PRC Economy - New Reflections : Dec 15 2011

harbans · Post by **harbans** » 30 May 2012 02:54

Amazing the contest now is how undeveloped we were just a few years ago..whatever happened to the India that was decades behind the Chinese..

Suraj · Post by **Suraj** » 30 May 2012 03:40

wonj, PPP accounts for inflation in prices, since disproportionately costlier fuel and food in nominal terms with respect to nominal income growth will lower purchasing power. Lower nominal and real wage growth in India compared to commodity prices would have been reflected in comparatively lower purchasing power, but that is not the case.

Of course PPP is an inexact barometer, but it is still a widely used reporting metric, being better than nominal GDP comparisons over a period of time. My datapoint simply highlights that on both the most popular GDP measures - nominal and PPP - Indian GDP in 2011-12 (last fiscal year) was equivalent to Chinese figure in ~2004.

Added: India's main exports are engineering/machinery goods, chemicals, refined petroleum products, gems/jewelry and drugs/pharmaceuticals. Commodity prices have little effect on refined petroleum exports because the gains are in the refining margin and not the gross price; we pay to import and subsidize our consumption through significant refined value-add exports. In any case, between 2004 and 2012 Indian exports grew from ~$70B to $310B, rather more than 50% gain. More like 500% gain.

sudarshan · Post by **sudarshan** » 30 May 2012 06:34

Suraj wrote:wonj

LOL! That was deliberate, wasn't it? Not sure if Wong(j) was similarly deliberately mis-spelling in his posts.

Wong wrote:India exports petro chemicals and things like cotton, correct?? Commodities have risen over 50% since 2003, so even without doing a thing, exports would have risen 50% since 2003.

Wong, this just reinforces my conviction that you don't read any other threads on this forum than the China-related ones. If you glance at the SEZ export figures in the table in the Indian Economy thread, you will find that the % change in exports from Indian SEZs was more like 2600% since 2003. Hardly explained by a "50% increase in commodity prices" which could have been achieved by "doing nothing." A 26 fold increase in a span of 8 years works out to 50% compounded growth per year. Or is that what you were saying the commodity prices have been doing since 2003?

Sudarshan

Hari Seldon · Post by **Hari Seldon** » 30 May 2012 07:27

wong wrote:
Hari Seldon wrote:^^Dunno how that works. India's GDP 2012 is == PRC one in 2003. <10 yrs behind. Wonder how that worked if India has *never* exceeded PRC's steroidal growth rates starting 1978. Just wondering onlee. jai hu, jai mao.
This comparison only works if there was no inflation in China or India, so India 2012 cannot be compared to China 2003 in economic terms. Commodity prices have increased more than 50%+ in the last ten years according to the US BLS.

Real GDP is after inflation-based frothiness has been removed from the mix. So the "if there was no inflation in China or India" doesn't quite compute. Or maybe I'm misunderstanding some deeper point here.

gakakkad · Post by **gakakkad** » 30 May 2012 07:44

wong wrote:Surag, I do not concede India's real GDP today equals China 2003-2005. Nominal GDP, sure, but everything is worth 50% more today from inflation alone than in 2003. China's GDP today may be the same as the USA's GDP in 1995, but China today is definitely not the US in 1995. The US in 1995 is far richer than China today or will be for the next 20 years.

The SEZ timing I've already addressed. I think you placed too much importance on them for the Indian economy thus far.

Here's another specific example. When China started private sales of Shanghai apartments in the mid-1990's, they couldn't give them away. That's how unsophisticated the Chinese consumer was when it came to real estate in the mid-1990's. This is Shanghai, China's Manhattan, and they had to give away free residency permits to anyone in China who purchased at apartment there for less than $20,000. Again, another example of undoing communism and its legacy.

the GDP deflator of China in 2010 is 270% ,(base 2000) while India is about 160%... So in 2000 prices china's present gdp would be less than 3 trillion...anyway the gdp deflator of US too is about 190% , so by that standard US today is a lot poorer than it was in 2000...

amit · Post by **amit** » 30 May 2012 12:28

I wonder if Wong ji understands the difference between nominal GDP numbers and base year deflated GDP? I reckon not.

I can see now that my point, made without understanding its significance to the entire Drone meme on this thread, that the 12 year gap between liberalisation can explain the gap between the two countries to a large extent, has touched a raw nerve.

Remember the point I made: China crossed $1k per capita in 2003, its domestic car sales was 2 million. India crossed $1k in 2011, its domestic car sales was 1.95 million.

More importantly Chinese exports in 2002-2003 in the region of $300 billion India's in 2011-12 in the same ball park of $300 billion.

More items can be added to the list.

However, I would concede that in 2003 China was way ahead of India in various human development indicators but as Theo rightly points out that's been the case for the past 50 years or so. India certainly needs to work on this aspect.

[I would be eagerly waiting to see if the drones take the bait!]

Singha · Post by **Singha** » 30 May 2012 13:36

I read somewhere the japanese occupied taiwan (formosa) and korea also started out with a substantially better HDI/literacy vs what the british managed in a century of misrule and corruption in India 1857-1947.

