india-chinaBased on World Bank estimates, India’s economy grew by 7.3% in 2015, which was higher than every other major nation including China. For the first time in more than 20 years, India recorded the highest growth rate in GDP. In sharp contrast, according to the numbers released by the Chinese government, China’ economy grew by 6.9% in 2015.

Asian Development Bank (ADB), a Manila-based multilateral bank, projects China’s economy to grow by 6.5% in 2016 and by 6.3% in 2017. Even with excessive monetary and fiscal stimulus, the consensus is that China’s average growth rate in the next five years is unlikely to exceed 6.5%. A more realistic expectation is that the growth is likely to be lower because of the weaker demand from major developed industrial economies.

ADB is predicting India to become the fastest-growing major economy.  The projected economic growth rate is 7.4% in 2016 and 7.8% in 2017  propelled by investments in the public sector and lower oil prices.   

Dragon Warrior Restrained

With a debt hang, housing glut, and excess capacity in factory production, Chinese officials are projecting tougher years ahead. Fears over a slowing economy and concerns over plunging oil and commodity prices have started to chip away into China’s phenomenal growth rate observed during the last decade.

China is transitioning from being an investment- and industrial-oriented economy into a consumption economy, which is a key indicator of a major developed and industrial economy. China’s government is expected to encourage this transition which bodes well for consumers in China. Nevertheless, the ever so competitive China might consider various ways to augment its growth by relying on deficit financing.

China’s stock market volatility is also likely to have some negative repercussions. The stock market observed a massive run-up followed by the gut-wrenching plunge, which reflects underlying uncertainty.

Tiger Unleashed

Bullish on India, the International Monetary Fund has projected a robust growth rate of 7.3% for 2016 and 7.5% for 2017. IMF welcomes India’s emphasis on public infrastructure spending, reducing subsidies, improving the labor and product markets, and enhancing the strengths of financial institutions. As one of the world’s largest oil importers, India has benefited from low oil and energy prices, which has been a major factor in propelling current growth and is a key factor in explaining future growth rates.

A key source of concern in India is that the country’s banks, especially the public banks, have a disproportionately high percentage of “bad debts” on their books which have yet to be written down. According to Reserve Bank of India, about 21% of all loans to large Indian companies were “stressed” as of June 2015, up from about 17% in September 2013.

The data on the growth rate in India must be taken with a pinch of salt and lots of spices. Most worldwide investors are often mistrusting of India’s growth numbers  because of the unreliable process by which data are gathered and assimilated. Therefore, the stock market may not reflect the renewed economic optimism as foreign direct investments may decline if institutional investors do not believe in the growth numbers.

For U.S. investors, both India and China continue to appear as attractive investment opportunities especially considering the weak growth rate in the US and Europe.

New York, May 5, 2016; 12.52P

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