01 November 2015 07:24:14 IST

Too early for India to replace China as global engine: BNP

India’s service sector is proportionately much larger than China’s, but its investment and industrial-production shares are much lower

India is quietly assuming the mantle of the fastest-growing major emerging-market economy, but its size is too small on economic parameters to replace China as a new global growth locomotive, a new report says.

According to global financial services firm BNP Paribas, the hope that India can replace China as a key locomotive of global demand is “misplaced”.

China posted a 6.9 per cent GDP in the third quarter of this year to register its weakest growth since the 2009 global financial crisis. India is projected to grow faster than China in the near future. As per Moody’s Analytics, India’s GDP grew in September quarter by 7.3 per cent, while for the full fiscal it would be 7.6 per cent. India’s GDP grew by 7.3 per cent in FY15.

“Those hoping that a more buoyant India can effectively replace the ailing Chinese economy as a new global growth locomotive are likely to be disappointed, however, at least for the foreseeable future,” BNP Paribas said in a research note.

“Although India is fast approaching China in terms of absolute population, its much lower living standards mean its economy is around five times smaller than China’s. At market prices, Chinese GDP was a little over $10 trillion in 2014, while India’s was just over USD 2 trillion,” it added.

Moreover, the structure of the Chinese and Indian economies greatly differ.

India’s service sector is proportionately much larger than China’s, but its investment and industrial-production shares are much lower, it said.

Slowly usurp

The report noted that infrastructure investment has surged to more than 20 per cent of Chinese GDP, but it is still in the single digits in India. Given the respective sizes of the two economies, China’s annual spending on infrastructure in USD terms is more than ten times India’s.

The report further noted that Chinese commodity demand swamps India’s.

India’s commodity demand has been about ten times smaller— it consumed around 80 million tons of steel in 2014 as against China’s 800 million tonnes.

“Accordingly, while India may be slowly usurping China in terms of overall GDP and industrial production growth, it cannot realistically act as a meaningful offset to peaking Chinese demand for industrial commodities as its epic investment cycle inevitably flattens out,” the report noted.