India v China The X factor Which of Asia’s emerging giants grew faster in 2010?

Apr 20th 2011 | HONG KONG | from the print edition

MORGAN STANLEY thinks it could happen in 2013; the World Bank thinks it might happen next year. Many pundits have speculated about when India’s growth might outpace China’s. But the IMF’s World Economic Outlook says it’s already happened—without fuss, fanfare or felicitation. China grew by 10.3% last year; India by 10.4%. How can that be?

There are two idiosyncrasies in the way India typically reports its GDP figures. It calculates growth for the fiscal year, not the calendar year. More important, it reports its GDP “at factor cost”. That means it adds up all the income earned (by labour, capital and other “factors of production”) in the course of producing the country’s goods and services. By that measure, its GDP grew by 8.6% in 2010.

But other countries, including China, normally report their GDP “by expenditure”, adding up all the spending on domestically produced stuff. In principle, expenditure should equate to income. But taxes and subsidies get in the way.
A sales tax adds to the amount you have to spend on a good, boosting measures of GDP by expenditure. A subsidy has the opposite effect. In India net indirect taxes seem to have risen from 7.5% of output in 2009 to 9.2% in 2010. That was enough to lift India’s growth by expenditure to 10.36% in 2010, fully 0.06 percentage points faster than China’s.

Some bloggers have suggested the 10.4% figure is an artefact of inflation or exchange rates. Not so. GDP was measured in rupees, not dollars, at the prices prevailing in the 2004-05 fiscal year. Nor is the figure an IMF concoction. It drew its data from India’s Central Statistics Office (CSO), which estimates GDP using both methods. The country’s statisticians prefer GDP by factor cost because it is less prone to revision. The CSO still finds it easier to track production in farms, factories and offices than to track consumer spending or investment.

As India struggles to count its GDP the way most other countries do, China has begun to report its growth rate the way America does (comparing one quarter’s GDP with the previous quarter, rather than the same quarter of the previous year). So China grew by 9.7% in the year to the first quarter under its old method of reporting, but by just 2.1%, or 8.7% at an annualised rate, under the new methodology. That is the kind of pace India might well match or surpass, however you measure it.

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