THE economy of India is the seventh-largest in the world measured by nominal GDP and the third-largest in terms of purchasing power parity.

According to Global Wealth Report 2016 compiled by Credit Suisse Research Institute, India is the second most unequal country in the world with the top 1pc of the population owning nearly 60pc of the total wealth. 

India has prospered, registering economic growth of around 9pc in the pre-2008 years but accelerated with a growth of 7.4pc in 2015-16, breaking its own record of being a two-trillion dollars economy, according to a recent report by the ADB.

The World Bank has also declared India as the fastest-growing economy of 2017 at 7.8pc on the strength of robust consumer demand from a general increase in wages that offset a slowdown in investment.

While private and public consumption has depicted steady growth, private investment remains weak, dragged down by low capacity utilisation and the weak financial position of some corporations. Job creation in the organised sector has also remained subdued.

Robust growth has been accompanied by a decline in inflation and the current account deficit. The decline in merchandise imports is driven by weak business investment.

Lower gold imports have kept the current account deficit to below 1.5pc of GDP. The combined deficit and debt of the central government and states are high compared with other emerging market economies. The weak part of the economy looks like being business investment.

One factor that could mean economic growth ahead in 2017 is the foreign direct investment figures.

In recent days, the Reserve Bank of India has announced plans to allow foreign investors to own up to 10pc of Indian companies, and 40pc of supranational companies, a move which is all-but-guaranteed to bring an influx of cash into the country.

The Modi government recent decision to withdraw big rupee notes by demonetising the Rs500 and Rs1,000 banknotes, accounting for about 86pc of cash in circulation, will adversely impacted business activity.

According to the RBI, banknotes worth over $74bn in old cash has been sucked out of the economy since Prime Minister Modi’s abrupt announcement.

Analysts estimate economic growth to fall by up to one-percentage points over the next 12 months, while longer-term gains will depend on follow-up reforms. According to the Institute of International Finance, the economy could pull growth down by more than 2pc over the next two-quarters as consumption declines along with government revenues.

The cash crunch is expected to paralyse economic activity in the short-term, and the 2017-18 GDP growth is likely to be 5.8pc. The Ambit Capital, expects GDP growth to decelerate from 6.4percent in first-half by 0.5pc in the second-half with a distinct possibility of GDP growth contracting in third-quarter of this year.

China

ONCE driven by exports and investment, China’s growth model in recent years has shifted to depending more heavily on consumer spending and services.

GDP, which has more than doubled over the past eight years, is now expanding at the slowest pace since 1990. Debt has reached to alarming levels according to some economists.

The Asian nation in 2010 surpassed Japan’s economy as number two even after its expansion moderated and debt ballooned. Though Chinese economy has become a larger, more powerful and a more influential, the GDP growth of the world’s second-largest economy is seen slowing in 2021 to less than half the 2007 double-digit expansion.

In the eight years since the global financial, the vitality and importance of low-cost exports that the Chinese economy used to rely on have steadily declined. In an attempt to support the country’s growth, the Chinese government has embraced monetary and fiscal stimulus measures, causing the country’s outstanding debt to balloon to almost 250pc of GDP.

China’s total debt, including housing, financial and government sector debt, hit $25tn in 2015, equivalent to 249pc of GDP.

The debt owed by households in the world’s second largest economy has surged from 28pc of GDP to more than 40pc in the past five years.

Though China’s economy continues to show signs of stabilisation with the help of government-led infrastructure investment, a cooling property market and sluggish private investment is still casting a shadow on the economic outlook.

The government has been relying on infrastructure spending to aid growth for years. Infrastructure investment, which now accounts for one-fifth of the total investment, grew 19.4pc in the first ten-months of this year to about $1.4tn.

This has made almost certain that the Chinese government can achieve a growth rate higher than the 6.5pc in 2016 according to some analysts.

In the early days of economic reform, China was in the low-income group. After decades of investment and export-led growth, China joined the ranks of the lower-middle-income countries in 2008.

Although most observers agree the pace of transformation has been extraordinary in China, many remain concerned about increasing wealth and income. Economists expect the economy to grow at 6.7pc, down from 6.9pc in 2015.

Chinese household debt has risen at an alarming pace. The share of household loans to overall lending hit 67.5pc in the third-quarter of 2016, raising fears of a sharp drop in property prices that would cause many new loans to go bad.

While China’s household debt ratio is still lower than advanced countries such as the US and Japan, it has already exceeded that of emerging markets.

Published in Dawn, Business & Finance weekly, December 5th, 2016