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Will India Trump China as US Policy Shifts?

Changing times

Neighbours and rivals, China and India have the distinction of being the world’s two most populous nations. With between 1.3- 1.4 billion people each, they account for 36.5% of humanity. The similarities largely end there. Over the past three decades, China has become more prosperous than India, with an economy five times larger. While India’s 4-8% growth rate has been solid, it lags China’s red-hot pace, which has topped 10% for much of the past few decades.

However, this dynamic has begun to change. Since 2015, India’s economy has begun to pull ahead of China’s (Fig.1). The drivers of China’s economic miracle, namely: a productivity-enhancing transition from being rural- to urban-based, and the impressive build-up of infrastructure, are past the point of diminishing marginal returns. In addition, the country is awash in debt. China’s total debt (public plus private) has grown to levels comparable to those in Europe and North America, and this portends slower growth. By contrast, India’s rural-urban transition, while well underway, is less advanced than China’s and could boost India’s productivity for many years to come. India’s debt ratios are only half of China’s and have not been growing during the past decade (Figs.2–4). This, too, could set the stage for many years of solid growth in India that could begin to exceed that of China as we move into the 2020s. We note, however, that short-term growth in India could lag China’s as a result of the damage to the economy from Prime Minister Narendra Modi’s withdrawal of high-denomination currency notes in an effort to crack down on the country’s vast shadow economy.

Debt levels correlate strongly with both economic growth and the level of interest rates. Yet in both cases, the relationship tends to be a chicken-or-egg sort of problem. Less volatile economies, which are often the slower-growing ones, can support high leverage ratios. But high leverage ratios can slow economic growth. Low interest rates can encourage credit growth and high debt ratios. High debt ratios, in turn, necessitate low interest rates so that public and private debt burdens can be financed.

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