Q: India is finally delivering on its massive economic potential. Will it remain at the forefront of economic development in Asia?
A: India is the fastest growing large economy in the world right now and we think this will remain the case in the years to come. Annual GDP is growing at more than 7% [7.4% in 2015], and could accelerate to more than 8% if the government succeeds with its ongoing reforms. But the overall size of the Indian economy has not matched that of China’s yet. India’s per-capita income is around one-third of China’s. Therefore India will need more years to catch up with China in terms of economic growth. From an FDI perspective, the country is less open than China, and it will need even more time to catch up, but it will get there eventually.
Q: Will India be able to increase the international profile of its economy and turn exports into an additional pillar of economic growth?
A: India has world-class business services and IT sectors, which is an advantage. However, currently the top service firms don’t work much with domestic manufacturers, which is different from what you see in more mature export-oriented economies such as Germany, where local IT firms are an additional source of competitiveness for German manufacturers. Indian service firms need to play a greater supporting role for the local manufacturing sector to become truly globally competitive. The country also needs more investment into transport and energy infrastructure to lower the non-labour part of production costs.
Q: Were you surprised by China’s growth falling below 7% in 2015?
A: China’s gradual economic slowdown is not surprising and essentially rooted in two factors: its shrinking workforce, and higher wages that are reflected in an economy that is transitioning from competing on low wages to competing on productivity and innovation. These two things are somehow independent, but both have put downward pressure on Chinese growth. Other external factors also matter. China is a global economy, and a relatively weak European economy and global cycle as a whole put additional pressure on Chinese growth. We are forecasting growth at 6.5% in 2016 ad 6.3% in 2017.
Q: How long will it take for China to complete its economic transition?
A: China is already showing very clear and strong signs of a structural transformation. On the demand side, consumption growth has been very robust, outpacing growth in investment and exports. On the supply side, the service sector is already more important than the manufacturing sector in terms of its contribution to GDP.
Q: Will looser family planning policies benefit economic growth in the mid-term?
A: As wages keep rising, international experience tells us that overall growth will slow down even further. Looser family planning policies will help, but will not fundamentally change the fact that growth will adjust to the pace of more mature economies.
Q: Who are the winners and losers from China’s slowdown?
A: There are economies that are very connected to the Chinese economy through regional and global value chains, such as South Korea, for example, which adds value to its exports by shipping parts and components to China, where they are assembled and finally exported. Rising wages and costs make Chinese firms less competitive, and make it harder for South Korean firms to export in the short run. In the medium term, South Korean firms can adjust by shifting production to Vietnam and other countries.
Other economies are benefiting from what’s happening in China. In the garment industry, Chinese producers are retreating from lower- and mid-value garment production and countries such as Bangladesh and Cambodia, which are good at producing garments, can now increase their market share.