Changing Order

Indian economy to surpass Japan, BRI birthday overshadowed by Xi-Putin meet, China reaching a preliminary agreement with Sri Lanka surprises global creditors and sets stage for IMF lending.

Oct 25, 2023

UPDATE: India to also set to surpass Japan to become second largest economy in Asia by 2030, the S&P Global report added. India, currently the world's fifth-largest economy, is on track to surpass Japan and become the third-largest global economy, with a projected GDP of $7.3 trillion by 2030

China recently hosted the Third Belt and Road Forum for International Cooperation to mark 10 years of the Belt and Road Initiative (BRI). One of the most noteworthy aspects of the forum was a meeting on the sidelines between Chinese president Xi Jinping and Russian president Vladimir Putin.

India to become third-largest economy

India to also set to surpass Japan to become second largest economy in Asia by 2030, the S&P Global report added. India, currently the world's fifth-largest economy, is on track to surpass Japan and become the third-largest global economy, with a projected GDP of $7.3 trillion by 2030, as per the latest report from S&P Global Market Intelligence.

After experiencing two years of rapid economic growth in 2021 and 2022, the Indian economy has maintained strong growth throughout the 2023 calendar year, it added. India's gross domestic product (GDP) is expected to grow between 6.2 percent and 6.3 percent in the fiscal year ending in March 2024, making it the fastest-growing major economy in this fiscal year. Notably, India's economy surged by an impressive 7.8 percent in the April-June quarter.

Positive Near-Term Outlook

S&P Global highlights a positive near-term economic outlook, with continued rapid expansion for the remainder of 2023 and 2024, driven by robust domestic demand, PTI reported.

The influx of foreign direct investments (FDI) into India over the past decade reflects the country's favourable long-term growth prospects, bolstered by a youthful demographic profile and rising urban household incomes, it added.

The report forecasts that India's nominal GDP, measured in USD terms, will rise from $3.5 trillion in 2022 to $7.3 trillion by 2030. This rapid expansion will position India as the second-largest economy in the Asia-Pacific region, surpassing Japan. By 2022, India had already exceeded the GDP of the UK and France, and by 2030, it is expected to surpass Germany.

As of now, the United States remains the world's largest economy with a GDP of $25.5 trillion, representing a quarter of the world's GDP. China holds the second-largest spot with a GDP of approximately $18 trillion, nearly 17.9 percent of the world GDP. Japan follows as the third-largest economy with a GDP of $4.2 trillion, and Germany is fourth with a GDP of $4 trillion.

Long-Term Growth Drivers

S&P Global cites several key drivers supporting India's long-term economic outlook. These include a rapidly growing middle class, which fuels consumer spending, a booming domestic consumer market, and substantial investments from multinational corporations in various sectors, including manufacturing, infrastructure, and services.

Further, India's ongoing digital transformation is set to accelerate the growth of e-commerce, reshaping the retail consumer market in the coming decade. This transformation has attracted global technology and e-commerce giants to invest in the Indian market, S&P report noted. The report projects that by 2030, 1.1 billion Indians will have internet access, more than doubling from the estimated 500 million internet users in 2020.

India's robust FDI inflows, observed over the past five years, continue to gain momentum, even during the pandemic years of 2020-2022. Investments from global technology multinationals (MNCs) and a surge in FDI inflows from manufacturing firms are contributing to this growth, it added

Future Outlook

India is anticipated to remain one of the world's fastest-growing economies over the next decade, making it a crucial long-term growth market for multinational companies across various industries, from manufacturing to services, including banking, insurance, asset management, healthcare, and information technology.

Washington’s view of Xi-Putin meeting and BRI Forum

From October 17–18, China hosted the Third Belt and Road Forum for International Cooperation to mark 10 years of the Belt and Road Initiative (BRI). While the forum itself was significant and warrants analyzing, one of the most noteworthy aspects of the forum was a meeting on the sidelines between Chinese president Xi Jinping and Russian president Vladimir Putin. This marks their first meeting since Xi’s trip to Moscow in March 2023, and it is Putin’s first trip to the People’s Republic of China (PRC) since Russia invaded Ukraine in February 2022. Together, the Xi-Putin meeting and the BRI forum provide valuable insights into China’s foreign policies.

