Those two Asian giants are in the top five of world economies. They account for 35% of world population and for one-fourth of global economic demand and output.

Last year, China and India economies soared, respectively, at annual rates of 8.1% and 8.9%.

Estimates for this year call for more modest growth rates. Still, India is implausibly estimated to grow 7%, while China’s enforcement of its zero-Covid policy was taken as the main argument for a pessimistic growth outlook somewhere in the range of 4% to 5%.

Both countries will aim for maximum growth, but the actual strength and scope of their demand management policies will depend on the internal and external balance of their economies. Those are also called economic fundamentals.

Starting with China, one can easily observe that the country has plenty of room to safely support its aggregate demand and employment creation in the coming months.

China’s 5% growth target is within reach

With an inflation rate of 2%, China can continue to use an accommodative monetary policy as the main instrument of economic stimulation. The key shot-term interest rate of 2.1% and ample liquidity provisions are exactly what is needed at this stage of the business cycle. Apart from that, specially targeted credit measures are also helping the real estate sector, small- and medium-sized companies and people severely impacted by sanitary problems.

The fiscal policy has less room to rev up economic activity. The consolidated public sector balance sheet shows a substantial deficit (6.5% of GDP), but a much smaller central government budget gap of 2.8% of GDP should offer some space for larger infrastructure investments to make possible an increasing demand and output.

Net exports will also help toward a more robust growth. In the first five months of this year, exports rose 11.4% from the year earlier and generated a trade surplus of $274.2 billion. The ten countries of the Association of Southeast Asian Nations (ASEAN) took the top spot and accounted for 15% of China’s foreign trade, followed by the U.S. and the E.U.

As a result, net exports could contribute 2 percentage points to this year’s GDP growth. Foreign trade and infrastructure investments will be China’s key growth drivers.

India is a very different story.  

Inflation shot up to an 8-year high of 7.8% in April on soaring energy and food prices. India’s 75% reliance on imported energy means that inflation is set to worsen considerably in the months ahead.

That will be a serious blow to the real purchasing power and a strong depressant to household consumption that accounts for 60% of India’s GDP.           

On top of that, credit costs will keep rising. The monetary policy must tighten because the consumer price inflation has exceeded the central bank’s “upper tolerance limit” of 6% for the fourth consecutive month. The key policy rate was raised 40 basis points in early May to 4.4%. That, however, is just the beginning because, adjusted for inflation, the central bank’s repurchase rate is a negative 3.4%.

India must lift its structural barriers to steady growth

On the fiscal side, there is no room at all for tax cuts or higher government spending to support household consumption and business investments. The budget deficit is 8.3% of GDP, and the public debt is more than 80% of GDP.

India’s trade accounts are also in bad shape. The current account deficit of 2.2% of GDP means that net exports are a drag on economic growth. In fact, the trade deficit is expected to shave off about 2 percentage points of this year’s GDP growth.

All that shows that India is facing structurally binding economic growth constraints. Domestic savings are spent to cover public sector’s debts and deficits, while imports of foreign savings equivalent to more than 2% of GDP are necessary to make ends meet.

But India’s nonaligned global status is a huge advantage. When asked last week at an international security forum in Europe how can India keep sitting on the fence, the country’s External Affairs Minister Subrahmanyam Jaishankar shot back: ”I am sitting on my ground.”

As a result of its independent foreign policy, India is not threatened by trade sanctions or other economic limitations. China and the U.S. are India’s largest trade partners.

By contrast, China’s booming foreign trade with the U.S. and the E.U. – $657.5 billion and €695.4 billion, respectively, in 2021 – could be a casualty of an increasingly hostile “strategic competition” the trans-Atlantic community is waging against Russia and China.

One can explain that glaring paradox of strategic hostility and booming trade in the case of the U.S. by the fact that, having virtually destroyed its manufacturing sector, America depends on China for a broad range of vitally needed consumer and industrial products, some of which are also supplied by American production facilities operating in China.

That’s not the case of America’s European allies. Brushing aside Washington’s concerns, they are eager participants in China trades and investments.

The bottom line is this: China will forge ahead as an increasingly powerful economic and strategic player, while India needs to lift structural barriers to its steady and sustained economic growth.