2017, the Year Indian Growth (Finally?) Beats China's

♠ Posted by Emmanuel in , at 1/29/2015 01:30:00 AM

As per the story of the and the hare, the World Bank is predicting something that's been a long time coming: With China slowing from its years of (reported) double-digit growth year in and year out to focus more on growth quality rather than quantity on one hand and India (hopefully) speeding up with a reformist, pro-market leadership under Nejendra Modi on the other, the World Bank is predicting that 2017 is the year Indian's growth rate moves ahead of China's. See the 2015 Global Economic Prospects from which the chart above is taken from. Onto the story:
This is a short-term forecast based on some very specific circumstances. India, for example, now has a credible central banker [Raghuram Rajan] doing sensible things like tackling inflation. The country's popular new government is finally building infrastructure and cutting the red tape that held the economy back for so many years. If India keeps it up, the World Bank expects its economy to grow 7 percent in 2017, up from 5.5 percent in 2014. Meanwhile, the forecast calls for growth in China to slow as its government reduces spending, tightens credit, and unwinds its housing bubble. The bank expects China's growth to fall from 7.4 percent in 2o14 to a modest 6.9 percent in 2017.

There are reasons to believe that the slowdown isn't a temporary blip and that, over the long term, India's economy will ultimately overtake China's. At the moment, both countries are growing so quickly because they're catching up to richer economies. They are shaking off the effects of market isolation, under-educated populations, limited access to technology, poor infrastructure, and regulations that stifled business development. Eventually, when these economies catch up, adding machines won't increase productivity. It's impossible to predict exactly how long this will take.
Then there are the supposed advantages of superior demographics and openness that should see to it that India pulls ahead:
Then growth will depend on demographics and each country's ability to innovate. India has a better outlook on both fronts. Its population is growing; China's is shrinking. It's harder to predict which country will be better at innovation. Signs point to India because democracies, with their secure property rights and general stability, tend to be better at fostering successful entrepreneurship. China's authoritarian capitalism is a new model, and it's not clear whether it can produce the sort of environment in which people take chances, form businesses, and invent things.

India still faces many hurdles. It needs to build lots of infrastructure, improve access to quality education, and remove the bureaucracy that has existed for years under many vested interests. This is an area in which China's more authoritarian system has an edge. Its leaders have greater liberty to make hard choices and smooth out rough patches. China's may prove to be a better model for catch-up growth. But managing a thriving, mature economy requires entrepreneurship and innovation. So far, India has the edge. 
I would also like to point out that the environment may be even worse in India than it is in China, but let's give the new Indian leadership the benefit of the doubt. Predictions are a terribly tricky business, and it is certainly quite possible that we will look back at this post two years from now thinking it rather foolish.

Remember also that we all had high hopes for Manmohan Singh when he became prime minister given his track record promoting economic reform as finance minister, but look how that turned out as he was unable to confront entrenched Congress Party interests. As always, we wish our Indian colleagues the best--with a guarded optimism.