Can India match up? 

india_manufacturing

“India may never quite match China’s rapid ascent, but even at a slightly slower speed it will make waves”

As China matures, double-digit growth seems even less likely to return. Where, then, is the next story of hyper-charged growth? Sri Lanka will probably grow faster than China this year, as may the Philippines, Vietnam and Bangladesh at some point. But these economies will hardly make a dent. Only one economy could eventually equal China’s punch: India.

In size and per-capita income the Indian economy stands where China’s did in the early 2000s – when the Mainland started to make its impact felt globally. Whether India will swiftly follow China’s lead depends on the country’s ability to raise savings and shift towards more manufacturing.

That’s a challenging transformation. India may never quite match China’s rapid ascent, but even at a slightly slower speed it will make waves.

China adopted reforms in earnest in the early 1980s; India in the early 1990s. India is a little ahead of China at the same stage of the development process – though the Mainland’s ‘growth spurt’ came late, so India will need to pick up speed, ideally raising growth to double digits.

One key issue is productivity growth: that essential ingredient for sustained progress. But, except for a brief period in the early 1990s, India’s productivity growth has always lagged China’s and the gap has remained stable over two decades.

The disappointing productivity performance reflects India’s low contribution to GDP from manufacturing – 13 per cent compared with China’s 31 per cent. Services are much more important – 57 per cent of GDP against 46 per cent in China – but efficiency gains are easier to attain in manufacturing. So if India wants to match China’s development trajectory, it needs to shift its economy more to manufacturing – hence Prime Minister Narendra Modi’s “Make in India” campaign.

Government policy has an important role. Pruning the regulatory burden of labour laws and red tape would help boost manufacturing, for example, and that sector requires proportionately more and better physical infrastructure than services. India’s new government has promised plenty on these fronts.

When China was roughly at India’s development stage, its investment as a share of GDP increased dramatically. So India not only needs to reverse its declining investment share but to raise it well above its historical peak.

However, that poses the question of how to fund all that capital spending, whether private or public. China’s national saving rate rose dramatically when investment took off. Indian saving must now increase sharply – even more than in China, because India is already short of local funding for its current level of investment.

Source: HSBC – Can India match up?

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