How India and China are fuelling global growth

Emerging giants India and China are leading the global economy on a '32-62-72' growth path, Standard Chartered Bank's Chief Economist has said -- using the numeric phrase for evolving economic size of the world.

"Despite the crisis in the West, the world economy continues to grow, led by the likes of China and India. '32-62-72' is the phrase that I use to describe this," says Gerard Lyons, Chief Economist of the global banking giant.

Explaining the phrase, Lyons said that the world economy had grown from $32 trillion in 2000 to just under $62 trillion on the eve of the crisis and, in nominal terms, it is set to reach $72 trillion at the end of this year.

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"The shift in the balance of power continues to make the global economy bigger and, in doing so, provides markets for countries and firms in the West to sell into," Lyons has written in an internal publication of the bank, Standard Chartered Asia Focus.

While acknowledging the contribution of emerging countries like India and China in the global economic growth, he also noted that there was need to implement reforms and to move up the value curve in the developing economies.

"This period of global change is also an opportunity for countries to make structural changes, whether it be the need to address low productivity rates in a number of Western economies, or the need to implement reforms or move up the value-curve across the emerging world," he said.

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"This group (emerging world) is not immune to what happens elsewhere but is much better able to cope.

"Yet, in just looking at what has happened recently across economies as diverse as India, China, Brazil or Indonesia, it is clear that while the longer-term outlook is positive, there will be setbacks along the way.

"Sometimes these may be significant, other times they may be easier to manage. Thus the key is to focus on a combination of economic fundamentals, policy and confidence," he said.           

While Lyons did not mention any specific cases, concerns have been raised in the recent past about a slow pace of economic reforms in India, including in the areas of foreign investment rules and taxation.

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"In this global environment it is important not to lose sight of a number of key factors. One is that there are still considerable risks out there; hence the fear of a 'perfect storm' in 2013.

"Secondly, the economies in the West are still finding it hard to work off all the excesses of the past, and these challenges are not being helped in Europe by the slow and, at times, stubborn political process," Lyons said.

StanChart's Chief Economist said that the year 2012 has so far showed "a divided and disconnected world economy that faces major policy dilemmas".

"Europe is imploding, the UK is contracting, the US is stagnating and, while Asia is cooling, it at least has the policy tools to be able to rebound," he said.

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The growth rate of global economy fell to 3 per cent in 2011, from 4.2 per cent in 2010, and could further decline to 2.6 per cent in 2012.

". . .As we have seen in recent years, globalisation means no region of the world is completely immune to problems in the West," he said.

Noting that central banks have become the shock absorbers for the world economy, Lyons said: "This is particularly challenging for the emerging economies, as it is they who have to cope with the fallout from low rates in West.

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"Capital will flow towards their economies in search of higher yields and all this at a time when some of them now face homegrown problems.

"While the West is in a mild depression, emerging economies, having seen steady growth in recent years, are at a more advanced stage of the cycle which, in the past, may have led to trade or inflation problems.       

"That is why no-one should be surprised if there are setbacks across the emerging world, after all the business cycle does exist. The trend is up, but there will be setbacks along the way.

"That is the reality. But it is important not to confuse cyclical setbacks being seen in a number of emerging countries with positive longer-term structural features," he said.