn.

Another contrasting feature found in both the economies is that while India's growth has been driven by domestic demand, China's has largely been fuelled by external demand. That is why India has the upper hand for the time being simply because even though the global economy has yet to recover, Indian companies can rely on domestic demand to spur growth. The same cannot be said for China, which has largely depended on the West to fuel its economy. But the crisis has meant that China is gradually looking to bolster domestic demand so that its dependence on exports going forward is reduced.

Both the countries, however, are trying to grapple with the problem of inflation in recent times. In China's case, increasing liquidity and an expansionary bank credit has led to prices rising as more money is chasing fewer goods. In India's case, problems have been on the supply side as food shortages have fueled food prices which in turn has caused inflation to remain at persistently higher levels. Both the central banks are dealing with the problem by raising interest rates to curb excess liquidity. That is why growth in both these economies could slow down a tad bit in the future if inflation is not brought under control. Despite these near term concerns though, both these economies seem poised to grow at a strong pace in the longer term, a feat which the developed world may find hard to replicate in the years to come.