Indian Economy Has The Potential To Close Its Gap With China At A Faster Pace

By: K R Sudhaman

United Nations declared in Mid-April this year that India has become the most populous country overtaking China at 1.43 billion. Can it do the same with regard to GDP to become second largest economy in the world? On the face of it, the proposition seems difficult in the next few decades as China is the second largest economy in the world at over $18.5 trillion as against United States’ nearly $25.5 trillion. There have however been suspicion for quite some time that Chinese figures are exaggerated and the size of its economy is not as big as it is made out to be. If this is true, it is within realms of reality that India overtakes Chinese economy in the foreseeable future.

This is because of new evidences emerging now to show that Chinese economy can at best be around $5-6 trillion and hence it is around the size of Japan and not at around $18 trillion. Japan’s GDP is put at around $5.16 trillion and is the third largest economy after US and China. India is the fifth largest economy at around $3.5 trillion. It recently overtook Britain and is widely expected to overtake Germany and Japan to become third largest economy in the next few years. Germany and Japan are the two other economies ahead of India apart from United States and China. While India is now on a bright spot with foreign investors looking up to India, experts lately say that China’s economy has tuned slippery and its reopening boom is a charade.

According to John Burn Murdoch of Financial Times, China has stopped publishing many date points like electricity consumption on a periodical basis ever since Xi Jinping came to power in 2012 implying Chinese economy is not doing well and that downslide had started in several sectors. But more importantly, according to a US based Chinese analyst, Lei, China’s real GDP is less than half of what the Chinese government claims to be. She argues that China’s GDP was just $9 trillion officially in 2012 and wondered how is it that its economy has doubled to over $18 trillion in the next ten years when the economy has been on the downslide since then. She says China’s published GDP in 2022 was $17.9 trillion against US $25.5. However, people believe that China’s GDP is “overstated and manipulated”.

According to the method adopted by Louis Martinez of Chicago University, data are exaggerated by 35 per cent in autocratic countries including China. He had come to this conclusion after analyzing data using satellite images of various countries based on when people turn off their lights on a daily basis since 1984. His study is silent on the data prior to 1984.

Lei used this as a deflator to calculate the real GDP of China since 1992. China’s official GDP in 1992 was $493 billion and in 2022 it was $17.99 trillion. This meant that China’s annual GDP growth was 12.7 per cent annually. If Martinez method was used as deflator, then the GDP growth rate comes down after the adjustment to 8.25 per cent annually. This meant that China’s real GDP in 2022 was just $5.3 trillion, about the size of Japan.

But Japan’s population is just one tenth of China, which meant Japan’s per capita income is ten times more than that of China. Also Chinese currency is administratively pegged at 6.3 Yuan to a dollar. But in the grey market, which reflects the real value, is around 10 Yuan to a dollar. If this also is factored in an economy where exports accounted for more 40 per cent of the GDP, the China’s GDP will be much less than $5.3 trillion, some analysts argue.

That apart a recent study by experts said nominal and real GDP growth of China was over calculated by two percentage points year after year from 2008 to 2016 and that the miscalculation only got compounded in those years. As a result China’s GDP said to be $ 13.5 trillion in 2018 is actually 18 per cent lower at around $11 trillion. The study is authored by Chen Wei, Chen Xilu and Michael Song of Chinese University of Hong Kong and Chan-Tai Hsieh from University of Chicago. But even at around $11 trillion after the necessary correction of the figures, Chinese economy is still quite large and is twice the size of Japan. But the new evidences by Lei indicate that China’s GDP would be just half of $11 trillion arrived at by these professors. The Chinese GDP was merely $5.3 trillion or around that of Japan.

Many indicators of growth in China are underwhelming. A growth model dependent on stimulus and debt was always going to be unsustainable and now it has run out of steam, Ruchir Sharma, who is Rockefeller international chair, wrote in the Financial times. Confidence that China’s economy can rebound from Covid restrictions is untethered to economic realities. “Something is rotten in the Chinese economy, but don’t expect Wall Street analysts to tell you about it, “Sharma said listing several indicators that point to underlying weakness.

For example, Wall street’s assumption of 5 per cent GDP growth would suggest that corporate revenue growth of 8 per cent, but it rose by 1.5 per cent in the first quarter, he said adding in fact, corporate revenue is slower than GDP in 20 of the country’s 28 sectors, and MSCI China stock index down 15 per cent from a January peak. Imports, a strong indicator of consumer demand dropped 8 per cent while youth unemployment hit 20 per cent and is rising. “These facts point to the source of the rot,” he said. China’s economic model since 2008 has been driven by government stimulus and rising debt, particularly in real estate and now Chinese debt service already account for a third of disposable income. China’s growth potential is only half of 5 per cent target this year due to shrinking population.

Lei goes on further to say there are about 30 provinces in mainland China, of which only six are in a position to manage their finances. The rest are severely debt-ridden at an unsustainable level.

Given these data points and analysis, it is quite possible that Indian economy has the potential to overtake China in near future if its economy continued to fire on all cylinders. The figures do certainly indicate that Chinese economy is on the decline while Indian economy is on the rise India’s GDP in real terms may not take much time to reach near the level of real GDP figure of China. The big gap which was thought earlier is not that big after taking realistic estimates of Chinese data. (IPA Service)