India set to outpace China within a decade

The Indian economy is set to grow faster than that of China within the next decade and other Asian countries are also catching up with China, the world’s second largest and fastest-growing economy.

Meanwhile China’s growth is predicted to slow down whilst Japan’s growth will remain very low.

Speaking at the Asia Business Champions event in June 2014, sponsored by Telstra Global, Simon Baptist, Chief Economist at the Economist Intelligence Unit, said: “China is slowing and India and Indonesia are speeding up. China’s expected growth this year is 7.3 per cent but it will slow down and drop to an average of six to seven per cent over the next five years.”

Baptist said rising wages had diminished China’s previous cost advantage and that many international companies were looking to set up manufacturing elsewhere. “People want to be in China nowadays to service the consumer market so it is much more of a consumer story nowadays,” he explained.

“Wages in Shanghai are approaching some of the OECD countries. Competition for migrants is increasing. The Western and Central provinces are cheaper, but the logistics there are more challenging,” he said.

But he pointed out that if China’s US$8.2 trillion economy (2012 GDP, nominal current US$) does not slow down, it would face a serious credit or asset bubble, most likely in property.

The Chinese Government was now deliberately “setting the foundation for solid growth away from the bubble economy,” he said.

“Companies are telling us that India, Indonesia and Singapore are where they plan to invest,” he said.

Wage growth in India was not as fast as in China, which was also facing a rapidly ageing population. “If India can get its business environment and policies right in the next three to four years, it’s got the scale of workforce to do what China did in the 90s, perhaps in the 2020s,” Baptist pointed out.

He said India could see a decade of continuous high growth rates of eight, nine or 10 per cent, during the period from 2020 to 2035.

“There is no way that India’s new prime minister Narendra Modi can meet everyone’s expectations because they are so high, but India could pull off a decade of high growth like China, if it moves from an agriculture to manufacturing-based industry and people move from rural locations to factory jobs in cities,” he said.

“India has to do that because of its demographic otherwise it will face a period of sub-par growth,” he said.

India’s “exceptionally young” and educated population were a great asset, and that together with Modi’s majority in Parliament and his record at a state level, all made India’s future look promising.

But disruptive and divisive politics, poor infrastructure, over-regulation and labour issues not having been addressedwere hampering India’s attempts to grow he said.

Bangladesh, Vietnam, Nigeria, Russia and Brazil were now becoming less attractive locations for labour-intensive manufacturers to set up in, he said, whilst India, the Philippines, Peru, Taiwan and Poland were becoming more attractive.

“Indonesia, South Korea and Thailand are the emerging markets to watch,” Baptist said, adding that he predicted “exciting growth” in Papua New Guinea, Sri Lanka and Myanmar (Burma) as well.

But he said operational risks were high in Myanmar (Burma). In some countries the attractiveness of FDI was different to the attractiveness of the overall business environment. An example of that was Vietnam, which has recently witnessed large-scale rioting targeting foreign-owned, mainly Chinese, companies and factories at industrial parks triggered by the escalation of their long-standing territorial dispute with China in the South China Sea.

The Japanese economy, meanwhile is showing no signs of picking up. He said that although fiscal stimulus, quantitative easing and structural reforms were clearly effective as inflation was now back, he expected Japan to grow at less than one per cent from 2018 onwards. The declining population was the major issue, he said. “Japan is scaling back its operations in China, partly because of rising wages, but also because of security issues,” he added.

The ASEAN region is also set to become a major economic power, he said. “The economy of ASEAN will be as big as Germany’s by 2018,” he added.

Companies in Malaysia and South Korea were focused on overseas expansion and China’s outbound investment was already on an upward slope, expected to reach more than US$200 billion by 2018.

He predicted that in his lifetime North Korea would collapse and see a massive transition.  “It’s such a massive country and so far behind, it will be incredible to watch,” he said.

But he said was not too concerned about recent developments in Thailand. He said Thailand’s growth had slowed in the short-term owing to the recent military coup, but medium-term growth prospects remained the same. “It has always been politically unstable. Thailand has not decided where the power lies – is it in the hands of the Royal Family, the Parliament, the military, democracy or the elite? That will continue until the King dies and then there will be a succession battle over who controls the power. But if you are a car manufacturer maybe it does not matter so much whether there are street protests in Bangkok.”

He added the economic recovery of US, Japan and Europe was greatly helping exports in emerging markets.

To see a slideshow of the event click below:

naomi.canton@asiahouse.co.uk

View Simon Baptist’s presentation, which is on slideshare, below:

To find out what Tom Homer, Head of EMEA and the Americas for Telstra Global, said at the Asia Business Champions Conference held in June 2014, click here.

To read an interview with Dr Arvind Mayaram, Secretary, Department of Economic Affairs, Ministry of Finance, Government of India, click here.

To read an interview with the High Commissioner of India to the UK HE Mr Ranjan Mathai, click here.

To read about the rapid growth of Chinese outbound investment in Asia and beyond click here.