India & China

China said its economy expanded at the slowest pace in 12 months during the September quarter as a World Bank report tipped it to slow down further in 2011, raising the possibility of India becoming the fastest-growing economic powerhouse next year. The world’s second-largest economy grew 9.6% in the three months to September, just two days after the World Bank pared its growth forecast for the year ending December 2011 to 8.5%. This is a tad below the bank’s growth projection of 8.6% for India during the same period. For the fiscal year 2011-12, the multilateral lender has forecast an 8.7% growth for India. Though the difference is marginal, the eventual numbers will depend on how the countries overcome several challenges that could upset their growth prospects. Faced with a 23-month-high inflation and growing pressure from the rest of the world to let its currency appreciate, China faces severe headwinds to growth. “With weak global growth and fading impact of the stimulus package, we project growth to slow to 8.5% in 2011,” said the World Bank report.
In absolute terms, however, China’s gross domestic product at $4.9 trillion is about 3.78 times that of India’s. The US economy, the world’s largest, is 2.9 times the size of China’s and 11 times India’s. Others also expect India to start growing faster than China, but not so soon. A research report by Morgan Stanley had said India could overtake China’s growth rate by 2013 and expected it to be notably ahead from 2015 onwards. China’s industrial production also fell from the previous quarter to 13.3%, a report of the National Bureau of Statistics said. “China growth forecast is a bit on the downside,” said Jehangir Aziz, chief economist, JPMorgan. He expects China to grow closer to 10% for FY11. Nonetheless, there is agreement among economists that China faces many hurdles ahead. The Chinese central bank raised the benchmark interest rate by 0.25% to 2.25% on Tuesday after nearly three years to rein in prices and inflation, which touched a 23-month high of 3.6%. The Chinese government earlier in the year had set a ceiling for inflation levels at 3%, and had predicted that inflation would moderate in the second half of the year. Its biggest worry, however, would be the growing global friction over currency values and calls for China to let the yuan appreciate and address the large surplus it runs with other countries for better distribution of growth. But China’s main challenge going forward would be to change the structure of the economy, from an export-driven to consumption-driven economy, wherein it becomes less prone to external shocks in demand.