By Devin Cowette
Could India become the new China?
This past spring all eyes were on India as newly elected Prime Minister Narendra Modi stepped into office as the 15th Prime Minister. Before his victory, Narendra Modi served as the Chief Minister of Gujarat as well as the leader of the Bharatiya Janata Party (BJP). For the Western world, this would equate to the Republican Party.
While he held office as the Chief Minister of Gujarat they had a massacre there that lasted three days. Chief Minister Modi at the time was accused of instigating and condoning the massacre. Although all formal charges were dropped the people of India have not forgotten. Interestingly, however, India is a democratic country and the majority of the people voted him into office, which in turn may ignite India into an economic growth period that would ultimately surpass China.
To understand why Narendra Modi was voted into office you need to understand what was going on in India at the time. Before the millennium India’s growth was very volatile. In the late 80’s GDP was above 10%, but shortly thereafter in the early 90’s GDP went below 2%. It was not until the early 2000’s that growth took off and stayed on the upside of 8%. However, this growth brought upon social inequalities. The rich states of India were growing and creating a huge divide between the poorer states. As this divide grew, the recurring tension between the Muslims and the Hindus intensified. All of these social and religious tensions acted as a powder keg with the only missing piece being the spark. That spark came in 2002 with the Gujarat riots.
Since these riots, India has been under the world’s radar. That is until the Prime Minister elections were held. What most of the world would consider conservative India deems radical and therein lies the allure of Narendra Modi. He is a radical in India’s eyes but for the rest of the world he is a rational thinker who can turn India’s slow growth around. One way that he is taking India out of a dismal economy is by changing how India calculates GDP. Raymond Zhong and Anant Vijay Kayala wrote:
…It’s benchmark measure of economic growth will henceforth be based on market prices, not on factor costs. The latter method, which India had previously preferred, tabulates economic activity based on the costs of production, whereas the other method is based on the amounts paid by consumers. Most countries and international bodies calculate GDP based on market prices. (Wall Street Journal)
Finally, India is now using the same calculation of GDP as the rest of the world. This means that analysts can finally value India to other countries as an apples to apples approach rather than an as a unique case. Once Modi made this change GDP for 2014 increased from 4.7% to 7.4%. Modi is also beginning to ease regulations for foreign countries to export to India, and he is raising the required reserve for banks, which will encourage the banks to lend more.
Will this be enough to surpass China’s growth? At China’s peak GDP surpassed 14% and at China’s lowest it never fell below 3%. It is important to note that how GDP is constituted is specific to each country. For example, India’s GDP as of 2013 was comprised as follows: 17.4% Agriculture, 25.8% Industry, and 56.9% services. Whereas China’s composition for that same year was 46% Agriculture, 44% Construction & Manufacturing, and 10% Service Sector. Now these numbers start to complicate the apples-to-apples comparison. The best way to show the striking difference is through a dollar denominated Exports/Imports chart.
Whereas China’s Imports/Exports is the following:
It is clear to see China greatly surpasses India in both Exports and Imports as of 2014. However, there is an indication that China is starting to slow. For starters, China’s Annual Exports & Imports chart shows exports slowing and imports growing. This signals the movement from an emerging country to a developing country. To confirm this, China’s GDP as of 2010 was 10.4% whereas 2014 came in at a stagnant 7.3%.
The falling oil prices is also not helping China. This is unfortunate because as previously stated their second biggest component of GDP is Construction & Manufacturing which represents 44%. China’s industrial production, which measures business generated by the industrial sector, has been falling from over 18% in 2010 to a current 6.80%. If oil prices fall further or stay stagnant this will put more downward pressure on an already sluggish sector that represents nearly half of their GDP makeup.
This does not look like it will be the case for India. In fact, lower oil prices seem to be helping their services sector which again represents 56.9% of the overall GDP. Chart 3 above shows a huge uptick in India Services PMI. A reading above 50 indicates that the service sector is expanding.
The service sector has taken off since July of 2013, and though it is not at their all-time high in January 2013, with forward expectations of a rising GDP it is only sensible to assume the highest attributor to GDP will also rise.
All of these lagging indicators show what has already happened. Economists are looking ahead and noticing striking differences. For one, housing in China has been on the decline. As the chart below shows. China has hit their lowest housing level ever of -5.70. Whereas India keeps making new highs.
Chart 5 is not percentage based but index based. This is not a true apples to apples comparison, but as of now, this is how India is calculating the index. The important takeaway from these two charts is that China has been moving in a downward direction while India is propelling upwards. This uptick in housing should also boost GDP levels. Rajesh Roy and Raymond Zhong reported that India’s Finance Ministry expects, “Asia’s third-largest economy to grow between 8.1% and 8.5% in the next fiscal year, which begins in April,” whereas China’s growth will most likely curtail, “Economists expect China’s economy to expand by 7% or slightly less this year” (Nasdaq.com). All of these indicators are showing great strength for India and the proof will be at the end of this fiscal year when the annual GDP number is realized. As for China, their growth is slowing, but they should not be ruled out. The road to becoming a developed country is arduous, but the end might be around the corner.