India to Overtake China's Growth, Credit Suisse Says

Date: Wednesday, December 13, 2006
Author: Cherian Thomas, Bloomberg.com

(Bloomberg) -- India will overtake China next year as the world's fastest-growing major economy on rising consumer and government spending, Credit Suisse's chief Asia economist Dong Tao said.

Credit Suisse raised its 2007 growth forecast for India's $775 billion economy, Asia's fourth biggest, to 10 percent from 8.5 percent, Tao said. China's $2.2 trillion economy is expected to grow 9.9 percent next year from 10.4 percent in 2006, he said.

Surpassing China's expansion rate for the first time at least two decades may help lure the overseas investment India needs to replace dilapidated port and roads and create manufacturing jobs. Prime Minister Manmohan Singh needs rapid growth to lift 350 million people out of poverty in the world's second-most populous nation.

``India's growth story will only get stronger,'' said D. H. Pai Panandiker, president at RPG Foundation, an economic policy group in New Delhi. ``There is a lot of money available to spend in India.''

India's benchmark stock index, which has risen 38 percent this year, touched a record on Dec. 7 as overseas funds bought a net $8.52 billion of stocks after having invested a record $10.7 billion in 2005.

Per-capita income in India has doubled in the last nine years and the number of households earning an annual income of at least $10,000 is rising more than 20 percent a year, according to McKinsey & Co. Commercial banks' outstanding loans have doubled in the past three years and has risen more than 30 percent since April 1.

Rising Incomes

India had the highest average salary increase in the Asia- pacific region in 2006 gaining 13.8 percent in 2006 compared with 14.1 percent gain in 2005, according to human-resources consulting firm Hewitt Associates Inc. Salaries in India may rise by 12.3 percent to 15 percent in 2007.

``The private consumption story in India is growing,'' Credit Suisse's Tao said in a phone interview from Hong Kong today. ``At this moment, India surpassing China as the world's fastest growing major economy is a possibility. India is more resilient toward a global slowdown compared to China.''

The Paris-based Organization for Economic Cooperation and Development said last month growth among its 30 members will cool to 2.5 percent in 2007 from 3.2 percent estimated for this year, the weakest since 2003 and dragged down by a U.S. slowdown. The 2007 forecast was below the 2.9 percent anticipated in May.

Global Trade

China, which accounts for 5 percent of global trade, has become the fourth-largest U.S. export market, from the 15th before it joined the World Trade Organization in 2001. It has run up record trade surpluses with the U.S., including a $202 billion trade gap last year that was the largest imbalance between any two countries in history.

China's economy has grown at an annual 10.1 percent pace on average in the three years ended 2005, prompting the central bank to take steps to prevent the economy from overheating.

The central bank on Dec. 11 sold 120 billion yuan ($15.3 billion) of one-year bills, the biggest sale this year, to drain cash from the banking system and prevent growth in credit and investment from rebounding. The bank has also forced lenders to set aside more money as reserves and raised interest rates.

India's economy, which has expanded at an average 8.2 percent in the past three years, is being driven by local demand as the country's exports make up only a 12th of gross domestic product and 0.8 percent of global trade.

`Policy Risks'

``The issue is not whether India grows faster than China. The issue is whether India's growth is sustainable,'' said Rajeev Malik, senior economist at JPMorgan Chase & Co. in Singapore. ``India has been accelerating and policy risks are greater in India. India is also an opportunity because so much can be done on infrastructure.''

Prime Minister Singh today begins a four-day visit to Japan to sell the India growth story and seek help in funding his government's five-year $320 billion plan to improve the country's roads, ports and other infrastructure.

India now wants to draw investments from Japan and narrow the gap in overseas funding with China, which began unshackling its economy in 1978, 13 years before India. India's northern neighbor got $60 billion of foreign direct investment in 2005 compared with India's $7.5 billion.

General Motors Corp., Royal Dutch Shell Plc. and other companies have invested in about 3,000 new factories and expansion projects worth $21 billion in India since May 2004 to cater to growing demand, according to the finance ministry.

Government Spending

``Capacity additions in the steel, auto, metals and consumer goods sector seem to be gathering pace in response to strong consumer spending and a pick-up in public investment spending in the power, roads and highway sectors,'' Tao said.

Industries such as steel and cement are also benefiting from Prime Minister Singh's decision to increase spending on roads, ports and other infrastructure by a quarter to 992 billion rupees ($22 billion) in the year that started April 1 in a bid to attract overseas manufacturing companies and spur growth to 10 percent over a decade.

``We do anticipate the government's infrastructure spending to go through,'' Tao said.

To contact the reporter on this story: Cherian Thomas in New Delhi at cthomas1@bloomberg.net