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25th Anniversary series: 2006 – Scenarios for India and China 2015

April 22, 2015

While still commonly referred to as emerging markets, both China and India have long outgrown the term, particularly as a result of expansion over the last decade and a half. It is also common to group the two countries together when in fact their political, economic and social structures are quite different. To take just two of the more important examples, China is a one-party communist state with obscure and hard to analyze regulatory structures, while India is the world’s largest democracy with overt and recognizable regulation; secondly, China has an ageing population, while India follows the more common emerging markets model of rapid growth at the younger end of the demographic curve.

Economic growth in China and India has posed both opportunities and threats to established industries elsewhere. For the UK, the most important body on the competitive front line is the international financial services cluster based in the City of London. In 2006, The City of London Corporation commissioned SAMI and a research partner to undertake a project to produce scenarios for India and China in 2015, and to explore the implications of these scenarios for the City.

The project methodology was to produce specifically developed scenarios for India and China to 2015, which were then used as the basis of consultations across the City. Three scenarios were developed for each country: a baseline evolutionary scenario featuring the development of existing trends; a revolutionary scenario producing accelerated change; and a scenario of instability characterized by a series of difficult adjustments.

India:

Evolutionary – “The Elephant Lumbers Along”: economic liberalization continues while governance moves towards being more federal and subsidiary.

Revolutionary – “The Elephant Breaks its Chains”: economic liberalization accelerates alongside an increasingly centralised system of governance.

Instability – “The Elephant Retreats into the Woods”: economic liberalization is reversed, but governance still moves towards increased federalism – the effect on the economy is a sharp slowdown in growth.

China:

Evolutionary – “The Lion Leads the Dance”: State institutions prove effective and adaptable, and the outside world sees China as a source of wealth and opportunity.

Revolutionary – “The Crane Flies Against the Wind”: State institutions still prove effective and adaptable, but the outside world sees China as an economic threat.

Instability – “The Dragon Breathes Fire”: Governance fails to meet the challenge of growing complexity, while the outside world sees China as an unstable economic threat – the effect on the economy will be a long-term reduction in growth.

Scenario Highlights

  • All scenarios saw positive (albeit uneven) rates of growth, above those of the US and EU, for the next decade and a half.
  • Both countries were in the midst of major economic expansion that posed challenges to political and social structures.
  • India had too little capital and was heavily leveraged, while China’s high savings rate and positive trade balance provided abundant capital.
  • India had a more stable banking system, its Chinese equivalent being burdened by its links with inefficient State Owned Enterprises.
  • Multinational companies in both countries were moving up the value chain, with India benefitting from better developed financial services linkages.
  • The Chinese state no longer provided a comprehensive lifetime employment and social security system for its citizens. With most Chinese savings directed at life insurance, non-life insurance had difficulty in attracting capital.
  • The Indian insurance market was still protected by trade barriers, the reduction or removal of which would trigger a battle for market share.
  • Both countries were rapidly creating a well educated labour force with large numbers of graduates trained to internationally competitive levels.
  • India and China were both rich with investment opportunity, but also carried a substantial body of risk. The different risk profiles of the two countries stemmed from their different governmental systems, the policies they were likely to adopt, and the pace of change that they attempt.
  • India’s attractiveness as a business partner had been underestimated: she offered widespread English language skills, shared legal/commercial culture, democratic government, and a significant business community in the in the UK.
  • The main potential threat from the explosive growth of China was the disruption of world trade, starting with competition for raw materials and migrating to heightened international trade tensions.

The Scenarios in 2015

Both countries have migrated partially from their evolutionary to their revolutionary scenarios. India has benefitted from extensive liberalization across the industrial and utilities spectrum, and a gradual shift of powers from the states to the central government, which is now larger than the US Federal Government. “The Elephant Breaks its Chains” is clearly underway. China is a different case as the key scenario variable was not domestic but international. The Chinese economy is continuing to grow strongly, and Chinese companies are becoming more aggressive in overseas investment, particularly in Africa and ex-Soviet countries. We have not yet reached the stage where China is widely viewed as an economic threat, but the question as to whether we are heading towards “The Crane Flies Against the Wind” is less likely to be if than when.

The implications of Indian and Chinese growth for the UK generally and the City in particular are explored in the full research report published by the City of London: Scenarios for India and China 2015: Implications for the City of London, available on the City of London website.

Written by Malcolm Cooper.

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