Two Nations: One Fast and One Slow - What is the Driving Factor?

On a recent trip to London, UK, a friend of mine who is an Investment Banker stated that even though the Chinese economy is slowing down, the tapered growth is still quite meaningful to the entire world. His argument – at present, Chinese economy is so large that even if the growth were to slow down to 6 or 7%, it would still create a lot of demand worldwide. A few friends argued with him but, I believe those arguments were prompted more by Guinness than facts. On the way to my hotel, the discussions at the dinner table prompted me to analyze the growth of the Chinese economy and compare it with that of the Indian economy. As soon as I was back in my hotel room, I downloaded economic data from the World Bank database and started analyzing.

As I delved deeper into my analysis, a few things popped up that are worth mentioning. Firstly, in between 1991 and 2014, the Chinese economy has grown at an average rate of 10.1% as compared to 6.6% for the Indian economy. Also, in this span of 24 years, there have been 10 years when the GDP growth rate in China has exceeded 10% (see Chart A below). By contrast, in India, the GDP growth rate has exceeded 10% only once - in 2010. It is important to point out that in China the growth rates in excess of 10% have been in consecutive years – from 1992 to 1995 and from 2003 to 2007. Obviously, by all standards, this is a remarkable performance. 

Chart A: China & India - GDP Growth Rates (1991-2014), Data Source: World Bank

In addition, the GDP growth rates in China have been more predictable as compared to India. It is easy to prove this assertion solely on the basis of historical data. If we were to plot the current year’s GDP growth rate against the prior year’s GDP growth rates, we can see that in the case of China, the R-Squared is 0.37 whereas, for India the R-Squared is 0.05 (see Chart B). In statistical terms, the higher the R-Squared, the higher the predictability from one year to the next. Obviously, in the case of China, a higher R-squared means that the GDP growth rates in consecutive years are similar and not as volatile as is the case with India.

Chart B: Relationship between Current and Prior Year's GDP Growth Rates in China & India, Data Source: World Bank

The effect of predictably high GDP growth rates has been that the Chinese economy has grown much faster than the Indian economy during the period 1991 to 2014. In 1991 the size of the Chinese economy was 1.63 times the Indian economy. In 2014, the Chinese economy is 3.3 times the Indian economy (see Chart C). Now here comes the interesting part – if the GDP growth rate in India accelerates to 10% per annum whereas that in China it slows down to 5% per annum, the Chinese economy will still be twice the size of the Indian economy 10 years later in 2025.

Chart C: China & India - GDP in Constant 2005 US Dollars (1991-2014), Data Source: World Bank

When talking of growth, it is important to look at the effect of Foreign Direct Investments in China and India. It’s a well-known fact that the policies of economic liberalization in both these countries have helped attract foreign capital which consequently has fueled growth. The question is – on a comparative basis, what is the quantum of FDI that these two countries have attracted. Well, the level of FDI in India pales as compared to that in China (see Chart D). Since 1995, there have been several years when the FDI in China has been ten times or more than that in India.

 Chart D: China & India - Foreign Direct Investment (1991-2013), Data Source: World Bank

 

We have looked at the GDP and GDP growth rates in the two countries as well as the levels of FDI since 1991. What needs to be statistically analyzed next is the relative impact of FDI on GDP growth. I tried to study the relationship between increase in GDP in a given year (in other words the growth in GDP) versus the FDI in previous year. The underlying assumption is that once the investments are made, it takes at least a year for its impact on production of goods and services. Also, in order to account for the difference in scale between GDP and FDI, I used the log-log scale, i.e. both the x and y axes were transformed to log scale. As you can see in Chart E, the relationship between increase in GDP in a given year and FDI in previous year is quite strong for both countries as evidenced by high R-squared values. Nonetheless, for China, the relationship is stronger. Also, in the case of China, the slope of the line defining this relationship is steeper as compared to India. This implies that for every unit of FDI invested in China, the impact on GDP is higher when compared to India. One could draw a corollary that this also means that for every unit of FDI in China, the revenue output is higher than in India. This conclusion is quite significant because it easily explains why between the two countries China is a natural destination for FDI.

Chart E: Relationship between FDI and GDP in China and India, Data Source: World Bank

At last, the million dollar question is whether we can prove statistically that the difference in GDP growth between China and India is influenced by the difference in FDI. I took the difference in FDI between China and India in the prior year on the x-axis. The y-axis, represents the difference between China and India in the increase in GDP in the current year as compared to the prior year (see the formula for the Y-axis in Chart F below). As shown in Chart F, the scatterplot shows an upward trend. Also, a polynomial of second degree fits the data quite well with an R-squared of 0.77. In other words, we have proven that the increased GDP growth in China as compared to India is fueled by increased FDI inflows. The moral of the story – FDI is the fuel for growth in both these countries and the more you can attract FDI, the better it is for the economies.

