prior to the financial crisis to less than 7% last year. In a slight contrast, India’s growth rate which also went down sharply to less than 5% in 2013–2014, has reportedly climbed back to over 7% — now claiming to be world’s fastest growing large economy. Among the BRICS nations, China and India are perhaps the only ones to maintain positive growth in the last few years.
With the advanced economies still gripped by the great recession (despite visible signs of improvement in the US), and a bleak IMF growth forecast for 2017 at 3.4% (as per July 2016 report), global economic performance seems to hinge on how these two large economies perform. Can China and India — accounting for 18% of global GDP in 2015 and one-third of population — emerge as a significant node for global economic recovery? This short chapter seeks to offer a tentative and speculative answer. The chapter is structured as follows.
Careful scholarship on Chinese economy has long been concerned about the quality and veracity of official economic statistics. Hence, it is useful to briefly review the data concerns to be able to make a reasonable assessment of its economic performance and prospects. Indian macroeconomic statistics have lately come under cloud with the latest revision of the base year of GDP in 2015. So, the chapter will begin in Section 1 with an assessment of the economic statistics of both the countries. Section 2 will briefly review China’s and India’s the economic performance after the financial crisis. Section 3 will make a comparative assessment of the prospects their economic revival — necessarily a speculative effort. Section 4 will conclude the study summarizing the main findings.
Section 1: Concerns About Quality of Macroeconomic Data
Chinese official statistics are widely believed to overstate economic growth rate systematically. One of the known inconsistencies is that the sum of the provincial output is systematically higher than national GDP estimates. Apparently, the overestimation happens because the official have an incentive to record the plan targets as achievements, since their career prospects often depend on performance as measured by output growth (Wu, 2002).
The long-held scepticism about Chinese the growth value got confirmed in WikiLeaks by Li Kequing, when the then Party Committee Secretary of Liaong province in 2007 told the US Ambassador in Beijing that Chinese GDP numbers are for reference only (NYT, February 26, 2016). The true measures of Chinese economic growth are rail cargo volume, electricity consumption, and bank credit. Taking cue from this, private financial firms (including The Economist) have created a Li Kequing index as a proxy for Chinese GDP growth.
Questioning of the Chinese official growth estimates intensified after the financial crisis, when critics claimed that growth could be considerably lower than official estimates (Figure 1).1 There are also concerns about the true state of the real estate economy with questions about the accuracy of property price index, bank credit accruing to the sector, and data on sale of property.
The scepticism got recently confirmed when a top Chinese official admitted to data falsification. To quote the official: “Currently, some local statistics are falsified, and fraud and deception happen from time to time, in violation of statistics laws and regulations,” Ning Jizhe, director of the National Bureau of Statistics, wrote in a column for Communist Party mouthpiece the People’s Daily on December 8, 2016 (as quoted in The Financial Times, December 12, 2016). All this goes to show the need for caution in using Chinese official statistics.2
India’s macroeconomic statistics has come under cloud after the recent revision to the new base year in (2011–2012) in 2015, when the growth rates got inflated compared to the previous series (Figure 2). Since the revised growth estimates are quite at variance with other macro correlates — such as flow of bank credit or industrial capacity utilization — there is a growing scepticism of the new series of National Accounts Statistics (NAS).3 The problem can be illustrated with respect to manufacturing sector growth. Since 2013–2014, while GDP manufacturing steadily rose from 5.6% per year in 2013–2014 to 9.3 cent per year in 2015–2016, the Index of Industrial production (IIP, the leading indicator of physical output) shows dismal improvement — from (−) 0.1% per year in 2013–2014 to 2.4% per year in 2015–2016. Surely, IIP is underestimating the growth as its base year is outdated (2004–2005), yet the gap between the two series is too wide to be attributed only to the dated base year. The change in the methodology of estimating gross value added in manufacturing in the new series is probably responsible for the discrepancy in considerable measure (Nagaraj, 2015).
Figure 1: A comparison of China’s official GDP growth with Li Keqiang index.
Source: China GDP Delate gate, by Tom Orlik, Bloomberh Intelligence Economist, September 15, 2015.
Figure 2:Disaggregated GDP growth rates for 2013–2014.
Source: http://www.ideasforindia.in/article.aspx?article_id=1728.
Considering the foregoing evidence on the scepticism of China’s and India’s output estimates, a reasonable view about the recent growth rates may be as as follows:
1.In the last 3 years or so, China and India have probably been growing roughly at the same rate.
2.The view that India has overtaken China to become world’s fastest growing economy may be an overstatement. Such euphoria in India ignores the fact that the level of China’s GDP per capita was five times that of India’s in 2015 (as noted above).
3.Growth rates of both the economies have decelerated after 2011–2012: China very dramatically, and India somewhat modestly.
4.China’s claim that its economy is getting rapidly rebalanced in favor of the consumption and services sector output may be suspect given the data issues. The major part of services growth in China is claimed to be due to the stock market and financial sector, which could be suspected. The reports that there are long queues at quality public hospitals tell us about the shortages of these services in China (even in Beijing), and hence the argument that the rebalancing is happening rapidly seems questionable.
Section 2: Policy and Performance After the Financial Crisis
China
China’s party-state draws its political legitimacy by delivering consistently rising living standards with employment generation. While the political power is concentrated in the central government (and party apex), economic decision-making is decentralized at the level of provinces and cities, with the centralized party, army, and bureaucracy forming the glue that binds the large, unevenly developed country. The party-state sets the national economic goals via 5-year plans, the achievement of which becomes the target for the provinces. Provincial bureaucracy and the party-state are incentivized to achieve the plan targets and maintain social harmony (proxied by employment generation locally).
Fiscal decentralization without an institutional mechanism of devolution of financial resources from the center to the provinces (perhaps after abolition of agricultural taxes) seems to have compelled provinces to depend on land sale and property sale and long-term lease as means of raising fiscal resources. This is possible in China because land, by definition, belongs to the state. However, Chinese provinces cannot raise public debt, but they
