‘India to overtake China growth from 2013-15’

By 2012, India and China will likely achieve similar growth rates of closer to 9 per cent and from 2013-15 India will start outpacing China?s GDP growth notably, according to global investment firm Morgan Stanley. It expects India?s per-capita income to reach China?s 2009 levels of US $ 3,750 over the next 10-11 years.

?India?s GDP growth is now inching closer to China?s. Over the past three years, India has been narrowing the gap with China in terms of GDP growth. In 2010, we estimate India?s GDP growth at 8.5 per cent and China?s at 10 per cent,? it said in a report ?India and China: New Tigers of Asia?.

Morgan Stanley?s Chief Economist for China, Qing Wang, said that China?s growth will move towards a more sustainable rate of 8 per cent by 2015, following the remarkable 10 per cent average over the past 30 years. ?We believe India?s growth will accelerate to a sustainable 9-10 per cent by 2013-15, after an average of 7.3 per cent over the past 10 years. In other words, over the next 10 years, we expect India?s growth to outpace China?s. We expect India?s per-capita income to reach China?s 2009 levels of US$ 3,750 over the next 10-11 years. We believe India will see further rise in investments to GDP, particularly infrastructure, and China will see a gradual rise in consumption GDP,? it said.

?Over the next 20-25 years, we expect India to remain the highest growth economy among large countries. India could have the advantage of maintaining its high-growth phase for a longer period than East Asia did as UN data shows that India?s age dependency will continue to decline until 2040,? it said. UN projections show that India will be the only large country which will still have favorable demographics after 2010. Japan, Europe, and the US (in that order) will have a significant rise in their ageing populations. ?So, while in the past 20 years, China has benefited ahead of India from a faster fall (improvement) in age-dependency ratio, over the next 20-25 years India will have this advantage,? it said.

Real GDP growth in China has averaged 10% annually over the past 30 years, compared with 6.2% in India. During this period, China?s GDP grew 16 times to US$ 5 trillion whereas India?s rose seven times to $ 1.2 trillion. China?s exports (including services) surged 65 times over this period to $1,330 bn while India?s exports increased 22 times to $ 250 bn.

?The lag in India?s performance, in our view, was due to the lower level of support from demographic, reform, and globalization factors. India?s demographic cycle is trailing China?s. Although the two had similar age-dependency ratios in the late 1970s, China has far outpaced India in the past 20 years. China was also well ahead of India in initiating structural reforms, introducing them in the late 1970s versus in the 1990s in India,? it said. One could argue that the pressure on policy makers to create jobs emerged earlier in China because of the way the change in the working-age population progressed there. India was also late in deciding to participate in globalization, as reflected in the import tariff trend.

Over the next 12-24 months, Morgan Stanley expects the pace of reforms to pick up. There could be further steady reduction in subsidies: For instance, the government announced a 10% hike in urea (fertilizers) prices and a new nutrient-based subsidy in February 2010. For gas, the government approved a revision of administered gas prices effective June 2010. Also, the government has increased domestic fuel prices twice so far in 2010 and has announced that gasoline prices will be market-linked from now. ?We estimate these measures will effectively reduce subsidy expenditure for an annualised rate of about 0.6% of GDP. We expect the government to maintain its path to reduce subsidy burden,? it said.

A transition to the Goods and Services Tax (GST) system would be an important milestone from a macro perspective, moving from the current system of different types of indirect taxes and multiple rates of indirect taxes. The new system would cover a wider base, including all goods and services. ?The current system taxes production, whereas the GST will aim to tax consumption. Indeed, current law levies taxes on the movement of goods from one state to other – effectively creating borders within borders. It distorts the allocation of resources and inhibits productivity growth. India?s budget confirmed government plans to implement the consolidated nationwide GST system from April 1, 2011,? Morgan Stanley said.