Hari Seldon · Post by **Hari Seldon** » 30 May 2012 13:37

BTW, SokO is all set to overtake the japs soon in per capita PPP, as per the economist. The comeback must taste sweet indeed in seoul, I gather....

wrdos · Post by **wrdos** » 30 May 2012 14:15

I don't really believe the PPP calculation.

One of the reasons, by PPP calculation, Singapore and Hong Kong are above Japan while Taiwan and South Korea being very close. I have been living in Japan quite long and have traveling experience to the other areas too. Sir, you know them behind Japan the moment you arriving there.

amit · Post by **amit** » 30 May 2012 15:53

^^^^

Wrdos,

There are lot of things that you don't seem to believe, especially if they are against your "China is the greatest and bestest" worldview. Yet I don't see you posting links, information to support you contentions. Please note that folks here are not posting to teach you and neither will they shrivel up in same because you don't believe what they write. So if you want to question their assertions show proof. Otherwise you're just a troll trying to disrupt discussions.

abhischekcc · Post by **abhischekcc** » 30 May 2012 16:11

Singha,

Japanese Imperial policy in SoKo was very very different from Brutish policy in India.

Japanese actually invested in education of SoKo people, among many other aspects of HDI. Whereas the Brutish were exporting foodgrains from India to UQ when this country was facing Biblical (pun intended) levels of famines.

Believe it or not, the Japanese were more humane than the Brutish.

Singha · Post by **Singha** » 30 May 2012 17:20

during the early phase of WW2, is there any record of mass japanese atrocities on civilians in philipines, indonesia, singapore and malaya?
against soldiers, the bataan death march seems to be the standout. but then americans also let around 500K german soldiers die in open compounds in the winter after the war ended. the russians worked german prisoners to death in factories and prison mines. the bridge on river kwai prison camp must be a picnic compared to a russian prison mine in siberia. the germans gassed 6 mil jews and gypsies and killed another 10 mil ukrainians and russian civilians either through war or enforced starvation and crop destruction.

the british while avoiding such short, sharp standout cases dug their claws in very deep and throttled the countries economy and human resources to a slow and lingering death at 1% GDP growth rate for over a century. plus killing around 40 mil civilians in famines. that kind of blow needs decades to recover from.

other than some cases like nanking massacre and bataan death march, does anyone know of big cases of IJA brutality?

pankajs · Post by **pankajs** » 30 May 2012 18:23

Guest post: China should avoid a major investment stimulus

Suddenly China finds itself damned if it inflates, and damned as it deflates. After appearing to sail so effectively through the world financial crisis, China’s economy is at a major, difficult turning-point, requiring big shifts in policy emphasis, and acceptance of much slower growth for at least a few years.

The outward sign of its problems is the inflation that resulted in 2010-11 from 2009’s recovery policies. Yet the first quarter of this year saw the economy shift sharply back into a deflation that is worsening the current downswing.

China’s recovery entailed a massive money and credit expansion with top-down direction towards investment; and deliberate restraint of yuan appreciation against the dollar, keeping China undervalued, and therefore the US overvalued. Investment rose as a percent of GDP from 42 per cent in 2007 to 49 per cent in 2010 and 2011, and fixed-investment price inflation moved from minus 4 per cent in mid-2009 to 7 per cent by mid-2011. Undervaluation pushed export price inflation (in yuan) to 7 per cent by early 2011, and the corporate goods price index was rising at nearly 10 per cent last summer.

The 78 per cent of GDP commanded by these two spending categories dwarfs the 33 per cent for consumer spending, but the latter’s inflation was also given a hefty boost when US Federal Reserve chairman Ben Bernanke responded to mid-2010 deflationary risks in the US by quantitative easing that boosted world food and energy costs.

China’s control of the yuan had become self-defeating. Its wages were rising at a typical 15 per cent, and the shrinkage of profit margins suggests unit labour costs were rising faster than prices: by some 10 per cent per year in dollar terms when the modest yuan/dollar appreciation is taken into account, versus no gain at all in US unit labour costs since 2009.

The result was about a 20 per cent bilateral real effective exchange rate increase over 2010-11 that has left China unable to repeat the huge gains in world trade share of the previous quarter-century. With its growth trend still faster than the world average, this means the export-led growth model is defunct – and an extravagant investment rate of 49 per cent of GDP can only head downward.

On the demand side, this poses an obvious problem. How can the 33 per cent of GDP that is consumer spending possibly make up for serious decline in items totalling 78 per cent, when it is income from the investment and exports booms of the past that has “trickled down” to enable consumers to raise their spending at all, if more slowly than GDP?

Though nominal interest rates are quite high, courtesy of inflation, real rates are low to negative, so consumers find their wealth gains falling short of target, and have raised their savings rates in the last few years. Maybe disposable income can rise relative to GDP, but that turns the focus onto the implicit flip-side: falling business income.

For 25 years Chinese businesses took cheap labour from the countryside, added virtually free capital and made good profits. Productivity rose fast as people previously doing very little were put to work. Now, the 15 per cent wage inflation suggests a reduced flow of rural migrants. And at least nominally, interest rates are quite high, raising capital costs. Energy and raw material costs are also high, not least because of China’s wasteful usage.

