The return of global liquidity should ultimately favour the Indian economy more than China. That’s because the collapse of the 2003-07 boom affected these countries in very different ways. While the main impact on China was the result of the contraction of its consumer markets in the West and the slowing of its export juggernaut, India was hurt more by the withdrawal of external funding. India’s economy has always been less dependent on exports and the main reason for its difficulties during the current crisis has been its dependence on external fund flows during the boom. When these flows dried up, we had a liquidity crisis. It’s reasonable to expect then that the return of liquidity should be more beneficial to India than to China, with the very important qualification that it doesn’t lead to too much of a rise in commodity, especially crude oil, prices.
A few weeks back, Morgan Stanley chairman Stephen Roach said he was more optimistic about economic growth prospects in India than in China. Morgan Stanley has translated that view into numbers and the result is in the accompanying chart. Notice how the quarterly gross domestic product (GDP) forecast for India predicts a steadily rising GDP growth rate while China’s GDP growth is expected to peak in the first quarter of calendar 2010 and decelerate steadily thereafter. True, its rate of growth shown in the chart is higher than India’s, but Morgan Stanley believes the gap will steadily narrow.
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What could be the reason? There is some concern that as the push from China’s hefty stimulus package runs out of steam and as its loan push slows, growth too will taper off. As the chart shows, China’s GDP growth spurts in the initial quarters as the result of the stimulus, but starts decelerating once its effect dissipates. Roach has been drawing attention to China’s dependence on export-led growth, compared with India’s more domestic-oriented economy. Other voices have been far more critical.
Albert Edwards, global strategist?at?Societe Generale,?writes: “Most areas in the markets have now discounted a V-shaped recovery. Any doubt will trigger a rapid reversal in prices. I continue to be extremely sceptical and see recent events as part of a 1930s-like long march to revulsion. Talking about long marches, nowhere in the world fills me with more scepticism than the Chinese economic recovery. The continued enthusiasm for all things Chinese reminds me so much of the way investors were almost totally blind to the fact that the US growth miracle was built on sand. China could be the biggest disappointment yet.”
Even more interesting is Morgan Stanley’s prediction of annual GDP growth for the period 2011-15. While India’s GDP growth under the baseline scenario during these years is predicted to be 7.5% per annum, China’s too is pegged at 7.5%. Similarly, under the bullish scenario, both Indian and Chinese growth during 2011-15 is forecast to be 9% per annum. But in the bear scenario, India is expected to do even better than China, growing at 6.3% compared with China’s 6%.
Perhaps Morgan Stanley’s glasses are slightly rose-tinted. The Chinese government has taken a number of measures to boost domestic consumption and its leadership has always been pragmatic as it believes in “crossing the river by feeling the stones”. True, the transition to domestic-led growth is likely to result in lower growth rates, simply because value addition will be lower in the local market than in the export markets. But at least part of the lower growth percentage will be because of a higher base. As for India, its difficulties with building infrastructure and its fiscal woes too are well known.
Nevertheless, even the World Bank, in a report released on Monday, forecast that India’s GDP growth in 2010, at 8%, will be higher than China’s growth rate of 7.5% that year. Further, in 2011, both India and China are expected to grow at the same 8.5% rate. If Morgan Stanley’s perception of India’s prospects vis-à-vis China gains hold, the Indian market could be a beneficiary. A Citigroup Inc. 22 June research note by Elaine Chu and Markus Rosgen points out: “Net flows to all Greater China equity funds turned negative for the first time in 12 weeks. These fund groups used to receive major shares of total net inflows to Asia, but are now the source of funding to India country funds.”
But if the World Bank is right, liquidity is not going to return in a hurry. If its prognostications are correct, net private capital inflows to developing economies, which amounted to $1.2 trillion (Rs58.68 trillion) in 2007 and fell to $707 billion in 2008, will fall further to a measly $363 billion in 2009. Such a huge decline in liquidity will be a massive challenge for companies and markets in India this year.
Graphics by Ahmed Raza Khan / Mint
Manas Chakravarty looks at trends and issues in the financial markets. Your comments are welcome at firstname.lastname@example.org