Fixed investments & Gross Domestic Product Growth in China and

India compared to U.S

India and China are engaged in separate but parallel struggles with inflation. Both have responded

by monetary tightening. Such tightening affects inflation via its effect on demand and its interrelation

with the supply side of the economy.

Analysis of macro-economic parameters clearly confirms other forms of study that both the Chinese

and Indian economies are up against or approaching inflationary capacity constraints. Therefore, for

example, China is facing an overall problem of 'overcapacity' is the reverse of the truth China is facing

an overall problem of constraints on capacity which has inflationary consequences.

India's domestic savings level combined with a policy of accepting a moderate, up to 3% of GDP,

balance of payments deficit makes it credible for India to aim at a double digit, or close to double digit,

economically sustainable growth rate.

Historical examination shows that both China and India have among the most efficient sustained

uses of investment in generating growth in post World War II history far better than United States. China

and Indias economies grow so rapidly due to the very high investment rates, those being used very

efficiently.

This graph shows fixed investments in China and India and Gross Domestic Product growth between

1970 and 2005 compared to the US.

The blue graph above illustrates the changes in fixed investments in India correlated with GDP

growth. Starting in 1970 at 2,5 % it experienced a sharp rise up to 4,7 % by the end of 1973. What

followed was a phase of constant rising and in 1975 fixed investments stood at its peak at 7,3 %.

However due to global economic slowdown the last phase was followed by a downward trend and

reached a low of 2 % in 1978. Since the economy was characterized by a shrinking GDP the government

decided to take serious measures and the GDP growth accelerated in the next 3 years and rise to 6 % in

1981. From 1981 to 1984 it was a fluctuation period followed again by a downward trend from 5.4 %

down to 3 % at the beginning of 1985. In the following years fixed investments correlated with 1 % of

GDP remained consant and after 1990 it rose slightly to 4.2 % in 1996. The period between 1997 and

2005 was characterized by a slow growth to 4.5 % followed by a leveling out of 4 % by the end of 2007.

The red graph shows fixed investments in China correlated with GDP growth and as you can see in

1973 it was 3% and started to grow slightly to 3.8% in 1976. This percentage climbed dramatically in the

next year, reached the peak at 6.5 % lower than India which took similar measures in support of GDP

growth. In the next period fixed invetments in China fell sharply to 4.2 % in 1980 and continued the

downward trend reaching a low of 2.8 % by the end of 1987. For the next three years fixed investments

in GDP began to increase again and climbed slowly, so at the end of 1991 it was nearly 4%. In the

following years it was a period of fluctuations and from 1999 to 2005 GDP investments remained

constant at roughly 4%. Due to forecasts the investments will come to a moderate level of 3.8 % in the

next three years and level off in 2007 at 3.6 %.

To take an international comparison, at the end of the 1970s China, India and US each had to invest

about 6% of GDP to generate 1% of GDP growth. However after this efficiency of investment, from the

point of view of generating GDP growth, greatly improved in both China and India and it deteriorates in

the US. From 1970 to 1980 Fixed investments in the US as the graph shows fluctuated between 6 to 7 %

but in the next 2 years grew sharply to a double value of about 14 % which represent the peak of fixed

investments correlated to 1 % of GDP growth in US for the studied period. What followed was a phase of

downward trend and US investments reached a low of 4.3 % by the end of 1987. In the following year

investment rate began to increase again and reached 8 % until 1993. This rate dropped in 1996 to 5.2 %

and remain constant for the next 5 years. As the U.S has not suffered any intolerable macro-economic

imbalances it may be assumed that 5.2 % of GDP devoted to investment to generate 1 % GDP growth is

consistent with sustainable macro-economic stability. Since 2001 investments growth accelerated from

5.2% to 8% in 2005 and level off in 2007 at 7.2%