Meanwhile, the policy response to inflation was a prolonged administrative squeeze on credit during 2011 that has slowed the economy to a 6 per cent annual rate of growth in the two latest quarters (as re-estimated by Lombard Street Research). Suddenly this year, inflation has given way to deflation: first-quarter export prices were down 3.5 per cent from 2011’s fourth quarter, and fixed-asset investment prices by 2.5 per cent. This squeezes business income even more.

China will have to accept a much lower business-profit share of GDP if consumer spending is to raise its share in future – and this will correspond to the needed fall-back of currently excessive investment. But the parallel supply-side imperative, given high debt levels in much of business as well as the need to justify higher wages, will be much greater focus on cost control. Productivity must now be raised in existing plants, processes and products, rather than by simply making something where previously there was nothing. A key part of this will be a switch of government policy to “letting failures fail” – a difficult political programme in a country where much of the most conspicuous waste and vulnerability to debt is in the state-owned enterprises and banks.

The squeeze on business margins means the downward path of investment is likely to continue. China may need measures to ensure the economy does not suddenly “hit an air pocket”, but a massive 2009-style investment stimulus at this stage would revive a problem, not provide a solution. “Letting the failures fail” is deflationary in the short run, but essential if China is to establish a healthy growth path in future.

The danger, in this year of the major ten-year government job changeover, is that too many of the “failures” are too close to key people in the administration, and may soften the needed stringency of policy.

Charles Dumas is chairman and chief economist of Lombard Street Research

pankajs · Post by **pankajs** » 30 May 2012 18:33

China’s Economy: Seizure or Cancer?

The unexpectedly sharp slowdown of the Chinese economy has fanned anxieties around the world.

Had the Chinese economy been more balanced between domestic demand and exports and between household consumption and investment, monetary tightening and falling exports would not have had such dampening effects on growth. But the Chinese economy is highly unbalanced (although compared with a few years ago, China’s internal-external imbalances have moderated significantly), thus making the country less able to cope with the knock-on effects of credit-tightening and disappearing external demands.

In the short-term, most analysts are worried about a possible “heart attack” for the Chinese economy. Under this nightmarish scenario, plunging growth will expose China’s highly leveraged local governments, real estate developers and state-owned enterprises to the risks of insolvency and default while China’s export sector, dominated by foreign companies and domestic small and medium-sized private firms, contracts and lays off workers. The nasty feed-back loop looks like this: falling growth will greatly reduce the financial viability of the projects in which China has overinvested in the last three years. Such projects include real estate developments, heavy industries, and infrastructure (the most infamous example being the scandal-ridden high-speed rail system). Falling growth means lower demand. These projects won’t be able to charge higher enough prices to make a profit. Because they were financed with bank debt, it’s almost certain many of these projects will default.

In most other countries, such a crash would lead to a banking crisis, hence the “heart attack” scenario.

But China is different. Because the banking system is effectively owned and controlled by the state, a banking crisis won’t materialize unless the state itself is insolvent and Chinese depositors have completely lost confidence in the state’s sovereign guarantee of its banks. This unique character of the China’s state-owned financial system is the cause of the country’s inability to allocate capital efficiently. However, in the short term, this structural flaw may turn out to be an asset in averting a seizure of the financial system.

The Chinese government has already taken measures to prevent such a seizure. Last year, Beijing ordered a one-year moratorium on repayment of loans made to local governments and their highly leveraged financing platforms, thus delaying the day of reckoning. As the economy continues to struggle, one should expect the Chinese government to extend this moratorium to give local governments more time.

What about the banks? As state-owned institutions, these banks are in no position to say no to Beijing. Financially, these banks are under little pressure. Ever greening the loans by extending the repayment moratorium or rolling over the loans will technically maintain their “performing” status. Because interest rates are determined by the government, Chinese banks pay depositors nothing and have ultra-low funding costs. So carrying these effectively dud loans on their books does not cost banks real money. Ultimately, the Chinese government will have to cough up real money to bail out either local governments or help the banks write off these bad loans. But that is far away, and the Chinese state probably has enough resources (issuance of sovereign debt, sale of land and shares in huge state monopolies like the China Mobile, Petro-China, and the like) to pay for one more round of bank recapitalization.

Another short-term trick is to loosen the financial spigot. The People’s Bank of China has already lowered the reserve ratio, making more bank loans available. This measure is unlikely to work if effective demand remains weak and borrowers have no new projects to invest in. But if Beijing asks its local governments and state-owned enterprises to tap the banking system and use such “free money” to firing up short-term growth at all cost, this tactic might jump-start stalled growth.

That, however, could be disastrous for China’s long-term prospects. Despite the threat of a seizure in the near term, the greater danger to the Chinese economy is its structural inefficiency, which is deeply imbedded in a state-led development model.

