Differences in Growth - Economies Feeding Each Other

Differences in Growth - Economies Feeding Each Other

By

Rahul Gosain
Student - PGP (2007-2009)
Specialization - Finance
Alliance Business School
Bangalore

Can countries like India become a threat for developed nations if they continue to sustain the current rate of growth? This is a question many have been trying to think about and an attempt to answer this makes one think about how interdependent economies feed each other.

With India growing at a steady pace of 8.025 % on an average for the last 4 years and looking promising for the next 15 years to come (BRIC Report), many have been asking the question of how detached will developing economies like India become from developed economies like the US. US for example has been growing at less than 2% per year. Its markets have been giving negative returns to investors. This is primarily because the economy has matured and has been trying hard to fight inflation for a while. Instances like the sub-prime mortgage crisis and the Fed constantly wrestling with interest rates, add to this. The question arises about the differences in extremes of growth between countries like India & US and for how long will this exist. Moreover, is this sustainable in the long run? Many experts say that this would eventually mean that we would see huge differences in similar markets in different countries in terms of pricing, partly because of the rate of growth and partly because of difference in approach to industrial reforms in different countries. But differences in extremes of growth don't necessarily lead to instability. This is because of macroeconomic factors acting both on the demand and the supply side in interdependent economies. This interdependence means that either country has dominance in some field or the other. The gap in growth will eventually be filled up by this interdependence and by the slowdown in the rate of growth of developing economies.

India for example, will slowdown to a growth of below 5% on an average by 2050(BRIC Report). India in the in 2007 recorded a growth of around 8.5% which was less than the targeted 9%+. As per the National Council of Applied Economic Research, India's GDP might fall below 8.3% for the current fiscal due to rising interest rates, poor external demand and capital inflows. Though the rate of acceleration might slowdown, the growth will continue on a mammoth scale. Software and BPO exports alone crossed $31 billion on January 23, 2007(Source: www.bpoindia.org/news/2007-01.shtml). The interdependence is inevitable and most visible in the outsourcing of IT enabled support services by the West to India. Factors like the spill over effect of the sub-prime mortgage crisis into Asia also show how interdependent economies in the modern world are.

How huge the gap in growth of developed and developing economies will be, is something only time will tell. The studies and reports on predictions about future growth are partly based on assumptions and trend analysis. In practicality we rarely see ceterus paribus, but one thing can be said for sure....even if a factor of instability occurs due to extremes in growth, it will be short lived because eventually economies need each other to survive.

References:

Killawala, A. (2008). RBI Q3 Review of Annual Statement on Monetary Policy 07-08. Retrieved January 29, 2008.

The Goldman Sachs Group (2003). The BRIC Report. Retrieved on December 3, 2006.

Gupta, S. (2008). Reuters. Retrieved on February 7, 2008.
Website: http://in.reuters.com/article/topNews/idINIndia-31809520080207

Rahul Gosain
Student - PGP (2007-2009)
Specialization - Finance
Alliance Business School
Bangalore

Source: E-mail February 7, 2008