Mr Jaitley, India can’t Shoulder Global Growth as China Slows Down

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010
Being rhetorical is a part and parcel of being a politician. Or you run the risk of being called Maun Mohan Singh. Nobody perhaps understands this any better than the finance minister Arun Jaitley, who is more or less the official spokesperson for the Narendra Modi government.

Jaitley recently said in London that India can shoulder some of the global growth contribution previously made by China. As The Hindu Business Line reports: “India can shoulder some of the global growth contribution previously made by the Chinese economy, Finance Minister Arun Jaitley said in London, ahead of his trip to Davos. The world was now looking for additional “shoulders to rest global growth on,” and India would be part of it he said, acknowledging the “serious challenges” faced by the global economy.”

India’s growth rate, despite challenges is, among the major economies, the highest in the world,” Jaitley added.

The comment came after the Chinese economic growth fell to a 25-year low of 6.9% in 2015. In fact, the Chinese economic growth for the period October to December 2015 was at 6.8%. In 2014, the economic growth had stood at 7.3%. The Chinese economic growth has collapsed from the peak of 14.2% it had reached in 2007.

This slow Chinese growth led Jaitley to quip that India can shoulder some of the global growth contribution previously made by China. But how much sense does this statement make? Or was it just rhetoric on Jaitley’s part, as is often the case?

Let’s try and use some numbers here to understand.

Data from the World Bank shows that in 2014, the Chinese gross domestic product (GDP at market prices (constant 2005 US$)) was at $ 5.27 trillion. An economic growth of 6.9% in 2015 means that China added around $364 billion to its GDP and the world GDP as well.

India is now the fastest growing major economy in the world. During the period July to September 2015, the economic growth stood at 7.4%. Let’s assume that the country grows at this rate in 2015, given that the economic growth number for 2015 for India hasn’t come out as yet.

In 2014, the Indian GDP (at market prices (constant 2005 US$)) was at $1.6 trillion. The Chinese GDP was at $1.54 trillion in 2001, close to where the Indian GDP is now. The country has grown at a rate of 9.9% per year between 2001 and 2014. This tells us very clearly as to how fast India needs to grow if it has to reach where China is now.

Getting back to India. The Indian GDP in 2014 was $1.6 trillion. If India grew by 7.4% in 2015, it would mean adding $118 billion to its GDP, which is around one-third of what China has added, growing at a slightly slower rate of economic growth.

The basic point being that given that the Chinese economy is so much bigger than the Indian economy, even if it grows at a slightly slower rate than India’s, will contribute significantly more to the global economy. Or to put it a little more mathematically, China is growing of a much bigger base.

If India had to contribute as much as China (i.e. $364 billion) to the global economy it would have to grow by 22.7%. If India had to contribute even half as much as China it would have to grow at 11.4%. In times like these that is not possible. And that tells us why India can’t shoulder even a part of the global growth because of China slowing down. Also, as China slows down, India will slow down as well to some extent. We can’t be totally disconnected from a slowing global economy.

Hence, what these numbers clearly tell us is that Jaitley was doing what he does best—being rhetorical. That isn’t surprising given that before becoming a full-time politician he was a full-time lawyer.

The irony is that the Indian economic growth number suddenly started to look up after we moved to a new method to calculate the GDP in early 2015. As I keep mentioning GDP is a theoretical construct. The various ‘real’ economic numbers make it very difficult to believe that the economic growth is possibly greater than 7%.

In fact, as Bank of America-Merrill Lynch has pointed out, the economic growth during the period July to September 2015, as per the old method of calculating the GDP would have been 5.2% and not 7.4% as it has been as per the new method. Even for the period April to June 2015, the economy grew by 5% as per the old method, instead around 7% as per the new method.

This is not to say that the Chinese economic data is sacrosanct. As economist Eswar Prasad told the Wall Street Journal reacting to China’s 6.9% economic growth in 2015: “China’s reported growth rate for 2015 raises many questions rather than providing full reassurance about the economy’s true growth momentum.”

In fact, hedge fund manager Martin Taylor of Nevsky Capital summarised the situation very well when he said: “Currently stated Chinese real GDP growth is 7.1% and India’s is 7.4%. Both are substantially over stated. This obfuscation and distortion of data, whether deliberate or inadvertent, makes it increasingly difficult to forecast macro and hence micro as well, for an ever growing share of our investment universe.” Taylor’s comment was made before the latest

Chinese economic growth number came out and summarises the situation best.

The column originally appeared in Vivek Kaul’s diary on January 25, 2016

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About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

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