Can the economy of a large country grow by 24% per year? The answer: no – not if it’s a normal country. But China is not a normal country, so in the five years between 2006 and 2011, its GDP grew at an astonishing average of 24% per year.

In 2006, China’s GDP was $ 2.75 trillion. By 2011, it had miraculously nearly tripled to $ 7.5 trillion in five years. Do the math backwards: this equates to an average nominal GDP growth rate (real plus inflation) of just over 24% per year.

This was the starting point of the Chinese economy. It has grown from the world’s fourth-largest economy behind the United States, Japan and Germany to the second in five years. In 2006, the GDP of the United States was 13.81 trillion dollars, or five times that of China. In 2011, US GDP reached $ 15.5 trillion, double that of China. Thus, between 2006 and 2011, China’s economy grew from one-fifth ($ 2.75 trillion) that of America to half ($ 7.55 trillion) that of America. .

The reason for this modern take on Mao Zedong’s Great Leap Forward is elusive. China had never grown for five consecutive years at an average of 24% per year before 2006 and has not seen growth since 2011. An average annual growth rate of a more normal rate of 7.5 percent . It therefore took 10 years for China to double its GDP between 2011 and 2021 against only five years to almost triple its GDP between 2006 and 2011.

Look for clues to explain this anomaly in the yuan-dollar rate. In 2021, it averaged 6.46 yuan to the dollar. The exchange rate ten years ago in 2011, remarkably, was exactly the same: 6.46 yuan to the dollar. Over the decade, the rate has fluctuated very little.

But let’s go back to 2005-06. The yuan-dollar rate was over 8.1 yuan to the dollar. Thus, between 2006 and 2011, the Chinese currency strengthened against the US dollar by up to 25 percent.

Since GDP is measured in US dollars, the appreciation of the yuan has helped push the Chinese economy up by at least 25%. If the yuan had remained stable over the period 2006-11, China’s GDP in 2011 would have been closer to $ 6 trillion instead of $ 7.55 billion. This would have reduced the average annual growth rate of the Chinese economy in 2006-11 from a miraculous 24 percent to a more credible 14 percent. Without falsification, the annual growth figure would have been even lower.

In contrast, the Indian rupee has weakened considerably over the same period. In 2011, the exchange rate was Rs. 45 to one dollar. In 2021, it is Rs. 75. If, like the yuan, the rupee had remained stable in 2011-21 at 45 per dollar, India’s GDP in 2021, measured in dollars, would already be 5,000 billion. of dollars.

India has an ecosystem that is constantly looking for a weak rupee. The export lobby is for obvious reasons a strong supporter of a weak rupee. India’s merchandise trade deficit and an inflation differential with the United States explain why the rupee has historically depreciated at an average of three to five percent per year.

Exports, despite a steadily declining rupee over the past decade, have only increased this year, believing the argument that a low rupee is essential for export growth. Equally important are the quality of the goods, the cost of logistics and the shipping time. India needs to improve them instead of just focusing on a weak rupee to boost exports.

According to V. Anantha Nageshwaran, professor of economics at the University of Krea, “Of all the economic fundamentals that influence exchange rates, the only persistent factor is the inflation differential. In other words, the relative purchasing power parity (PPP) is valid in the long run. Almost a decade ago, in their annual Investment Returns Yearbook for Credit Suisse, financial historians Dilroy, Marsh and Staunton noted that the pound had depreciated by about 1% on average per year between 1904 and 2004. The annual inflation differential between the UK and the US was also around 1 percent. Thus, assuming that inflation differentials will better explain the dollar-rupee exchange rate over a 5-year horizon is not an unrealistic assumption.

“But even the US Federal Reserve concedes that America’s high inflation rate, which was seen as transient, is now seen as more permanent. The rate of consumer price inflation has been stubbornly at or above 5 percent in the past five months. So, for any USD-INR forecast, the higher inflation rates in India relative to the United States that have been the default factor for the past decades can no longer form the basis (for depreciation).

A more accurate comparison between large economies is to look at GDP as measured by purchasing power parity (PPP). When savings are quantified at current exchange rates linked to the US dollar, the local value of goods and services in low-cost developing countries is distorted. PPP calculations equalize these cost differentials. They also give a correct idea of ​​relative living standards, taking into account costs and wages.

In PPP, the GDP of China and India in 2021-2022 are estimated respectively at 26,000 and 11,000 billion dollars. This 2.5x GDP gap is well below the 5x differential suggested by comparisons using nominal GDP based on current exchange rates.

Likewise, if according to current exchange rate calculations China’s per capita income of $ 10,000 is five times that of India ($ 2,000), the per capita income gap based on on the PPP between the two countries is much lower. According to the latest estimates from the International Monetary Fund (IMF), China’s per capita income in PPP in 2020 was $ 16,216. India’s per capita income was $ 6,172. This gap therefore more realistically reflects living standards in the two economies. The IMF’s calculation reduces the per capita income gap between China and India from 5x to 2.5x.

As India enters a decade of strong economic growth and China’s economy slows to 4.5% per year, the per capita income gap is expected to narrow further. To achieve constant annual real GDP growth (excluding inflation) above 7%, India needs to pursue vigorous structural reforms. This should be the top priority of the Narendra Modi government in the second half of its second term.