Chart F: Relationship showing increased amount of FDI fueling increased GDP growth

 

India versus South Africa: It will be one cracker of a game

Tomorrow, in the ICC World Cup, India will play South Africa in Melbourne. After India’s performance against Pakistan a week ago, we are expecting that the men in blue will continue to maintain their momentum. However, South Africa is a markedly different opponent than Pakistan and if India were to win this one, they have to fire on all cylinders.

India has played South Africa in the World Cup thrice before - in 1992, 1999 and 2011 and, they have never won against the Proteas. In 1992, at the Adelaide Oval, the match was curtailed to 30 overs each because of rain. Azharuddin scored 79 and Kapil Dev supported him with a quick fire 42 off 29 balls to help India post a respectable score of 180. But the Proteas’ opening pair of Andrew Hudson and Peter Kirsten built a strong partnership and took the game away from India. South Africa won that game by 4 wickets with 5 balls to spare. In 1999, India played South Africa during the English summer in Brighton, a relatively smaller venue. In that game, Ganguly anchored the innings with a patient 97. He was run out to a throw from Jhonty Rhodes, probably one of the best fielders in the history of cricket. India managed to score 253 and Srinath got two early wickets – both the openers Herschelle Gibbs and Gary Kirsten were sent back in the 7th over for 22 runs. However, Jacques Kallis stood tall on that day, scored a marvelous 96 off 128 balls and took the game away from India. South Africa won by 4 wickets and 2 overs and 4 balls to spare. I still have bad feelings about India losing to South Africa in 2011. In that game in Nagpur, the openers Sehwag and Tendulkar game India a dream start – India were 142 in 17.4 overs when Sehwag was bowled by Faf du Plessis. Tendulkar scored a century (in Cricketing terms a Nelson i.e., 111) in that game and built a strong foundation with Gambhir after Sehwag’s departure. But, India lost 9 wickets in a span of 9 overs and were restricted to 296. In contrast South Africa started slowly but, eventually accelerated towards the end with some powerful hitting from JP Duminy, Johan Botha and Robin Peterson and, won by 3 wickets with 2 balls to spare. I remember being extremely upset after that game because after such a wonderful performance of the Indian opening pair, it hurts to lose a game because of such a colossal collapse of the middle order.

If we were to analyze the batting and bowling performance of Indians and the Proteas in the three World Cup fixtures in 1992, 1999 and 2011 by taking the historical performance of the respective players based on all the games played up to the meet, we can clearly say that in 1992 and 1999, South Africa had a distinct advantage. In 2011, the Statistical advantages were split – India had the advantage in bowling whereas South Africa excelled in batting (see chart A below).

Chart A: Comparative advantage of India and South Africa in previous World Cup encounters

The story of 2015 is that India has a small advantage in batting but, South Africa has a significant advantage over India in bowling. The economy rate of the Proteas is half a run better per over which means that in a 50 over game, they have an advantage of about 25 runs. Also, South Africa has a far better strike rate than India – on an average they take 6 less balls to take a wicket compared to the Indians.

I also compared the individual performances of the batsmen from the two teams (see Chart B below). It is pretty obvious that AB de Villiers, Hashim Amla and David Miller are the danger men. de Villiers has a strike rate close to 100 and an average of 52 runs per game. Hashim Amla has the highest average amongst all the batsmen from both the teams and similarly, David Miller has the highest strike rate amongst them all. India has to restrict at least 2 of these 3 if they were to give themselves a decent chance to win.

Chart B: Comparative Stats of Indian and South African Batsmen

The analysis of bowling figures for the two teams is in line with what we already know. The quartet of Dale Steyn, Morne Morkel, Vernon Philander and Imran Tahir are the best amongst the bowlers from both the countries (see Chart C below).

Chart C: Comparative Stats of Indian and South African Bowlers

As I have said above, the key to winning this game is that India has to fire on all cylinders which implies a solid opening partnership followed by middle order consolidation, restrict at least 2 out of 3 amongst the trio of de Villiers, Amla and Miller, maintain the line and length in bowling and refrain from giving too many loose deliveries. India has won against South Africa in recent times. In Champion’s Trophy in England, India beat South Africa by 26 runs. Shikahr Dhawan scored 114 and together with Rohit Sharma, the opening pair put up 127 runs. A late innings cameo from Ravindra Jadeja (47 off 29 balls) helped India post a score of 331 runs. Even though de Villiers scored 70, Amla was restricted to 22 runs and David Miller was out for a duck. India's batting and bowling performance in that game is exactly in line with my analysis here and, the result was in India’s favor.

I am forecasting one cracker of a contest and I believe India can win against South Africa just like it did at Sophia Garders, Cardiff during Champion’s Trophy in 2013.

Best of Luck Men in Blue!