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.
