India vs China: How will these economies pan out?

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It was a data heavy week for the global economy. India's GDP growth came in stronger than expected for FY10. Chinese manufacturing was weaker than expected for May and dragged down Chinese markets.

India's GDP grew at a faster than expected 8.6% in the Jan-March quarter. China's had grown even faster at 11.9%. However, this week's data showed Chinese manufacturing on the purchasing managers index (PMI) slowed down in May. Chinese authorities have been furiously targeting the bubbles in its property market thereby dragging the equity markets into bear territory.

In an interview with CNBC-TV18, Morgan Stanley Economists Qing Wang who tracks China and Chetan Ahya who tracks India, spoke about how they see these two economies pan out.

Here's an excerpt of the conversation:

Wang: The PMI is indicating sequential growth momentum. Our GDP growth for Q1, we do believe that the Chinese economy is slowing on sequential terms. May PMI is little bit exaggerating the downside risk because the typical similar patterns suggest that there will tend to be a small decline of PMI in May. No doubt the Chinese economy momentum is weakening, but overall growth is still strong.

Q: 11.9% in the Q1, what is your estimate for 2010 on an average?

Wang: For 2010, we expect 11% growth basically reflecting normalisation policy. At the same time, we expect that a global growth momentum will be recovering, but remain tepid. That's the key assumption, which helped contain inflationary pressure in China. We kind of envisage a goldilocks scenario for China in 2010 that is relatively strong growth, but inflation remains quite benign.

Q: Do you think it is a goldilocks year for India as well? The GDP numbers that came this week have been slightly better than expected for FY10. Inflation appears to be coming down. The first signs of monsoon have already hit the country. Would you say it is a goldilocks year for India FY11?

Ahya: No really. China is different, it had been continuing with big amount of investments in recession period of 2009. So they do not really have a capacity utilization tightness at all. Whatever inflation pressure you were seeing in China is large just because of the housing cost and that is due to the property. So India is different. India is seeing inflation pressures across the board. It is not just food it is non-food as well and within non-food as well if you break it up into housing cost and other areas you see that there seems to be a generalized inflation building up here.

This is because we did not invest in the 18 months proceeding to date and that is because of the impact of credit crisis on funding in India. So I think India is different. India is seeing strong growth and inflation, whereas China is seeing strong growth and low inflation.