India Unseats China as the World’s Fastest Growing Economy—for Now

William T. Wilson / February 20, 2015

It was not supposed to happen this fast. Earlier this week India’s Central Statistics Office (CSO) released figures showing economic growth of 7.5 percent year-on-year in the fourth quarter for 2014. This rate was a little faster than China’s year-end rate and is noteworthy since China has outgrown India in every year but one over the past quarter century.

Thanks to a new methodology in which the base year to calculate economic growth was updated to a more recent and accurate year to reflect changes in industry composition, gross domestic product growth for 2013–2014 was revised upward from 4.7 percent to 6.9 percent. While cynics point out that these revisions came out at a convenient time to boost Prime Minister Modi’s popularity, in truth, the new methodology is practiced in most developed countries and the new figures are closer to actual growth.

While other big emerging economies, like Russia and Brazil, are battling sluggish or recession conditions, India’s stock market has been surging, the current account deficit is finally shrinking and the rupee has stabilized.

India’s recent momentum is a function of a number of factors. Because it imports 80 percent of its oil, lower prices have been a boon. As a result, the cost of generous government subsidies has plunged, helping to reduce the nation’s budget deficit. Foreign investment rules have been relaxed for insurance companies and military contractors. Perhaps the most important development: The country is attracting more foreign direct investment. Late last year, Japan and China pledged $35 billion and $20 billion to India, respectively, over the next five years. Auto companies, like Chevrolet, are setting up production facilities under the expectation that India will have the third largest auto market by 2020.

Is the Indian tiger finally catching up with the Chinese dragon? There was the same level of enthusiasm last decade before growth slowed and corruption worsened. Banks are reluctant to lend to the corporate sector, which is riddled with heavy debt, and the Indian bureaucracy is still difficult to work with. The World Bank currently ranks India as the 142nd hardest place to do business, and The Heritage Foundation/Wall Street Journal’s 2015 Index of Economic Freedom ranks India 165th and 150th in business and trade freedoms, respectively.

So don’t count on it just yet. But India’s economic revival is a good sign. Keep an eye on this space.