CHINA’S AND INDIA´S SLOWDOWN

WHY GROWTH IN INDIA SLOWED MORE THAN CHINA

Alok Sheel

The Economic Times, November 26, 2012

India was, till recently, the second-fastest growing major economy after China. Following the sustained slowdown in the global economy since the financial crisis of 2007, growth has fallen across the board, including in China and India (see accompanying table).

It was expected that China would be more affected, given its dependence on export markets for growth. For the same reason, it was expected that India, a more domestically driven economy, would be less affected — in 2009, goods and services exports comprised 40% of GDP in China, against 20% in India.

Although, in 2010, it may have seemed that this was indeed the case, in retrospect, the reverse seems to have happened, i.e, India has slowed more than China. As a result, Indonesia, which like India, is a more domestically-driven economy — goods and services exports at 24% of GDP in 2009 — has now replaced India as the second-fastest growing major economy. We need to understand why this is the case so that corrective steps can be taken.

While China experienced a huge external shock through the trading channel on account of the sharp decline in growth in its export markets in western countries, the impact on growth was not commensurate on account of its huge investment-oriented stimulus package. India too had a timely 'fiscal stimulus' — mostly by default than design — although not as large as that of China.

While the final budgetary stimulus in 2008-09 was almost identical in both countries at about 3% of GDP, the actual Chinese stimulus through budgetary and banking channels may have been in the region of 4 trillion yuan, or about 14% of GDP. However, since private investment and consumption demand held up reasonably well in India, its recovery matched that of China.

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