The prospects of India’s economic growth overtaking China’s in 2016-17 has occasioned much comment, if not a sense of triumphalism. If this scenario indeed comes to pass, India will become the fastest growing economy in the world. This change in growth leadership reflects either the rapid slowing down of the dragon’s expansion or an acceleration of the lordly elephant’s pace. The expectation nevertheless is that China and India will keep growing and powering the world economy. However, the probability that growth will sharply decelerate in both China and India has not been seriously examined.
Looking into the seeds of time, economists cannot really predict whether a particular economy grows rapidly or sluggishly over long stretches of time. Or why acceleration in growth is followed by an equally sharp deceleration. China’s example is a singular one as it has expanded at a super-rapid rate for more than three decades. For all the talk of India’s low and stable so-called Hindu rate of growth, it has experienced 17 years of accelerated expansion from 1993 to 2010, according to US economists Lant Pritchett and Lawrence Summers. The big question is not if, but when the slowdown kicks in.
These sharp swings in growth are rarely factored in by economic forecasters. Typically, when projections are made for the prospects of individual or a group of countries like Brazil, Russia, India, China and South Africa (BRICS), their recent track record is taken into account to forecast future performance. This is the basis for perennial discussions of when, say, a China would overtake the US to emerge as the world’s most powerful economy. Or the number of decades it would take for India to catch up with the standards of living in the advanced countries.
The acronym BRICS became fashionable a more than decade ago when a Goldman Sachs report held out India’s prospects as a major world player along with other BRIC nations. South Africa is the latest entrant to this grouping. These economies are expected to become the future engines of global economic growth. The BRICS in the aggregate are expected to overtake the US by 2015. Brazil’s economy is larger than Italy. India’s and Russia’s will be individually larger than that of Spain, Canada or Italy. China has overtaken Japan as the world’s second largest economy and is closing in on the US.
The BRICS were resilient enough to recover fast from the global crisis of 2008-09 than most other economies in the developed world. China was one of the first emerging economies to emerge from the crisis and return to its rapid growth trajectory of 10 per cent. India experienced a sharper contraction, but attained more than 10 per cent growth in 2010. Russia and Brazil experienced a boom in commodity prices. Looking to 2025, these BRICS economies, along with Indonesia and the Republic of Korea, are expected to collectively account for more than half of all global economic growth. Unfortunately, the BRICS have now fallen from grace and are no longer the poster boys of investment banks. Brazil is on the brink of recession after 2014’s near-zero growth. India’s economic fundamentals remain weak, although its stock market continues to boom. Russia is suffering from a crash in oil prices and sanctions and its gross domestic product is expected to shrink by three per cent this year. Investment growth in China declined in the third quarter of 2014, and leading indicators point to a further slowdown according to the IMF. South Africa’s growth prospects are only marginally better than Brazil and Russia.
China’s prospects truly worry economists as there is too much investment and too little consumption in its economy. The spectacular growth performance from 1977 to 2010 was predicated on booming exports to the most powerful economy in the world, notably, the US. This is no more sustainable, as America wants to increase its own exports and reduce its massive trade deficit with China. The need, therefore, is for rebalancing so that China’s growth depends more on domestic demand and less on exports. This adjustment is not as smooth as expected, hence the recent signs of flagging growth. This is the backdrop against which the feel-good factor regarding India overtaking China by 2016-17 is playing out. India’s recent growth performance is only of the order of five per cent over the last three years. The immediate past is thus no reliable guide to expect a step up to 6.3 per cent this year and 6.5 per cent in 2016-17. The big assumption being made by the IMF and World Bank is of a Modi-dividend on India’s growth. In other words, the formation of a majority government in India in May 2014 was expected to result in crucial policy reforms that can revive investor sentiment and boost growth.
There is thus, little or no basis to infer that both China and India will continue to grow indefinitely. Extrapolating from the past to the future is the stuff of only statistical dreams. The reality is that the 28-odd episodes of super-rapid growth in the world economy have given way to sharply declining growth to a global average of 2.1 per cent, according to Pritchett and Summers. For China, this entails a fall in growth to 3.98 per cent. India’s growth acceleration would hit lows of 1.64 per cent — a substantial deceleration from past acceleration.
The bleak growth prospects of both China and India thus appear very different from scenarios that optimistically project the past into the future or assume reforms with a new government in India. It would naturally be tempting to argue that policy failures are responsible for this denouement. But the inevitable slowdown cannot be averted. Having had a run of explosive growth for long stretches of times, the law of averages is bound to assert itself. The sharp downswing in growth fortunes of both countries is bound to have negative consequences for the world economy, besides driving one more nail into the BRICS coffin.
(N Chandra Mohan is an economics and business commentator based in New Delhi)
N Chandra Mohan
