China and India: The Tortoise and the Hare

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Includes: IFN, IIF
by: Kishore Jethanandani

In a 1992 editorial published in Economic Times, a leading business news daily in India, I likened the economic reforms initiated by Dr. Manmohan Singh to the "Hare and Tortoise" story -- where China was the Hare and India the Tortoise. We predicted that India will eventually catch up with China and overtake it.

The latest growth rate figures for the second quarter growth in the fiscal year 2006-07, released by the Central Statistical Organization, come close to vindicating my forecast; the Indian economy is already growing at the rate of 9.2% not far from the 9.5 reported for China recently.

The stock market in India, in retrospect, responded rationally to the prospects of Indian economic growth. Between 2001 and 2006, the stock indices in India have risen by four times while growth rates increased from about 4.5% to twice as much. In contrast to China, institutional development and deregulation have progressed in tandem in India. Chinese stock market indices move much more erratically reflecting the lack of depth in that country's capital markets. This also implies that capital allocations in India are driven much more by economic considerations compared to China.

In its last issue, the Economist commented that the potential growth of India is only 6.5% and that the current growth rates are not sustainable. The argument is based on the premise that India's savings rate at 30% trails China's at 45%. This is a flawed argument since it does not take into account the efficiency of capital use in India.

The current rate of growth is not only sustainable but it has also very likely exceeded 10% according to Surjit Bhalla, an Indian economist and investment banker. There is also as yet untapped potential for growth in infrastructure and the farm sector and the Government is working to implement reforms to get this underway.

I will not be surprised if growth rates eventually touch 15%.