In 1988, China and India’s economies were relatively close in terms of economic output. China’s economy now is five times bigger, and China’s defense budget is three times larger than India’s. India has a lot of catching up to do, even if it could manage to maintain for some time the current 7.2 percent growth rate.
India’s fiscal policy looks a bit stretched with a consolidated public sector budget deficit of about 6 percent of GDP, and the gross public debt of 69 percent of GDP. The same is true of the monetary policy, where the real short-term interest rate of 1.7 percent is too low for this phase of the business cycle.
India’s merchandise trade deficit shot up 8 percent. During all of last year, the deficit on goods and services trade (the current account) more than tripled.
China, India’s largest trade partner, can definitely help with all that by buying more from India to cut down last year’s trade surplus of $51.7 billion, which was an increase of 8.5 percent from 2016.
China is doing some of that. India’s exports to China last year increased 39.1 percent to $16.3 billion. But there is still a long way to go because China takes only about 4 percent of India’s exports, while, incredibly, the European Union remains Delhi’s main export market, absorbing nearly 20 percent of Indian sales abroad.
India says it is getting only 1 percent of some 150 million Chinese traveling overseas.
India may wish to join China’s Belt and Road infrastructure projects. India wants to build 35,000 kilometers of highways and rail lines over the next five years. China can recycle that money back to India to build modern infrastructure that would set the foundation for India’s sustainable, faster and balanced growth.