In this model, the Chinese state collects an excessive amount of revenue (the current estimate puts effective aggregate taxes at nearly 35 percent of GDP), provides inadequate social services, and allocates most of the capital inefficiently through a highly politicized banking system (in which loans are made on the basis of government policy and political connections, not market principles). To use a medical metaphor, this model is the cancer that will kill China’s long-term prosperity.

By all accounts, the Chinese people have already paid a huge price for this cancer. Their share of the national income has fallen to 42 percent of GDP. That is why Chinese household consumption, at 35 percent of GDP, remains the lowest of the world’s major economies. The investments made by the Chinese state may have given the Communist Party a lot of prestige (think of the country’s modern infrastructure and ambitious high-tech plans), but delivers preciously few real benefits to its people. Chinese state-owned enterprises have thrived because of their access to practically free capital, but their efficiency remains abysmal compared with domestic private firms or their Western rivals.

In a crisis, a far-sighted government should have the courage to push through tough reforms and remove these “cancerous cells” in the Chinese economy. So today, Beijing must try a different strategy to revive its growth. Tax cuts, deregulation, privatization, and increasing funding for social services can all help raise domestic consumption and promote growth. The other option – repeating the folly of stimulating the economy through state-led investment – would make China’s economic cancer all but incurable.

Abhijeet · Post by **Abhijeet** » 30 May 2012 20:03

wong has a fair point. If India's GDP in 2012 $ is $x, and if China's GDP in 2004 $ was also $x, then some adjustment needs to be made to account for the fact that a dollar in 2012 is worth less than a dollar in 2004.

Currency depreciation does not take care of this (it partially expresses differences in inflation between the US and India, but obviously that's far from the only factor affecting the exchange rate). There are periods when the Re. appreciates against the $ but that doesn't mean that inflation in India is negative.

It's definitely pretty good if India consumes the same number of cars now that China did in 2003, though.

gakakkad · Post by **gakakkad** » 30 May 2012 20:06

@ Abhijeet , the reported GDP has already been adjusted for base year (inflation)...that is what amit ,suraj et al are trying to explain ...

Theo_Fidel · Post by **Theo_Fidel** » 30 May 2012 20:28

^^^^
Who is Sita.....

---------------------------------------

What is under reported about Panda wonderland is the inflation rate. Several people have now reported that the inflation rate is far far above anything that is reported. One has estimated a inflation rate of 15% for consumers. As part of its inflation control for instance Panda has refused to raise taxi fares, only allowing a fuel surcharge which goes in off the books.
---------------------------------------

Everyone dances around the consumption rate issue. The real meaning of a 32% consumption rate is that that is the share of the economy going towards wages. So even as the economy grows the people are getting poorer overall and getting paid less and less. Even 10% annual wage raises are not keeping up with inflation even let alone rising dependency rates. We had an odd dichotomous discussion some time back with a Panda praiser, who was extolling the wonders of Panda Paradise and then dropped the clunker that the average Panda factory worker earned very similar amounts to the average Indian factory worker. How this can be with a claimed GDP 4 times larger baffled me though said Panda poster never picked up on the shocked comments. I get the feeling they are so cut off from the world that they don't even know what a realistic wage is.

Hari Seldon · Post by **Hari Seldon** » 30 May 2012 21:25

Abhijeet wrote:wong has a fair point. If India's GDP in 2012 $ is $x, and if China's GDP in 2004 $ was also $x, then some adjustment needs to be made to account for the fact that a dollar in 2012 is worth less than a dollar in 2004.

Currency depreciation does not take care of this (it partially expresses differences in inflation between the US and India, but obviously that's far from the only factor affecting the exchange rate). There are periods when the Re. appreciates against the $ but that doesn't mean that inflation in India is negative.

My query is more mathematical. How can, in nominal GDP terms, an economy that was bigger than India's in 1992 and has since been consistently growing faster than India's not see the gap with the Indian economy widen since 1992? The base year (say USD circa 2000 = 100 cents and thence etc.) is one thing and does not seem to fully account for this artifact.

It's definitely pretty good if India consumes the same number of cars now that China did in 2003, though.

Yeah, but PRC cars were bigge and more luxurious than the tiny, SDRE hatchbacks we've been selling in India, am sure. The base model effect comes intoplay then, I guess...

Suraj · Post by **Suraj** » 30 May 2012 21:26

wrdos wrote:I don't really believe the PPP calculation.

One of the reasons, by PPP calculation, Singapore and Hong Kong are above Japan while Taiwan and South Korea being very close. I have been living in Japan quite long and have traveling experience to the other areas too. Sir, you know them behind Japan the moment you arriving there.

You can believe what you want. It remains a well utilized standard for measuring purchasing power across countries. It may not be precise, but it's a best effort option and there is nothing better - certainly nothing like some superficial big mac index.

Having been to all three countries you mentioned, I don't see why Singapore and HK would not have higher purchasing power for a given unit of money, say a dollar. From a very superficial visitor's perspective, food is much cheaper in HK and Singapore, and so is the subway. Cabs in both places are cheaper than in Japan, as was the price of a roughly equivalent hotels. PPP does not measure nominal per capita income but purchasing power as seen in a 3rd currency. From my experience I could make $100 go furthest in HK, a little less in Singapore and much less in Japan.