What the Xi-Putin Meeting Reveals about China-Russia Relations

This latest meeting between Xi and Putin comes amid growing concerns among the United States and its allies about deepening strategic alignment between Beijing and Moscow. While China has not taken drastic steps to aid Russia’s war in Ukraine—such as providing Russia with lethal military aid—Beijing has gone to great lengths to prop up Russia diplomatically and economically. In September 2023, monthly trade between the two countries reached a record high of $21.2 billion, up nearly 60 percent from the same period two years earlier.

The readout of the Xi-Putin meeting was brief, but several aspects are worth noting. First, Xi doubled down on the importance of strengthening China-Russia relations. Xi stated that “developing the China-Russia comprehensive strategic partnership of coordination with ever-lasting good neighborliness and mutually beneficial cooperation is not an expediency, but a long-term commitment.” Xi’s emphasis on “long-term commitment” counters arguments that the China-Russia relationship is a marriage of convenience.

Notably, Xi did not use the term “new era” (新时代) when describing the China-Russia partnership, despite that phrase being officially stamped onto the moniker of the upgraded relationship in 2019. However, he did emphasize the need for both countries to grasp the trajectory of history, and Putin voiced his view that Xi was correct in his judgement that “the world is undergoing changes unseen in a century.”

Xi and Putin both mentioned that the two countries will mark 75 years of diplomatic relations in 2024 and advocated for advancing relations next year. A deepening or upgrading of China-Russia relations next year could strengthen Beijing’s position in a potentially difficult year. Beijing is worried about the larger geopolitical impacts of the two conflicts in Ukraine and the Middle East and is concerned that U.S.-China relations could deteriorate in 2024 because of dynamics associated with the U.S. and Taiwan presidential elections.

Second, Xi and Putin each offered support to the other for challenges they faced at home and abroad. Without directly addressing Russia’s war in Ukraine or the failed Wagner coup, the readout indicates Xi stated that “China supports [the] people of Russia in following their choice of path to national rejuvenation and in safeguarding sovereignty, security and development interests of the country.” Reciprocating PRC support for Russian rejuvenation, Putin reaffirmed Russia’s commitment to “one China” and Taiwan as part of China, and support for protecting China’s sovereignty and territorial integrity.

Finally, the readout shows that both leaders are committed to broader international cooperation. Xi discussed the recent historic expansion of the BRICS and expressed PRC support for Russia’s hosting of the BRICS leadership summit. He also made clear China’s desire to work with Russia within the United Nations, Shanghai Cooperation Organization (SCO), and G20 and to work together on food, energy, and supply chain security. Putin echoed Xi’s desire to cooperate within the BRICS and “other multilateral mechanisms,” but interestingly the readout did not indicate that he specifically spelled out cooperation in the United Nations, SCO, or G20. The two leaders also held an “in-depth exchange of views on the Palestinian-Israeli situation.”

In addition to the publicized bilateral meeting, which was attended by high-level officials on both sides, Putin revealed that he and Xi also had a private conversation over tea that lasted an “hour and a half, maybe two hours.” According to Putin, this private discussion was held at Xi’s suggestion, and the two had “very productive and informative” conversations on “very confidential” topics. Official Chinese media has not acknowledged this private session, and it is not included in the official readout of Xi and Putin’s meeting.

Unpacking the Belt and Road Forum

The Xi-Putin meeting took place on the sidelines of the third BRI forum. Launched in 2013, the BRI is Xi Jinping’s signature foreign policy initiative aimed at strengthening China’s connectivity with the world through hard and soft infrastructure development and people-to-people exchanges.

By some statistics, China could argue that the BRI has been a success. As of October 2023, 151 countries have signed onto the BRI. Together, those countries—which are overwhelmingly developing countries—have a combined population of some 5.1 billion people and a collective GDP of roughly $41 trillion. The willingness of these countries to join the BRI has been a source of pride and legitimacy for China on the world stage.

Yet the BRI has faced significant hurdles. The Covid-19 pandemic and China’s ongoing economic slowdown at home have had a dampening effect. In 2022, the combined value of Chinese overseas investment and construction projects in BRI countries was down over 44 percent from their high in 2018.

Sri Lanka Gets Closer to IMF Funds After China Support

By Maya Majueran

Last week, International Monetary Fund (IMF) staff and the Sri Lankan authorities have reached a staff-level agreement on economic policies to conclude the first review of the 48-month Extended Fund Facility (EFF)-supported programme. Sri Lanka will have access to Special Drawing Right (SDR) 254 million (about $330 million) in financing once the review is approved by IMF Management and IMF Executive Board.

