India can learn from China’s mistakes and avoid making the same ones.
The Chinese government has made a number of economic mistakes, such as its excessive reliance on debt and its suppression of innovation. These mistakes have slowed down China’s economic growth and made it more vulnerable to shocks.
Economist and Nobel laureate Joseph Stiglitz
China’s rapid economic growth over the past few decades has been one of the most remarkable developments in global economy. Several factors have contributed to this, such as favourable demographics, export-led economy, rapid urbanization and focus on innovation. The results were evident. China became world’s second-largest economy after the United States, held about one-third share to global production, and became the favourite destination for FDI.
However, the country is now facing deflation with declining eximvolumes, falling property prices, GDP growth much lower than expected. More than $10 billion has been pulled out by global investors from China’s stock markets.According to US-based research firm Rhodium, business houses in US, Europe, Japan are diverting their investments from China to other developing economies including India, Mexico, Vietnam, etc. Government of China recently discontinuedthe publishing of youth unemployment data while it was 21.3% in June 2023. Imports have slumped 12.4% in July 2023; 7.6% during Jan-Jul 2023 period. Many, including US President Joe Biden are calling it a “ticking time bomb”.
One’s loss is another’s gain. This economic rule is proving right for India which has now become the major benefiter of China’s fall. India has smartly banked on the “China Plus 1” business strategy. Many global players have or are planning to shift production to India, FDI inflows are at record levels,global brokerage houses including Nomura have revised the GDP forecast upwards for India. But as India looks to accelerate its own economic growth, it can learn from China’s mistakes.
China’s economy has been heavily reliant on debt in recent years. This has led to a debt-to-GDP ratio of about 280%, which is one of the highest in the world. Fueling the economy by injecting public debt seems an easier technique but if backfired this can have catastrophic effects, for instance US and Japan. Indiahas been able to keep a tab on the debt levels which were 57% of GDP in March 2023. However, considering the total public debt has grown by 174% since 2014-15, India needs to be careful.
Another lesson is monitoring the real-estate prices. China’s realty market generated about 30% of China’s GDP. However, now Evergrande and Country Garden, China’s biggest realty players, are on the verge of default. This has created a bubble that is now in danger of bursting. New home sales for the top 100 developers decreased by more than 30% in June-July 2023 yoy, after clocking a double-digit growth in 2022.Real estate sector witnessed default of over $100 billion over the past two and a half years, according to JPMorgan. India is better with the net debt of top eight realty companies declining by 43 per cent to Rs. 23,000 crore in 2022-23 from 2019-20, as per consulting firm Anarock.Realty players like Brigade, Prestige and M3M have reported highest ever sales in 2023. Nevertheless, keeping a close watch on debt levels will help India avoid any future troubles.
China’s government suppression ofprivate companies’innovation and participation in social media to protect state-owned enterprises has resulted in loss of business confidence for global investors. This has not only stifled the growth of new businesses,but many companies have suspended partial or complete operations in China. India seems to be a close follower. Investors are reluctant to make huge investments fearing of the Income tax, CBI & ED (ICED) cases being initiated against them.
Lastly, China has achieved exponential economic development but along with increased regional disparity. Leaving out eastern and southern provinces which boast of prosperous business and skyscrapers, about one-third of Chinese provinces are poor. In fact, Northern China’s share in the national economy decreased by about 20% to 35.2% in 2021 from a decade ago. Similar to China, India’s growth story, though impressive, is limited to just few states. Consider this, around 50% of our total GDP is contributed by top 5 states.It is the onus of every government that economic prosperity is as equally spread out as possible.
India can learn from China’s mistakes and avoid making the same ones. By avoiding excessive debt, controlling real estate speculation, promoting innovation and private sector, and reducing inequality, India can achieve sustainable and equitable economic growth.
Rajesh Mehta is a leading international consultant in the field of market entry, innovation & public policy.
Sunny Sabharwal is a chartered accountant, ex-banker and financial writer.