China and India both face problems with investment, but very different ones

Both China and India have a problem with investment growth—for Beijing, it is a problem of plenty while for New Delhi it’s a problem of scarcity. Graphic by Naveen Kumar Saini/Mint

Both China and India have a problem with investment growth—for Beijing, it is a problem of plenty while for New Delhi it’s a problem of scarcity. Graphic by Naveen Kumar Saini/Mint

The chart shows Indian and Chinese investment rates (as a percentage of gross domestic product , or GDP) since 2000, taken from the International Monetary Fund’s (IMF’s) recently released World Economic Outlook.

Two facts stand out.

First, the Chinese economy is slowing its rate of investment, but at a snail’s pace. Consider that, according to the IMF projections, China’s investment-to-GDP ratio in 2018 is likely to be 43.35%, which is not only very high but also much higher than what it was till 2009. This indicates that China is still dependent to a very large extent on growth via pushing investment demand. The shift to consumption demand that almost every economist is recommending for China is taking place at a glacial pace. If the Chinese government continues to support investment, commodity prices, too, will be supported. But the big question is: is this continuation of investment-led growth sustainable and, if not, would it increase the chances of a hard landing?

And, second, does the IMF believe that investment demand in India is not likely to go up by much even by 2018?

The IMF’s prediction of India’s investment rate is 31.6% for 2018, well below the rates notched up as far back as 2004.

India, unlike China, needs to increase capital expenditure, especially in infrastructure and an investment rate of 31.6% is not good enough.

In other words, both China and India have a problem with investment growth. For China, it is a problem of plenty—for India, a problem of scarcity. A neat solution would be for China to invest a lot in India, but politics is playing spoilsport.

 

 

[“source-livemint”]