Did India grow faster than China in 2010?

WASHINGTON: Crouching Tiger snuck past the Fiery Dragon?

The intense debate about whether lumbering India can overtake China's red hot economy has been fed more fuel with The Economist suggesting that it may already have happened in 2010 "without anyone as much as noticing".

On the face of it, China grew by 10.3% last year, comfortably outpacing India's estimate of 8.6%. But the IMF's latest World Economic Outlook released earlier this week says that India grew by 10.4% in 2010. How can that be? Here's how the acclaimed journal crunches the numbers to arrive at the same conclusion. India typically reports its GDP "at factor cost", meaning it adds up all the income earned in the course of producing the country's goods and services. Other countries, including China, typically report their GDP "by expenditure", i.e. by adding up all the spending (including taxes) on domestically produced goodies.

So, says The Economist in a blog post, you have to factor in a couple of things into the Indian GDP: taxes and subsidies. A sales tax adds to the amount you have to spend on a good. A subsidy has the opposite effect. If these taxes and subsidies remained steady as a percentage of output, they would not affect the growth rate of GDP, even if they do affect its level.

In India, net indirect taxes rose from 7.5% of output in 2009 to 9.2% in 2010, boosting the growth rate of GDP by expenditure for that year. So if New Delhi adopts the same metric as other countries to measure its GDP, i.e., by expenditure, it lifts India's growth to 10.36% in 2010. "That's fully 0.06 percentage points faster than China. Jai Hind!" says The Economist.

Not everyone buys into the conclusion. "Brilliant. So all India has to do is increase indirect taxes every year by 1000% and her GDP will go to the moon," one reader wrote in snarkily. Another maintained that exchange rate is a more important factor than taxes, pointing out that the IMF estimates growth rates by converting the GDP of countries in local currencies to dollar at market exchange. While India's currency appreciated 6.4% in 2010, from Rs 48.85 per dollar in 2009 to Rs 45.93 in 2010, China's Renminbi appreciated only 0.9%, from 6.84 per dollar in 2009 to 6.77 in 2010. So India's GDP got a push that was higher than China's.

The Economist itself had a tongue-in-cheek take on the whole India versus China growth issue, saying that given the fervid debates "it would be ironic if the moment (of India overtaking China) had already come and gone, without any fuss, fanfare or felicitation".
PGDM 2nd sem(2010-12)