India

The world’s second most populous country India, a land of 1.27billion inhabitants, is now home to a third of the world’s poor. Over 32.7pc of India’s population lives below the international extreme poverty line of $1.25 per day. The country has recently emerged as the world’s third largest economy in terms of purchasing power parity, overtaking Japan but behind the US and China.

According to data released by the International Comparison Program, hosted by the Development Data Group at the World Bank Group, the size of Indian economy almost doubled from 19pc of the US economy in 2005 to 37pc in 2011 and in a matter of six years became the world’s third-largest economy from being the 10th largest in 2005.

The Indian growth is predicted to be the strongest among major developing economies over next three years to 2016. The estimated growth rate in 2013 was just 4.8pc, but the coming years could see a rapid acceleration and the economy is set to grow by 7.1pc by 2016. India is almost catching up with China.

By 2016, the gap between the rates of growth of the two major developing economies will narrow down considerably to just 0.4pc compared with the 3.1pc gap in 2014. According to the IMF, India’s economy is 12th largest and only about a third of Japan’s in terms of absolute unadjusted dollars.

India is facing the worst slowdown since the 1980s. Due to problems such as high inflation, lagging infrastructure development and a slow pace of economic revamping which all have hurt corporate investment and sapped consumer demand.GDP growth has almost halved to under 5pc in the past two years, far weaker than the nearly 9pc expansion it was experiencing as recently as 2011.

However, India is struggling to come out of weak growth and high inflation. While many analysts are hoping for a rapid implementation of pending labour, fiscal and tax reforms for a faster economic recovery, some say high corporate leverage and rising bad loans at Indian banks will hamper the pace of recovery.

According to OECD’s latest economic outlook, the Indian economic growth that had plummeted to a decade-low of 4.5pc in 2012-13 is expected to gain momentum with a decline in ‘political uncertainty’ after the general elections, inching up to 4.9pc in 2014, although rising bad loans would weigh on recovery. GDP is expected to grow 5.9pc in 2015. In the year ended March 2014, the economy grew at a slightly higher pace of 4.9pc.

Policymakers are hopeful of an economic rebound that began in April, but much depends upon the pace of reforms after a new government takes over in New Delhi. Experts’ hopes are high that the newly elected government would kick-start a slew of reform measures and revive the economy to 8pc level. Morgan Stanley in its research report predicts the reforms that could follow post elections will improve the business sentiment, putting India on course to achieve an average real GDP growth of 6.75pc over the next eight-quarters.

China

A study jointly conducted by United Nations’ International Comparison Programme and the World Bank reveals that China will overtake the US by the end of 2014 as the world’s largest economy in terms of purchasing power of money.

In 2011, China’s economy was 87pc the size of the US economy, but when measured using purchasing power parity, it was 20pc higher than earlier thought. In dollar terms, however, the US, which had overtaken the UK as the world’s largest economy in 1872, is still far ahead of China. The IMF had earlier predicted China to surpass US economy in 2019. China has, however, rejected the report and stated that the country is on track to become the No.1 economy by the early 2020s.

Meanwhile, China’s National Development and Reform Commission’s recent data suggests across-the-board weaknesses in China’s economy, igniting new calls for the government to ease policies to shore up growth. Annual economic growth dipped to 18-month low of 7.4pc in the first quarter. Despite the challenges, the government, however, hopes to post growth of around 7.5pc this year. The World Bank has already trimmed its 2014 growth forecast for China to 7.6pc, from 7.7pc previously.

Liu Li-Gang and Zhou Hao, economists at ANZ, are of the view that China’s monetary policy will have to be eased further. China’s central bank has already directed commercial banks to speed up home loans and to set mortgage rates at reasonable levels as any sharp deterioration in the property market could strain the economy. Real estate directly affects about 40 other industries in China and is considered a crucial pillar of the economy.

But the Peoples Bank of China Governor Zhou Xiaochuan has made it clear that the central bank would only fine-tune and hopes that the government would not use any large-scale stimulus to boost the economy in response to speculation that authorities might lower reserve requirements for banks to spur growth.

Reuters report that Chinese President Xi Jinping has reiterated to continue coordinating efforts for stabilising growth, promoting reforms, adjusting structure, improving people’s livelihood and preventing risks to ensure sound economic growth and social stability. But he wished that the country must adapt to a ‘new norm’ of economic growth and keep ‘cool-minded’ amid a slowing economy.

The authorities have, however, ruled out major stimulus to accelerate growth. Chinese top leaders have signaled that they would be more tolerant of slower economic growth while they push through major economic reforms which are designed to create new, better-paying jobs.

The NDRC has reaffirmed nine reform priorities for 2014, including deepening reforms in the power and the oil and gas industries and cutting red tape for investment approvals. China will push forward price reforms for resource products; quicken reforms on property taxes and consumption taxes. It will also speed up liberalisation of interest and exchange rates as well as undertake urbanisation-related reforms to allow more people to live in cities.

Published in Dawn, Economic & Business, May 26th, 2014