McKinsey rates India ahead of China

How many times have you dismissed the government’s growth analysis as window dressing? It’s time you stopped. India’s reputation in the BRIC-and-mortar world is now earning it more brownie points from overseas analysts than official number crunchers back home.

Sounds unbelievable? Well, here’s the lowdown: In its recent report on a comparison of Indian and Chinese financial systems, the McKinsey Quarterly has trotted out some pretty impressive growth stats for India.

Entitled “India’s Lagging Financial System”, the report makes a point-by-point comparison of the two “emerging economic giants”. But the real surprise lies in the fine print. According to the report, India’s GDP growth in the ‘93-03 period at 8.4% is higher than China’s 8.1% — the only parameter where the Indian economy scores over China.

This is quite in contrast to the more plebeian numbers the government’s own Central Statistical Organisation (CSO) dishes out annually. According to the CSO, the decadal growth of the Indian economy is less than 6%.

Finance minister P Chidambaram has gone on record to say that the key difference between India and China is that both have reached a similar high growth phase. But while China has held on to it, the Indian GDP growth rate has oscillated widely.

In Budget ‘05-06, he said, “At the recent meeting of the finance ministers of the G-7 countries, to which India and China were invited, the finance minister of China looked in my direction and told the gathering that China had received $500bn worth of foreign investment since it opened its economy in 1980. Of this, nearly $60bn came in calendar ’04.”

The McKinsey report is, however, less euphoric about the India story in other respects. “As powerful as the progress of both countries has been, China’s industrial development is clearly outstripping that of its neighbour, not only because of China’s headstart in economic liberalisation but also because of a commonly overlooked factor: India’s financial system,” it says.

The report says that even after discounting the huge NPAs of the Chinese banking system, its financial stock was more than $4 trillion in ’03, nearly four times the size of India’s stock. It is this difference and the lower domestic savings ratio and FDI inflow, due to which “India has been less able to finance investment and accumulate physical capital” (including infrastructure).