Thanks for treating Taiwan as the separate country that it is, by the way.

Since PPP measures purchasing power, it doesn't lose value to inflation the way the nominal per capita income does, because such a loss in value would be reflected as loss in purchasing power for the associated basket of goods and services. Therefore, while claiming that nominal per capita incomes in 2004 in PRC match the 2012 figure in India may be suspect due to commodity inflation, PPP per capita figures are different - the fact that PPP figures are also comparable indicates that real incomes and purchasing power per capita between the two nations for those two periods are comparable.

Abhijeet · Post by **Abhijeet** » 30 May 2012 21:46

gakakkad wrote:@ Abhijeet , the reported GDP has already been adjusted for base year (inflation)...that is what amit ,suraj et al are trying to explain ...

Are you sure? According to Google (which sources from the World Bank), the $1.73 trillion figure is at 2010 prices (not 2012 as I thought, but not 2000 either):

https://www.google.com/search?q=india+gdp

I believe this $1.7-2 trillion figure is what is being bandied about here. This seems to be in current prices, not constant prices (which are relative to a base year with inflation stripped out).

See this other article here: http://nextbigfuture.com/2011/05/indias ... upees.html. This also seems to indicate that the $2 trillion number is at current prices (GDP = Rs. 80 trillion = $2 trillion at the then exchange rate).

Obviously, China's GDP in 2004, if it was indeed around the same nominal figure of $1.7 trillion, cannot have been expressed in 2010 prices. So there is still some inflation adjusting to do.

Suraj · Post by **Suraj** » 30 May 2012 21:58

Abhijeet, all nominal GDP figures are reported at current prices, though they may utilize different base years. What google is saying is that the data is pulled from the World Bank 2010 report (released in mid 2011), not the 2011 one (which WB has not released yet). Different entities use different formulae to account for exchange rate fluctuations. I recall the IMF WEO figures use some kind of 3-year average, while WB and CIA follow their own policy.

As a separate point, PPP GDP figures per capita are also equivalent for the same periods, indicating that averaging purchasing power for a representative basket of goods and services (based on local consumption patterns) was similar.

Abhijeet · Post by **Abhijeet** » 30 May 2012 22:34

Suraj, as I understand it, it doesn't make sense to say that GDP is reported at current prices but utilizes a base year. Since the GDP values are in current numbers, there is no base relative to which those numbers are being reported.

Are you referring to the IIP base year? If so, that's different than the GDP base year, as I'm sure you know.

A "base year" for GDP only makes sense when you are talking about GDP expressed in constant prices, relative to some other year with all intervening inflation stripped out.

Won't the PPP figures from different years have similar distortionary effects due to inflation? It seems intuitively that PPP should capture the cheapening of a currency due to inflation, but I'm not sure that the PPP factors are recomputed often. I remember seeing the same PPP factor of 4 or so for India for several years now, even though inflation in India has been roaring along in the meantime.

gakakkad · Post by **gakakkad** » 30 May 2012 23:09

Won't the PPP figures from different years have similar distortionary effects due to inflation?

read suraj posts to wrdos..

Inflation would be reflected in PPP...eg let a particular item x cost 100 inr... let 1 ppp $ = 20 inr ..let cost of the item x after 5 years 110 INR...but the 1 ppp $ would no longer be 20 inr ..its value would change depending upon the exact inflation...the inr would depreciate against the ppp dollar...so inflation would automatically be adjusted in PPP...

Suraj, as I understand it, it doesn't make sense to say that GDP is reported at current prices but utilizes a base year. Since the GDP values are in current numbers, there is no base relative to which those numbers are being reported.

how do you suppose GDP is calculated ? how exactly can the total of goods and services produced in a massive country be calculated ? does someone physically count each and every object and service produced in a country ?

2nd thing is that while comparing India of 2012 with China of 2004 ..Is China of 2004 cheaper or more expensive than India of 2012 ? can we use nominal or even real gdp figures for the comparison ? can 2 trillion dollars (todays price) get you more in India today or more in China today ? impossible to say exactly...
That was the reason why Suraj compared using ppp ...

Suraj · Post by **Suraj** » 30 May 2012 23:15

Abhijeet, it does. Base year doesn't define a constant price level. Well, it does, but only at a statistical level - the more important matter is that it defines a comprehensive economic activity measure. Collecting data about the aggregate economic activity level on an annual basis is not a trivial exercise, especially in a developing economy where so much activity is, ah, 'informal', and a poorly funded CSO. Even the US, with a wellfunded BLS/Dept of Commerce, they still have raging debates on the validity of economic activity and inflation data (ask Hari Seldon). Instead, such an aggregate database is only collected once in N years , i.e. the base year. IIP base year may differ from GDP base year (and it has on many occasions).

The base year is a once in N years level where a comprehensive collection of 'all' activity is obtained and used to generate a fractional measure of what activity comprises how much of overall economy. Subsequent annual growth figures are incremental deltas of these. This data can either be reported in current prices (which is the raw data) or they can apply the GDP deflator and report data in constant base year prices. However, the latter doesn't really make sense because no one is paying in '2010 Rupees/Yuan/$'. A base year is good to report growth rate from, since it eliminates inflation from the calculation. But all reported GDP figures themselves are nominal current price figures.