This agreement comes against the backdrop of China’s calculated move similar to a chessboard strategy by reaching a preliminary agreement with Sri Lanka on Chinese debt restructure in late September. On October 11, the Government of Sri Lanka confirmed that it had completed its debt restructuring negotiations with the Export-Import Bank of China (EXIM), as an official creditor covering about $4.2 billion of outstanding debt.

Commercial debt, multilateral or multilateral development bank (MDB) claims and bilateral debt are all playing major roles in Sri Lankan debt, where bilateral debt accounts for 31 percent, MDBs 27 percent and commercial (majority ISBs) 42 percent. And more than 80 percent of Sri Lanka’s foreign debt is owned by Western financial institutions, Japan, and India. China held about 10 percent of Sri Lanka’s external debt as of the end of last year.

Even though numerous Western political leaders and media outlets blame China for Sri Lanka’s debt, academic research provides that it was not Chinese debt alone that entrapped Sri Lanka in debt and has discredited the so-called ‘Chinese debt trap’ argument.

Nevertheless, in order to meet IMF conditions, Sri Lanka started negotiating last September with its bondholders and key bilateral creditors – including China, Japan and India to move forward on a $2.9 billion IMF bailout. Japan, India and France have announced a common platform for talks among bilateral creditors to coordinate the restructuring of Sri Lanka’s debt.

However, China pursued a separate bilateral talk. China is not a Paris Club member, and therefore there is no mandatory requirement to follow Paris Club-like policies. The financial framework with Paris Club creditors and the framework with China is very different. China assured Sri Lanka repeatedly that it would help Sri Lanka in its own way to overcome its current economic crisis by bringing in investments to support an economic boost. And China’s investment in Sri Lanka under the Belt and Road Initiative (BRI) has effectively promoted economic and social development in Sri Lanka.

The group of major creditors, including the United States, France, Japan and India are promised to sign a memorandum of understanding (MoU) with Sri Lanka during the International Monetary Fund and World Bank meetings held in Marrakesh, Morocco on October 12-13. However, they failed to do so, and were planning to blame China for the delay in restructuring Sri Lanka’s debt and pressure China to get on board.

However, China has taken the front seat in Sri Lanka’s external debt restructuring process by entering a preliminary debt deal with the Sri Lankan authorities. China also has provided a financing support document to Sri Lanka in a timely manner and helped Sri Lanka obtain loans from the IMF in March 2023.

China also affirmed that China would continue to support its financial institutions in conducting friendly consultation with Sri Lanka to reach early agreement on the treatment of debts related to China in a joint Statement during the Sri Lankan President Ranil Wickremesinghe’s visit to attend the third Belt and Road Forum for International Cooperation in China from October 16 to 20, 2023 at the invitation of Chinese President Xi Jinping.

China reaching a preliminary agreement with Sri Lanka, before the group of major creditors signing a MoU has taken the country’s other foreign creditors entirely by surprise and has brought shame upon the U.S., India and Japan who were blaming China for no reason. The U.S. and other Western countries should end the blame game and take more responsibility to pressure Western private lenders to ease loan repayment requirements for low-income countries to tackle their debt crisis. China calls on multilateral institutions and commercial creditors to participate jointly in Sri Lanka’s debt restructuring and share responsibilities fairly.

China has also shown its traditional friendship with Sri Lanka by reaching this agreement before President Ranil Wickremesinghe’s visit to China. Sri Lanka commended China for its support to Sri Lanka to ease financial difficulties. The long-standing friendly exchanges between the two countries have shown that they have always adhered to the principles of mutual respect, mutual understanding, mutual trust and mutual support.

There is a growing realization that the IMF has benefited rich countries instead of poor ones. Despite being founded by more than 40 countries, the fundamental principles of the IMF and the World Bank have promoted the interests and ideology of the U.S. and a few other Western European countries by imposing strict and additional conditions on providing assistance for other countries. The IMF and World Bank’s leadership is limited by the powerful nations that control them.

Therefore, the Global South demands change that the voting power share reflects the sizes of their economies. Otherwise, the Asian Infrastructure Investment Bank (AIIB) and The New Development Bank (NDB) will take the lead in supporting the Global South.

That’s the reason the head of the IMF Kristalina Georgieva has recently backed reforms that could eventually give China and other emerging countries more voting power within the fund, warning of ‘devastation’ if the institution remains without adequate financial resources to aid struggling countries. Kristalina also called for the IMF to better represent changes in the global economy over the past decade, which include the rise of China.

Long Mekong

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