I thought India was better than Vietnam!

When I first started to look at the economy of Vietnam I thought it is a pretty small economy that is overly reliant on exports and investment and has struggled to maintain its macroeconomic stability off late.

I was also pessimistic about the economy on account of the heavy state involvement in production as well as banking. More than 80% of banking is state controlled and the state owned enterprises (SOEs) contribute to about 35% of the economy. There is heavy channelling of bank lending to state enterprises and that leads to inefficiencies.

Such a scenario in Vietnam made me think that our India is doing quite well. We are a democracy and private markets here are not interfered with. Well all this remains the truth but when compared to Vietnam, I now realise, we are certainly not doing better.

The reforms for the two countries started around the same time (1986 for Vietnam and 1990 for India) and Vietnam has managed to achieve a comparable per capita income already. Like India, Vietnam didn’t contract during the Global Financial Crisis and the growth rates for both countries are quite similar.

What came as a surprise to me is that government owned banks still control 75% of Indian banking system and 3% of their loans are bad. Most of these bad loans are attributable to loans to government owned entities or projects like the Indian Airlines.

And that is not the only negative comparator; India also visited a similar macroeconomic instability recently as Vietnam with high inflation, high twin deficits, and low forex reserves.

Well, India certainly has a much bigger economy than Vietnam as of now but that is due to the enormity of its size. In terms of the economic fundamentals credit must certainly go to Vietnam for catching up so fast despite years of strife on account of the infamous Vietnam War.