India and China: Economic Contrasts

India and China present a study in economic contrasts, with differing strategies despite similar challenges such as investment and consumption imbalances.

India's Economic Challenges

• Investment rates in India have remained stagnant, with corporate reluctance to invest.
• Government initiatives include: 
  • Production Linked Incentive schemes.
  • Lower tax rates for new manufacturing facilities.
  • Increased public investments to spark private investment cycles.
• Investment and manufacturing are concentrated in four states: Gujarat, Maharashtra, Tamil Nadu, and Karnataka.
• Despite policies like the National Manufacturing Policy aiming to increase the manufacturing sector's GDP share to 25% by 2022, it has stagnated.
• Recent policy shifts focus on boosting consumption through tax reductions and GST cuts, imposing fiscal constraints on public spending.

China's Economic Strategy

• China continues to focus on its investment-export model, with minimal steps towards boosting domestic consumption.
• Key economic indicators: 
  • Investment to GDP ratio around 40%.
  • Exports at $3.58 trillion, with a trade surplus nearing $1 trillion in 2024.
• Currency management favors undervaluation to boost export competitiveness, despite reducing household purchasing power.

Exchange Rate Policies

• The Reserve Bank of India (RBI) does not officially target the rupee but intervenes to stabilize it, affecting export competitiveness and import costs.
• China historically keeps its currency undervalued, boosting exports but making imports costly.

Structural Issues and Reforms

• China faces challenges of over-investment, low household consumption, and an ageing population.
• India struggles with low investment activity, high informality, and inadequate job creation.
• Both countries require structural reforms to address these deep-seated issues, but consensus and execution remain challenging.

Policy Trajectories and Outcomes

• China persists with its investment-export led growth model, testing its limits in a global market unwilling to absorb excess capacity.
• India relies on debt-fueled consumption and tax incentives amidst sluggish manufacturing growth.
• Both nations' policy focus seems to have shifted from growth prioritization to other strategies.