Why rating agencies seem optimistic about India’s economy and concerned about China


The comparison between India and China, often unjustifiably, has been a favorite of media commentators over the past three decades. Most of these comments were not charitable towards India. However, their numbers have surely dwindled over the past six months, and for a reason.

Last week, investment management and financial services firm, Morgan Stanley, predicted that India would be Asia’s fastest growing economy in fiscal year 2022-23, helping to more than a fifth of global growth. India’s economy, they said, was poised for its “best performance” in more than a decade.

“We have been constructive on India’s outlook, both from a cyclical and structural perspective, for some time. The recent round of strong data reinforces our confidence that India is well positioned to generate domestic demand alpha, which will be particularly important as weak developed market (DM) growth trickles down. on Asia’s external demand,” a note read.

Domestic consumption key

In recent months, Delhi has taken several initiatives – including commodity and commodity export restrictions – to control inflation and encourage domestic consumption amid growing uncertainties in the global market. Morgan Stanley merely confirmed that it had started to deliver results.

And, he did. The S&P Global India Manufacturing Index rose to 56.4 in July 2022, beating market expectations of 53.8. Inflation hit an 11-month low of 6.7%. Overall employment figures, a global concern, improved slightly.

However, hiring has increased at an extraordinary rate in the sectors of IT, telecommunications, banking and finance, pharmaceuticals, etc. E-commerce penetration has quintupled during covid. It didn’t just increase gig hiring; warehousing and logistics are also growing exponentially.

The activities are not limited to the big cities. As of March 2022, half of the roughly 66,000 recognized start-ups in India came from non-metropolitan cities, which are experiencing a property boom. Tier II and Tier III cities like Raipur, Lucknow, Coimbatore, etc. saw 15% YoY growth in house prices last year.

Feelings are reflected in growth projections by different outfits. In July, the International Monetary Fund (IMF) expects India to grow by 7.4% in FY23; World Bank 7.5%; Organization for Economic Cooperation and Development (OECD) 6.9% and; Asian Development Bank (ADB) by 7.2%.

Among the top rating agencies, only Nomura (4.7%) has a conservative view. S&P Global expected 7.3%. Fitch Ratings pegged growth at 7.8% in FY23 and an average of 7% between FY24 and FY27.

This does not mean that all is well in India. This should not be the case, in such a volatile global situation. However, rest assured, things are much brighter here than in China, which is struggling to stabilize the boat.

After dismal GDP growth of 0.4% in the June quarter (half-year growth of 2.5%), the official Purchasing Managers’ Index (PMI) for the manufacturing sector fell to 49.0 in July , compared to 50.2 in June. A PMI below 50 indicates a contraction. The performance was below analysts’ expectations of 50.4.

Gloomy outlook in China

Notably, Beijing lifted covid-related restrictions in July and Chinese Communist Party (CCP) spokesperson, world times, predicted that the country would record robust growth in the September quarter. The promise fell flat on his face.

According to a report by PA, on August 10, the CCP “stopped talking” about the 5.5% GDP growth target for this year as the country’s youth face sluggish job market prospects.

The effort to establish political control over the Internet economy has not been well received. Faced with a recruitment rush for players in India’s digital economy, Chinese tech conglomerate Alibaba said goodbye to 13,616 employees between January and June this year.

“The most educated generation in China’s history was supposed to lead the way to a more innovative and technologically advanced economy. Instead, an estimated 15 million (1.5 crore) young people are out of work, and many are lowering their ambitions,” Time reported July 25, 2022.

Headline unemployment figures in China look comfortable at 5.5%. Things, however, look terribly bad for young city dwellers (16-24 years old) where the unemployment rate is 19.3%.

To make matters worse, 11 million or 1.1 crore new graduates will join the workforce this summer. The growing gap between supply and demand is driving down wages for new hires. Considering the country has enjoyed a booming economy for decades, the ambitious impact is enormous.

What is killing China is a huge debt crisis. Officially, President Xi Jinping wanted to avoid this. But in the final analysis, he failed miserably. According to JP Morgan, Chinese household debt soared to 62% of GDP last year, from 28% a decade earlier. Corporate debt stands at 160% of GDP.

According to Trading Economics, a data aggregation platform, Indian household debt stood at 37% in December 2021, down from 34% a decade ago, but below the peak of 38.4%. Motilal Oswal estimated non-financial corporate debt at 48.6% of GDP, the lowest in seven years.

As a trade surplus economy, China has amassed enormous wealth at the governmental level over the past three decades. But the high indebtedness of its households and businesses points to a serious flaw in the system. Clearly, the boom was prolonged or inflated by over-indebtedness of the financial system.

And that brings us to the heart of the debt crisis currently rocking China.

The boom was swollen

Over the past two decades, 70% of household savings have gone into real estate, contributing one-third of China’s gross domestic product (GDP). The $2.7 trillion real estate market is now in crisis, which is spilling over into other areas.

Homebuyers in nearly 100 cities have stopped paying their monthly installments, against home loans in nearly 300 unfinished projects. Nomura had estimated that Chinese developers only delivered 60% of the homes they pre-sold between 2013 and 2020. The move puts around 4% of total bank lending in China at risk.

Faced with the recovery in housing demand in India, China is experiencing a sharp drop in sales. Nikkei Asia reported on August 13, 2022 that new home sales fell 27% in the January-June period in China. July sales fell 13% from June and 27% year-on-year in 100 major cities. House prices are falling.

According to S&P Global, around 20% of developers are at risk of insolvency. This is reflected in rising bond defaults which have topped $20 billion so far this year, compared to $9 billion in all of 2021. Property developers top the list defaulters.

The upheaval in the real estate market will have a negative impact on the economy. According to available reports, the steel sector is already facing the heat with many small steel mills operating at a loss for months. Construction accounts for 55% of steel demand in China.

“If timely and effective policy intervention does not materialize, the housing market distress will be prolonged and affect various sectors in China beyond the immediate property sector value chain,” Fitch warned last week.

The question is what kind of intervention China is planning. Beijing has already announced a recovery plan for the infrastructure sector. He can afford to shell out more money. But will they risk another wave of economic overheating or will they give restructuring a chance?

Read also : The world is watching China… with concern


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