On the other hand, such base years have significant drawbacks when economic activity profile evolves as it does in a dynamic developing country. For example, we had a 1993-94 base year for a long time, meaning all activity was tracked on the basis of an economic profile from that year. Entire industries that never existed at the time are not counted or tracked well enough. Even the current 2004-05 base year of CSO is essentially obsolete; there are industrial and service activity sectors that did not exist then.

PPP figures are not a nominal income level isolated from price level of goods and services. They compute the affordability of a basket of goods and services. Sure, there may be plenty to nitpick about, but as I said, this is a best effort metric. Measuring purchasing power enables the metric to better isolate both differential price levels between countries, as well as measure affordability over time, which is why I stated that 2004 PPP figures aren't necessarily different from 2012 PPP figures - they measure the affordability of a similar locally representative basket of goods and services either way.

Abhijeet · Post by **Abhijeet** » 31 May 2012 01:34

The base year is a once in N years level where a comprehensive collection of 'all' activity is obtained and used to generate a fractional measure of what activity comprises how much of overall economy. Subsequent annual growth figures are incremental deltas of these.

You're right, the base year concept does make sense from a practical standpoint. I don't think it alters the fundamental point though. GDP in 2010 $ is not comparable to GDP in 2004 $, even if they are based off similar base years, because of inflation and consequent erosion of the $ value in between.

The base year is simply a practical necessity, but doesn't alter the mathematical argument.

I think a lot of people here see "same base year" and think "expressed in comparable units", which is not the case.

Glad the PPP numbers are looking comparable. Now if we could only get comparable infrastructure, that would raise my quality of life in India significantly!

Suraj · Post by **Suraj** » 31 May 2012 01:45

I have no argument with the statement that nominal GDPs in 2012 and 2004 are not the same even if they are numerically comparable. That is indeed true. That is why I presented PPP data to show that purchasing power is comparable, so even though some things have risen in value, the overall availablility of goods and services in the economy has risen sufficiently, along with wage inflation, so that people have comparable purchasing power today in India to PRC in ~2004.

Whether that translates to specific products selling in equal volumes (e.g. cars) is entirely dependent on particular price levels and economic incentives available for that item or service. Such a 'PRC sells 2x cars' or 'Indians consume 5x milk' debate really serves no meaningful purpose from an economic perspective; there are too many local factors affecting them. Such debates are usually just useful dronehunting exercises to keep members sharp

gakakkad · Post by **gakakkad** » 31 May 2012 08:08

one of the problems with the present day economics is that they cannot take into account technological improvement ..

An led bulb can provide similar brightness to a light bulb even when consuming 1/4th of the electricity .. and its manufacturing costs too will end up lesser than light bulb eventually . Present day economics can't take into account that .. supposing the entire Indian population replaces there light bulbs with LED , there electricity consumption would reduce and also the spending component of there income...

rockefeller is believed to the the richest man ever..if you extrapolate his wealth in early 1900s to present day , using inflation data he ll be 10 times richer than bill gates... But IMHO even an SDRE middle class abdul lives a better life than rockefeller..

rockefeller could not carry 2000 songs of his favourite musicians in his pocket..nor could do his accounts on a computer...nor play a gaming console for recreation...he he wanted to come to India he could not do so in 12-18 hours ...nor did he have access to modern healthcare ... so IMHO rockefeller is a lot poorer than today's aam aadmi ...

real gdp calculations/base year take into account consumer price index...so again we have the basket of goods... a 10% cpi of china is not equivalent to a 10% cpi of India...

amit · Post by **amit** » 31 May 2012 09:36

My post is not meant as criticism but more of an observation, so apologies in advance if anyone feels insulted.

This discussion on whether China's GDP of 2003-04 is actually of greater value than India's GDP of 2011-12 IMHO is a classic case of being distracted by the minutiae while missing the big picture.

And the big picture IMO comprises two aspects:

A) China started its reforms push in 1978 while India started it's push in 1992

B ) Due to the authoritarian nature of its government China has been able to repeatedly and ruthlessly push through painful restructuring over the past 30 years. India on the other hand, again due the nature of its Govt (note ever since 1992 there has been a coalition govt in power, sometimes in a minority) has been meandering along and often following the line of least resistance in reforms.

Yet despite A & B we are actually having this discussion of whether 2003-04 China is >/= to India circa 2011-12. I think the WTF moment is the fact that we can have this discussion at all and not the hair splitting on the >/=.

By all accounts this seems to be a classic case of the tortoise and hare story. This is reinforced by the recent discussion we had - as Theo pointed out in an earlier post - which revealed that Chinese factory workers in places like Foxconn today are paid around the same as Indian factory workers despite the former having a GDP which is four times or so larger than the latter's. This seems to be a country with a rich government but relatively poor people - the recipe for a classic middle income stagflation trap for the economy.

