Co-authored by Aniket Ranjan, a final year MSc Economics student at Indian Institute of Technology, Kharagpur
The January 2015 edition of World Economic Outlook released by the International Monetary Fund (IMF) has projected India's growth to leapfrog that of China by 2016. The report has gained wide press and other institutions like the Organisation for Economic Co-operation and Development (OECD) and Goldman Sachs have come up with similar trends if not exactly the same conclusions.
These reports do not come as a surprise given the upbeat perception of India's resurgence following the election of its first majority government in three decades. On the other hand China is facing major structural challenges while transitioning from an export-led manufacturing-driven economy to a services-oriented internal-consumption driven one. This transition has not been very smooth - evident in the manner in which China's growth has plummeted by well-nigh 3 percent points within as many years.
The party for India stops right here. The IMF report, in our opinion, is no reason for India to celebrate. The first and the most obvious argument behind our assertion is that the numbers released by the IMF show little more than China's decline. India's ascent cannot be stated as convincingly. The projected growth for China in 2016 is 6.3% while that for India is a shade higher at 6.5%.
Our second argument consists of the caveats and health warnings that come with IMF projections. Figure 1 shows a large disparity between actual Indian growth* and the average of all IMF projections made a year before. The differences range between 4% to -3%. This gap is much smaller in the case of China (Figure 2) though it has been as high as 3.5% for two consecutive years (2006 and 2007).
An argument, however, can be made that the IMF may be underestimating India's growth. So we come to the third reason why we think that any celebration in India will be premature. Let us now assume that the IMF projections are indeed going to be proved correct and India's growth will beat China's by 2016. But we do know that these figures are at best indicative of China's growth going awry and India holding its ground. These projections might indeed be music to the ears of India's policymakers if China's fall could represent a shift in the world's manufacturing base from China to India in the medium or long run.
The 'Make in India' campaign launched by Prime Minister Narendra Modi also envisions the central role of manufacturing in the revival of India's growth story. The difference between an India growing at 7-8% annually, to an India growing at 10% or more is dependent not just on whether India can replace China as the 'workhouse of the world' but also if it is able to export as much as China did during all these years. To put it into perspective, let us record that China exported seven times as much as India did in 2013.
The large ground that India has to cover if it has to become an export powerhouse is not favoured by current state of the world economy. Notwithstanding the 'Make in India' campaign, the global economy is not ready to absorb India's exports owing to a very weak global demand. One of the two biggest indicators of weak global demand is the fall in China's growth itself. If China had an option to offset its low growth by exporting more, it would have happily done so as manufacturing still continues to command more than 40% of China's GDP as compared to a measly 15% in India. The other strong indicator of weak global demand has been the precipitous decline in oil prices.
Weak global demand is indeed a dampener for India's manufacturing take-off in the short and medium run. But can one be bullish on India's manufacturing sector in the long run? The answer to this question is our fourth and last reason for putting any jubilation on hold. If the global demand shores up or even if India has to build a robust manufacturing sector to quench the nation's internal demands - 'Make for India' as Raghuram Rajan put it - India has to undertake a host of reform measures to put itself on the manufacturing map of the world.
China's average annual wages in manufacturing has seen an incessant rise since the turn of the century. India has not been able to capture the receding space despite the twin advantages of low wage and favourable demography. The share of manufacturing in India's GDP has only decreased in recent years. The countries in Southeast Asia have taken full advantage of rising wages in China while India has stifled its own prospects through counter-productive labour laws, a a poorly skilled labour force, unpredictable tax policies and a maze of ill-thought regulations.
While it is not impossible to make India the new factory floor of the world, the odds are heavily stacked against the government which is about to present its first full year budget on February 28, 2015. Finance Minister Arun Jaitley has his work cut out as his budget carries huge expectations of putting India back on a high growth track. If there is one person who can potentially give us something to celebrate about India's growth future, he is Arun Jaitley.
*The growth figures used here are old ones. The new data released by Statistics Ministry recently has not been used because considerable doubts remain on the reliability of the new numbers