India, China and their potential for Australia

India is taking the mantle as one of the fastest growing economies in the world for 2016, having seriously emerged with its economy growing by 7.2% over 2015 compared to China’s 6.8%.

Robust growth of 7.3% is forecast for this year, and 7.4% in 2017, making the country one of the few where the OECD has revised up growth rates for 2016.

Oil is part of the story. As a large commodity importer, including around 75% of its oil requirements, India is one country to benefit from the price of crude falling by 70% over the past 18 months to around US$30/barrel.

Aside from savings on oil, consumers have benefited from strong wage growth and a moderation in inflation to around the Central Bank’s target of 5%. India has battled with double-digit inflation in recent years, in part due to drought putting pressure on food prices.

Government spending has also been helping to support economic growth, with Prime Minister Narendra Modi investing heavily in the country’s notoriously poor infrastructure. According to Credit Suisse, between April and December 2015, government capital expenditure was $28 billion, a 33% increase over the same period in the year prior.

Furthermore, amid low growth in global trade of goods, India’s large services export sector provides a source of resilience –IT service exports are prominent here.

In the World Economic Forum’s Global Competitiveness Report, 2015-16, India ranked 55th out of 140 countries, based on three sub-indexes – basic requirements (India ranked 80th), efficiency enhancers (ranked 58th) and innovation and sophistication factors (ranked 46th).

The country ranked most poorly in terms of basic requirements, which looks at factors such as infrastructure and access to healthcare and primary education. By contrast, India is kicking goals in many areas first world countries, such as Australia, currently have a strong focus on, such as innovation and business sophistication. India’s is a different economic model, where industrial development has received less prominence compared to service provision and innovation.

The country ranks very highly in terms of market size (opportunity). But to capitalise on this, respondents identified a number of factors as problematic for doing business, including corruption, political instability, inflation, access to financing and inadequate supply of infrastructure.

How does India measure up against our favourite global growth engine, China? The table below compares the two across several key indicators.


Table: Key indicators for India and China

These indicators show that India is a strongly growing economy – and one offering potential for Australia. Strong increases in merchandise exports and international student enrolments from 2014 to 2015 are testament to this.

However, despite having a population similar to China’s, India is, for now, simply too poor to plug the gap of a slowing China in terms of global growth. GDP per capita is roughly a third of China’s and a far-cry from developed economies.

India still offers fabulous potential in terms of market expansion for Australian businesses, and will still be a significant component of global economic growth for 2016. But having taken a different development path to many other Asian nations (with a greater focus on IT than industry), there is still a significant distance to go to reach China’s economic status as a global powerhouse.

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