China

After years of high economic growth averaging 10pc a year, China’s growth has fallen to its lowest level since 2009, hit by a slowing property market, cooling investment growth and unsteady local and foreign demand over the past two years. The government has cut its growth target for 2015 to 7pc, the slowest expansion in more than two decades.

After the government launched a range of measures aimed at preventing a slump, the National Bureau of Statistics reported 7pc YoY expansion in the second-quarter GDP, unchanged from the first quarter. Wall Street analysts have predicted a pick-up of China’s economy in the second half of this year after its GDP for the second quarter grew well above market expectations.

The economy in July grew at a more modest pace. China has a wide range of policies that will beneficially affect the economy but further acceleration in growth is not expected in the third quarter but is expected to remain on the track of hitting the 7pc growth target in 2015.

However, according to a recent study conducted by the Institute for Advanced Research (IAR) of Shanghai University of Finance and Economics, economic growth is likely to see a larger decline. The GDP looks set to grow 6.3pc in 2015. In 2014, the growth sharply slowed to 7.6pc. The IAR expects that a 7pc growth target can only be achieved by the combination of powerful financial and monetary policies.

The single most important development has been its credit spree. Standard Chartered Bank reports that since the financial crisis of 2008, China has relied heavily on credit to spur its high growth rates. But the alarming pace of credit growth has triggered worries for investors with the total debt soaring to two and a half times its economy to about 250pc of GDP. This has resulted in a heavy repayment burden. The growth in nominal GDP has been dramatically outstripped by the growth of debt in recent years.

Despite the rapid economic growth, poverty reduction remains an issue in China, especially in rural areas. The country has the second largest number of poor in the world after India. Rapid economic growth has brought on many challenges that include high inequality, rapid urbanization, environmental sustainability and external imbalances. A latest report from the Pew Research Centre reveals that more than 82m people still live below the poverty line. President Xi Jinping has reaffirmed his commitment to alleviate persisting rural poverty and described the need for poverty relief in underdeveloped rural areas as a ‘key’ for national economic development.

The government is expected to submit a draft of the 13th Five-Year Plan to the country’s legislature in March 2016 which will set policy priorities for 2016-2020. It is aiming to establish an ‘all-round well-off society’ by 2020. Though, China has become the second largest economy and its GDP of $18,967bn has outpaced US’s $18,125bn, on purchasing power parity basis, yet it remains a developing country. Per capita GDP of $7,572 in 2014 was still much lower of that in advanced countries.

India

India’s economic growth this year and next will be better, overtaking China in 2015 to become the world’s fastest growing major economy. Both the IMF and the World Bank see India’s growth rising to 7.5pc in 2015 from 7.2pc in the preceding year.

For 2016, however, the World Bank projects slightly higher growth at 7.9pc while IMF expects growth to remain unchanged at 7.5pc. The Indian finance ministry expects GDP growth to be 8-8.5pc in 2015-16, while the Reserve Bank of India estimated it at 7.6pc. The ADB has retained its economic growth forecast for 2015-16 at 7.8pc.

Even with a higher growth rate, India’s $2trn GDP, at current dollar prices, will remain much smaller compared with China’s $11trn economy. It will be the world’s fastest growing economy, for the second consecutive year in 2016. China was the fastest growing economy in 2014, at 7.4pc as against India’s 7.3pc. The World Bank has predicted that India’s GDP growth could reach 8pc in 2017/18, on the back of significant acceleration of investment growth to 12pc during 2016-2018. GDP per capita at current prices was $1,626 in 2014. External debt last year stood at $475.8bn which is 23.8pc of GDP.

Presenting the 2015-16 budget in the parliament, the Indian finance minister claimed the economy is growing at a strong rate and the economy was about to take off with foreign exchange reserves rising, currently estimated to be an all-time high at $355bn. The radical budget includes a substantial 5pc cut in corporate tax rates to spur growth in Asia’s third largest economy. In a bid to win back investment and boost growth, the government would increase spending on the country’s crumbling roads, railways and ports by $11.3bn in 2015-16.

Low oil prices and reduced inflation have given India a growth boost. An expected relief of sanctions on the Iranian oil sector will allow Indian companies to import more Iranian crude. According to India’s finance ministry, power-hungry India saves nearly $1bn in import costs for every dollar drop in global crude prices. India is particularly well positioned to benefit because many of its refineries are designed to receive Iranian-grade crude.

Meanwhile, analysts see that the turmoil in China’s stock markets has turned into a blessing for Indian shareholders. International investors are pulling out of China, fueling record outflows through the Shanghai-Hong Kong exchange link, amid a $2.8trn plunge in mainland equity values since June 12, plowing $705m into India and sparking a world-beating 7pc gain in the benchmark S&P BSE Sensex index.

India has the world’s largest poor. Living standards among the country’s 1.27bn residents are far from homogenous. Millions have seen little benefit from the country’s recent growth, and poverty remains widespread. Close to one-fourth of Indians lacked enough money for food (27pc) or shelter (22pc) for their families in the past year. According to a FAO report, India is home to 194.6m undernourished people, the highest in the world.

Published in Dawn, Economic & Business, August 3rd, 2015

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