By Ayhan Chemal, R5
By Ayhan Chemal, R5

Will the Elephant overtake the Dragon?

In July this year both R5 and the UK Foreign Office bought together a roundtable of INR traders to meet with the Indian Ministry of Finance and discuss the big question – When or will India overtake China in the economic growth race?

Recent IMF and World Bank forecasts show that India’s economy could take over from China as the world’s fastest growing economy in the next two years. But... India has changed the way it measures economic activity to conform to the international standards, resulting in huge upward revisions to growth figures. The new GDP series (that are calculated based on market prices) have confused economists across the globe. Moreover, Reserve Bank of India Governor – Raghuram Rajan – has gone on the record to mention that he “does not understand the new numbers”. RBI uncertainty over the government’s recent change in the methodology of calculating GDP have left a critical gap for the central bank to assess economic prospects, which showed India grew faster than China in the December quarter.

With the big growth coming in the 18-35 year old bracket over the next few years predicted. India has added another 50 million to the middle class and is on track to add another 100 million between now and 2020. That’s a lot of apartments, telecoms, cars, mobiles, holidays and all the other trappings of middle class expenditure to hit the inflation numbers and its affect on the interest rate. The Central Bank unexpectedly lowered its policy rate in March. India’s rate cuts came as a slew of central banks across developed and emerging economies cut interest rate, including Indonesia and China, despite the impending prospect of rising U.S interest rate later this year. The reduction surprised investors who had not foreseen a cut before the RBI’s policy review early in April.

In June, RBI cut interest rates for a third time, taking advantage of subdued inflation to lend more support to an economy that the bank itself has mentioned is not doing as well as latest impressive growth numbers suggested. The attendees of the meeting were focused on gold, FX reserves and the capital account convertibility of the rupee, which is still a distant dream until macroeconomic parameters are more stable. Although steps have been taken with the GIFT – currently Singapore and Dubai are the real GIFT so far.