Why India's growth lags China?

Tue, 27 Nov Pre-Open

   Previous Close   

   09:30 am   

   11:30 am   

   01:30 pm   

   Closing   

India and China are amongst the two fastest growing economies of the world. However, the financial crisis of 2007-08 saw growth rates of both these economies fall considerably. It was widely expected that China's growth would be more affected as it was largely an export driven economy. It may be noted that in 2009, goods and services export contributed to 40% of China's Gross Domestic Product (GDP) compared to 20% of India's GDP.

However, it is surprising to know that despite huge export dependence, China has slowed less than India with an exception in 2010. And there are multiple reasons for it. First, the impact on growth due to slowing exports was offset by huge investment oriented stimulus package in China. India, too, rolled out various stimulus packages but the quantum was lower than that of China.

Secondly, productivity of the Indian firms was seriously impacted during the crisis. It is believed that National Rural Employment Guarantee Scheme (NREGS) was responsible for it. That's because the act provided for higher wages but there was no corresponding increase in output. It also shifted jobs from productive areas to non-productive ones in the name of guaranteeing employment. However, one may argue that rupee depreciated during the same period which should make Indian firms competitive. But it should be noted that the rupee advantage was wiped off by rising commodity prices.

Also, it should be noted that high inflation with respect to other emerging markets was responsible for slower growth. Higher inflation has kept interest rates high which in turn impacted the capex cycle of corporates and thus growth. High inflation also affects consumer demand which is directly related to growth.

Further, it should be noted that India has very little fiscal ammunition left with itself to boost growth. In other words, boosting growth by increasing spending or reduction in taxes is no longer feasible as fiscal gap is approaching uncomfortable levels. However, the case is entirely different with China. It can still use its fiscal tools to boost growth and which it has been doing.

Lastly, it should be noted that China's growth is led by investment as well as consumption. However, India's growth is largely dependent on consumption since investment cycle is in a complete lull due to high interest rates and lack of policy reforms. Because of all these reasons India suffered more than China after the slowdown gripped world markets.