The bottom line is the contention of the drones that the Chinese are decades ahead of India is just a myth which has been busted with empirical data. The headstart is more due to the 12 year earlier start and due to the authoritarian nature of the government which has led to its own set of problems which India does not have to face.

You can dispute the minutiae details but the big picture remains.

member_20317 · Post by **member_20317** » 31 May 2012 14:08

Suraj ji you have educated well about the base year and also about the current price data.

Gakakkad ji you have absolutely perfectly expressed an even more important point that of ‘Changes in Quality of Life’ not getting captured even in PPP data.

Amit ji, you too have raised the right points.

But all this are pearls cast before a drone.

These guys cannot think beyond one or at best two lines worth of intellect.

If inflation is going up affecting the life of mango man. then so is the valuation of closing stock held, which in turn has effects on the sold out stocks of assets, which in turn brings more security to the table for better leverage and higher production. We in the Real Estate Industry use this cycle something like 1 to 2 even 3 times an year to lift the capacity. While people across the world use these mechanics to put off current consumption in favour of more efficient asset sweating.

We need to begin treating these Chicoms the way we treat Pakis. Kahte hein ‘sathe sathyam samacharet’. These chicoms are begging for some samaan aacharan. They are = = to pakis only.

When somebody highlights the problems in their economy and the risks and constraints that the rest have to live with because of these guys, then these guys go Cheena is gleat. When somebody else says ok Cheena is gleat now start working by market rule, these runts run around crying how turd world they are. Muftkhor attitude.

member_23007 · Post by **member_23007** » 01 Jun 2012 00:02

China's total installed power capacity in the year 2000 was over 300 GW - it's about 1100 GW currently. In the year 2012, we've only just managed to cross the 200 GW mark. Our 12th five year plan 'hopes' to add another 70 odd GW by 2017. In 2017, our total installed capacity will be less that what China had in 2000. That's how far behind we've fallen.

As noted by many, China indisputably had a headstart in launching reforms and 14 years is a long time. But the subsequent claim that the gap has stayed constant is spurious at best. Chinese currency, if allowed to appreciate (coupled with INR's free fall) will reveal the staggering difference between our economies. Our efforts over the next few decades should be to not let this chasm widen further.

wong · Post by **wong** » 01 Jun 2012 02:15

amit wrote:I wonder if Wong ji understands the difference between nominal GDP numbers and base year deflated GDP? I reckon not.

Actually, I do understand the difference Amit, which is why you guys have this 100% incorrect.

The approximate $2 Trillion GDP for China (2003-2004) is nominal. It has NOT been deflated. The only way it could be a deflated GDP number is if China experienced zero growth from 2003 to 2012 (which we know isn't true and I'm taking you at your word that China's GDP deflator is 270). So the only way to compare China's GDP in 2003 to India 2012 is to inflate China's 2003 GDP numbers to 2012 or deflate India's 2012 GDP numbers back to 2003.

The EXACT inflator/deflator needs to be applied for PPP GDP numbers too. There is no difference. So my statement stands, China 2003 doesn't equal India 2012 economically just because the nominal GDPs are coincidentally the same. This is as simple as I can make it without getting into Paasche vs. Laspeyres indexes.

Also, China 1978 does not equal India 1991 because China didn't have private ownership, private businesses, private entrepreneurs or even a legal system for private business and private transactions and that's assuming there was actually sufficient currency in circulation (which there wasn't and remember, China to this day is still a cash, not credit, based economy). It was 100% Communist in 1978.

Suraj · Post by **Suraj** » 01 Jun 2012 03:41

What are we debating here in the first place ? Who cares if China was 400% communist in 1978 ? The original topic was that 'India is decades behind'. I simply showed that both GDPs and average purchasing power in India today corresponds to China in around mid 2000s. Does that imply that any of the following will correspond exactly:
* car production
* milk consumption
* melamine tainting
* coalition party / princeling shenanigans
* electricity output
* %age of communism/socialism/private ownership ?
* <insert choice of metric>

NO. Why would anyone expect it to be ? Specific metrics are dependent on a whole host of local/cultural factors, incentives and policies, and administrative systems.

China being communist has little bearing on its economic situation since 1978. It is still totalitarian, still lacks private property rights and rule of law (as opposed to rule by diktat), and is still run top down. If anything, seen from an Indian perspective, a monolithic iron-fist regime gives it the ability to do things quickly that India spends years arguing about, like the massive fracas when the SEZ Act came into being. Heck, we've had freeway construction in Bombay halted because a famous singer complained the dust near her home from the construction would affect her voice.

wong · Post by **wong** » 01 Jun 2012 04:21

If I'm trying to cool a room, it does matter if the current temperature is 100% above my target temperature or 400% (the room is on fire).

Suraj, let's just agree to disagree. You have an interpretation you are happy with: that India is 10 years behind and catching up. I have a different interpretation that I'm comfortable with. Let's just leave it at that and wait & see (as someone else always says).

wong · Post by **wong** » 01 Jun 2012 04:26

Hari Seldon wrote:
It's definitely pretty good if India consumes the same number of cars now that China did in 2003, though.
Yeah, but PRC cars were bigge and more luxurious than the tiny, SDRE hatchbacks we've been selling in India, am sure. The base model effect comes intoplay then, I guess...

