India and China “need reform for economies to succeed”

The prospects for the continued growth of the Indian and Chinese economies depends on each country’s government adopting the necessary reforms. These were the opinions of Nicholas Lardy and Vijay Joshi, speaking at the Fund Strategy Investment Summit.

With China and India combined representing about 40% of the world’s population, the growth witnessed in their respective economies over the past quarter-century is transforming the global economy. In the past 25 years, India’s GDP has grown at an annualised rate of 6%, while, according to the International Monetary Fund, China has experienced a GDP growth rate of more than 9% for the past three years.

Lardy, a senior fellow at the Institute for International Economics in Washington DC, identifies four major factors that have driven China’s growth.

He says a much higher rate of investment has allowed rapid growth of capital stock, while the highly competitive nature of the country’s domestic manufacturing sector has also been a growth driver.

“China’s ratio of imports to GDP has grown from 5% of GDP in 1978 to 30% in 2005,” he says. “This is twice the level of imports to GDP than that recorded in the US.”

The increase in foreign domestic investment has further made the domestic manufacturing sector more competitive, he adds.

Massive Chinese infrastructure investment and investments into human capital are the other two factors Lardy uses to explain the country’s growth.

India, meanwhile, is also now in the middle of a boom, says Joshi, a fellow at Merton College, Oxford. Over the past three years, the economy has grown at a rate of close to 8%, while the poverty rate has declined from 45% to 25% of the population. As a result, after China, India has the fastest-growing economy in the world.

The question for India is whether it can move up a gear and become a major global economic power, says Joshi. “For me the answer is yes but there are a number of constraints in the way,” he says. “The most important short-term problem is the neglected infrastructure. The roads are neglected, the ports are a joke and power cuts are frequent.”

The only way this will be overcome, says Joshi, is via significant private sector investment. While he notes improvements on the roads and ports are under way, he says the issue of power is a bigger problem owing to the widespread popular opposition to charging for it.

Other policy challenges for India that need to be addressed, Joshi says, are slow agricultural growth, high fiscal deficits and inflexible labour markets.

“There are problems but in my judgment India is on a path of self-sustaining growth,” he says. “There will be short-term corrections along the way, but the long-term secular story looks good.”