India 1 China 0?

Does the economic rise of India make it the country to watch instead of China?

There has been much talk of the BRICs [Brizil, Russia, India and China] and then the  MINTs [Mexico, Indonesia, Nigeria and Turkey] –  newly-industrialised countries which were going to be instrumental in driving the world economy. Of these, Russia and Brazil have suffered from slow growth and falling commodity prices and the MINTs also seem to have faded from the economic horizon and so only China and India remain.

Last month China’s growth fell and India’s GDP growth rate overtook it. Previously China had consistently outpaced India so that China’s average income per head which was approximately equal to India’s in the 1970s is now four times as high. Although the change in relative growth rates is currently more to do with a slowdown in China than an increase in India’s growth, the future is bright for the latter country. China is currently facing up to the need to look after a rapidly aging population while India has a much younger population and so will not face the burden of dealing with an aging population for some time.

The Balance of Payments

The UK deficit in goods reached a record last year at £125bn. Therefore, despite a services surplus of £90bn, the overall trade deficit was £35bn. This has been partly explained by the slow-down in China, since they are now buying fewer of our exports but more significantly, these record deficit figures reflect the competitiveness of the UK economy. Possibly, if one feels optimistic, one could argue that the recent fall in the value of sterling will make us more competitive and our exports will increase. However evidence about the price elasticity of demand for exports is not promising. Our invisible surplus has declined in recent years, largely because of the falling contribution from net overseas income (interest, profit and dividends which have fallen as interest rates have dropped and  earnings from dividends and profits have been hit by the recession).

We have had a current account deficit for over thirty years so does it matter? If a country has a deficit, it must either  use its reserves, sell assets or borrow  to pay for the deficit. Fortunately foreign banks and individuals are happy to purchase UK assets, buying shares and government securities, and investing directly in the UK. However what might happen if the UK economic position deteriorates, the currency weakens (possibly because of fears of a possible exit from the EU) and banks start to sell sterling?