It's not the size of the car. It's the availability (or lack) of consumer credit in China. Otherwise, China would have hit those car numbers at least 5 years earlier. Cars in China in 2003 were all paid in cash in full.

wrdos · Post by **wrdos** » 01 Jun 2012 05:32

Cars in China in 2012 are almost (around 90%) all paid in cash and in full.

wong wrote: It's not the size of the car. It's the availability (or lack) of consumer credit in China. Otherwise, China would have hit those car numbers at least 5 years earlier. Cars in China in 2003 were all paid in cash in full.

gakakkad · Post by **gakakkad** » 01 Jun 2012 08:09

Ashish S wrote:China's total installed power capacity in the year 2000 was over 300 GW - it's about 1100 GW currently. In the year 2012, we've only just managed to cross the 200 GW mark. Our 12th five year plan 'hopes' to add another 70 odd GW by 2017. In 2017, our total installed capacity will be less that what China had in 2000. That's how far behind we've fallen.

As noted by many, China indisputably had a headstart in launching reforms and 14 years is a long time. But the subsequent claim that the gap has stayed constant is spurious at best. Chinese currency, if allowed to appreciate (coupled with INR's free fall) will reveal the staggering difference between our economies. Our efforts over the next few decades should be to not let this chasm widen further.

it is a lot more complicated than that

many indian factories own mini power plants that generate there own electricity ..that data does not figure in the above stats..

more importantly the reason why electricity capacity is not added as rapidly as it should , be are political rather than economic .. (eg koodankulum) ...we add about 20-30 gw every year.. if power sector reforms are made and the environment wallahs are made to STFU we can even add 100 gw a year..once we reach that pace the growth in other industrial sectors will be massive..

gap has only narrowed ,I say... if we can sort out our power/infra policies other stats will be achieved in a matter of 4 or 5 years...

Theo_Fidel · Post by **Theo_Fidel** » 01 Jun 2012 09:24

wong wrote:....that India is 10 years behind and catching up.

I don't think anyone said that at all. To catch up India would need to grow at 8% for 10 years while China grows at 0%. Obviously this can not happen just yet. The surprise is to learn that despite all the authoritarian ordering around and wild investment at 50% of GDP India is keeping pace and not falling decades behind as is claimed. Its a bit of a surprise to us as well.

Suraj · Post by **Suraj** » 01 Jun 2012 09:43

wrdos wrote:Cars in China in 2012 are almost (around 90%) all paid in cash and in full.
wong wrote: It's not the size of the car. It's the availability (or lack) of consumer credit in China. Otherwise, China would have hit those car numbers at least 5 years earlier. Cars in China in 2003 were all paid in cash in full.

Thanks. Can you give me a breakdown of percentage of cars sold in each sector, and their average prices ? For example subcompacts 40% $5000, compacts 20% $10000 etc ? Ditto for house prices - what's the average home price in a tier 1 city (Beijing and Shanghai) and in cities further below (Tianjin, Nanjing, Guangzhou etc ?), along with average amount of cash down in each case ? I'm interested in knowing how money supply and purchase of big ticket items works in China.

wong wrote:Suraj, let's just agree to disagree.

Fine. There's plenty of lack of understanding (not to mention lack of personal experience) of particular circumstances of each country anyway. For example, the private sector you credit in India was against the economic reforms. They fought tooth and nail for a decade to roll it back, paid off the opposition and the press. Why ? Because the 'private sector' of that time was a small oligopoly who paid the government for production permits (we were socialist - the government determined how much of what would be produced) and to keep any smaller competitors from getting into the scene. We may not all have worn Mao suits like the Chinese then, but it wasn't much better.

PS: the reference to 400% is a BRF meme referring to a famous shooting himself in the foot statement by a former Pakistani dictator.

gakakkad · Post by **gakakkad** » 01 Jun 2012 10:00

several pre 91 industrial houses perished post reforms...but huge number of good ones replaced them...the ones who were big just because they had govt in there pocket perished .eg the Modi group of industries..

ashi · Post by **ashi** » 01 Jun 2012 10:07

Cross post. A little discussion about "demographic dividend".

India's economy A Bric hits the wall

The third—and perhaps most important—issue raised by lower growth is another kind of stability: social. India, unlike the other BRIC countries, is still desperately poor. One businessman and guru interviewed by your correspondent recently declared that "the next fifteen years will be India's worst since independence" and that there was a one-in-ten chance of a revolution. If India's economic miracle turns out to have been a mirage, it will not be so easy to dismiss that kind of talk as cranky. There is already widespread disgust at corruption. And at least ten million young folk will enter the workforce every year for the next decade or so. They will be coming to the big cities, looking for jobs that won't be created if India expands at a rickshaw rate of growth. Talk of a demographic dividend may turn back into talk of a time bomb.

I don't think 10 years ago anyone would describe China as desperately poor. So the theory of 10 years trailing doesn't really convince me, at all.