Mr Jaitley, India can't Shoulder Global Growth as China Slows Down - Vivek Kaul's Diary
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Mr Jaitley, India can't Shoulder Global Growth as China Slows Down

Jan 25, 2016

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Being rhetorical is a part and parcel of being a politician. Or you run the risk of being called Maun Mohan Singh. Nobody perhaps understands this any better than the finance minister Arun Jaitley, who is more or less the official spokesperson for the Narendra Modi government.

Jaitley recently said in London that India can shoulder some of the global growth contribution previously made by China. As The Hindu Business Line reports: "India can shoulder some of the global growth contribution previously made by the Chinese economy, Finance Minister Arun Jaitley said in London, ahead of his trip to Davos. The world was now looking for additional "shoulders to rest global growth on," and India would be part of it he said, acknowledging the "serious challenges" faced by the global economy."

"India's growth rate, despite challenges is, among the major economies, the highest in the world," Jaitley added.

The comment came after the Chinese economic growth fell to a 25-year low of 6.9% in 2015. In fact, the Chinese economic growth for the period October to December 2015 was at 6.8%. In 2014, the economic growth had stood at 7.3%. The Chinese economic growth has collapsed from a peak of 14.2% it had reached in 2007.


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This slow Chinese growth led Jaitley to quip that India can shoulder some of the global growth contribution previously made by China. But how much sense does this statement make? Or was it just rhetoric on Jaitley's part, as is often the case?

Let's try and use some numbers here to understand.

Data from the World Bank shows that in 2014, the Chinese gross domestic product (GDP at market prices (constant 2005 US$)) was at $ 5.27 trillion. An economic growth of 6.9% in 2015 means that China added around $364 billion to its GDP and the world GDP as well.

India is now the fastest growing major economy in the world. During the period July to September 2015, the economic growth stood at 7.4%. Let's assume that the country grows at this rate in 2015, given that the economic growth number for 2015 for India hasn't come out as yet.

In 2014, the Indian GDP (at market prices (constant 2005 US$)) was at $1.6 trillion. The Chinese GDP was at $1.54 trillion in 2001, close to where the Indian GDP is now. The country has grown at a rate of 9.9% per year between 2001 and 2014. This tells us very clearly as to how fast India needs to grow if it has to reach where China is now.

Getting back to India. The Indian GDP in 2014 was $1.6 trillion. If India grew by 7.4% in 2015, it would mean adding $118 billion to its GDP, which is around one-third of what China has added, growing at a slightly slower rate of economic growth.

The basic point being that given that the Chinese economy is so much bigger than the Indian economy, even if it grows at a slightly slower rate than India's, will contribute significantly more to the global economy. Or to put it a little more mathematically, China is growing of a much bigger base.

If India had to contribute as much as China (i.e. $364 billion) to the global economy it would have to grow by 22.7%. If India had to contribute even half as much as China it would have to grow at 11.4%. In times like these that is not possible. And that tells us why India can't shoulder even a part of the global growth because of China slowing down. Also, as China slows down, India will slow down as well to some extent. We can't be totally disconnected from a slowing global economy.

Hence, what these numbers clearly tell us is that Jaitley was doing what he does best-being rhetorical. That isn't surprising given that before becoming a full-time politician he was a full-time lawyer.

The irony is that the Indian economic growth number suddenly started to look up after we moved to a new method to calculate the GDP in early 2015. As I keep mentioning GDP is a theoretical construct. The various 'real' economic numbers make it very difficult to believe that the economic growth is possibly greater than 7%.

In fact, as Bank of America-Merrill Lynch has pointed out, the economic growth during the period July to September 2015, as per the old method of calculating the GDP would have been 5.2% and not 7.4% as it has been as per the new method. Even for the period April to June 2015, the economy grew by 5% as per the old method, instead around 7% as per the new method.

This is not to say that the Chinese economic data is sacrosanct. As economist Eswar Prasad told the Wall Street Journal reacting to China's 6.9% economic growth in 2015: "China's reported growth rate for 2015 raises many questions rather than providing full reassurance about the economy's true growth momentum."

In fact, hedge fund manager Martin Taylor of Nevsky Capital summarised the situation very well when he said: "Currently stated Chinese real GDP growth is 7.1% and India's is 7.4%. Both are substantially over stated. This obfuscation and distortion of data, whether deliberate or inadvertent, makes it increasingly difficult to forecast macro and hence micro as well, for an ever growing share of our investment universe." Taylor's comment was made before the latest Chinese economic growth number came out.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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8 Responses to "Mr Jaitley, India can't Shoulder Global Growth as China Slows Down"

Chowdary

Jan 28, 2016

Your articles are very analytical and worth reading. They help in deciding my financial decisions also. Looking at the status of our industry and the Q3 results of industry leading companies its true that our growth rate is not what is being stated. Yes, it is more of rhetoric.

Like 

Vinod

Jan 27, 2016

You articles are increasingly becoming acute pessimist literature, there is no wrong in highlighting and asserting aspirations on a global stage, thats how branding works. China is already bearing brunt of the uncontrolled and aggressive development based on uncontested and unilateral decision making, definitely nothing to aspire for.

Like (1)

Prakash S Mainkar

Jan 26, 2016

worth reading.please send such articles regularly to me

Like (1)

Tikam patni

Jan 25, 2016

Jaitley Being a lawyer/politician, just talks from
both sides . Even his officers don't take him seriously . Often what he announces and what he means and what eventually happens all are different. ... ..

Like (1)

Carlos de Souza

Jan 25, 2016

That wasn't "rhetoric". That was a JHUMLA. The BJP is adept at it.

Like (1)

Rajan Ghotgalkar

Jan 25, 2016

Jaitley's words were

"India can shoulder some of the global growth contribution previously made by the Chinese economy, Finance Minister Arun Jaitley said in London, ahead of his trip to Davos. The world was now looking for additional "shoulders to rest global growth on," and India would be part of it he said, acknowledging the "serious challenges" faced by the global economy."

Clearly he refers to "part" of the growth gap - not the full !!
Surely that is not incorrect ??


Like (1)

Balakrishnan R

Jan 25, 2016

Dear Mr. Vivek, I would like to make a point in increasing excise duties on Petrol and Diesel. When the crude oil price was about 120 USD, the central government might collected some money as excise duty, which is a percentage of oil price. With reduction in oil price from 120 USD to 30 USD, the duty will fall by 75 %. In order to compensate this, the finance minister might be increasing the excise duty with each reduction in oil price. We should watch and make requests not to increase excise duties further, once the amount equivalent to 120 USD is reached.

Like (1)

Suhas Doshi

Jan 25, 2016

The declining India's exports is another indicator that India has not been able to share (Take advantage) of the burden.

Like (1)
  
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