13 Dec 08 CHINA AND/OR INDIA INTO RECESSION

Three of the world’s largest economies are already into recession and China, the fourth has also started feeling the heat. The question is whether India would also face the recession and why.

As far as the rewards of globalization are concerned, the answer is YES! This is because the economic and financial interdependence is bound to spread, even if only one developed country from where the business is generated, is into recession.

But, if we compare China with India there are other aspects which support the statement ‘NO’, India won’t be into recession’ (since there is difference between recession and slowdown) and even though there has been a slowdown, it’s definitely not to the extent of China.

The reason for this is because the Indian economy is fundamentally very strong as compared to Chinese economy. The term fundamentally strong has been explained in details below:

It is said that “Economic development leads to financial development and in turn financial development leads to economic development”. This means that when an economy is in a developing phase, the financial industry develops and once banking industry develops, it protects the economy from the downturn or acts as a catalyst in development. If we consider China from this aspect, neither side of the statement holds true, because when China was in the phase of economic development its financial (banking) industry did not develop. And so when the economy is in a slowdown phase its banking industry is not developed to the extent that can protect the economy from entering recession. On the other hand, if we compare India then we are considerably safe. This is because in Indian phase of economic development, India’s financial industry developed considerably and exploded greatly. So now when India is supposedly facing a slowdown, it has a good banking system in place which can protect India’s economy from entering recession.

Mathematically, people per branch, is the ratio which states the widespread of banking industry amongst the citizens. Lower the ratio, better it is for the economy and denotes that there are more banks spread and there is banking habit amongst the people. This is a good sign for the economy. China’s ratio is around three times higher than that of India’s. The more widespread the banking, the more it helps the government to effectively implement the monetary measures and that too, without huge time lag.

Another reason is that the Indian economy is driven mainly by domestic consumption and partly by rest of world’s consumption. Meanwhile the Chinese economy is driven mainly by rest of world’s consumption and partly by domestic consumption. Other such countries that depend upon rest of world’s consumption are those whose tourism forms major part of its GDP e.g. Malaysia and other small islands. Cateris paribus (other things remaining same) is the best form of economic development when everything is going good. It is a type of leverage (foreign leverage) wherein you develop your economy from outside money. But when the time worsens then the domestic economy falls as soon as there is recession in the exporting country. So those countries which are foreign leveraged are expected to get badly affected than those which are domestically driven. No doubt we need to work on our foreign trade, and much needs to be done from the policymakers. On this point we are well protected.

Again mathematically speaking, the contribution of domestic expenditure to Chinese GDP is only 42 %. This means 58% of GDP comes from rest of world. Whereas India’s share of domestic expenditure in GDP is much higher at 79 % which clearly states that Indian economy has a very strong consumption base. This means that even if 21% of our revenue source is affected we would be not affected greatly.

The contribution on domestic expenditure is important for monetary system to be effective. Because if you don’t have in-house consumption then what control can be gained by making changes in the money supply since the economy is bound to be affected by the rest of world’s policy rather than domestic policy.

Thanks to India’s non dependence on foreign countries and good banking system.

Tags: Banking System, China and India Recession, Domistic Consumption, Indian Fundamentals, Recessiion

Filed in financial markets

13 Dec 08 CHINA AND/OR INDIA INTO RECESSION

Leave a Comment

Categories

Tag Cloud