China’s difficulties. Is it India’s opportunity?
There seems a misplaced notion prevalent in India, and it was much in evidence in the Prime Minister’s interaction with Indian industrialists on September 15. It is that China’s slowdown means an opportunity for India. Even the CEA Arvind Subramaniam, though somewhat circumspect, says: “Cheap oil will help our macro-economic indicators. The Chinese slowdown and massive excess capacity in sectors like steel will put pressure. But cost of building infrastructure has come down due to fall in commodity prices. This will boost infrastructure development. India will remain an attractive destination.”
But there is little evidence that his government is investing more in infrastructure. The capital expenditure to budget, and capital expenditure to GDP ratios are both still pointed south. To expect foreign capital to build India’s infrastructure is to be naïve. Foreign funds invariably come with a short term perspective, and as recent experience shows investment in India’s infrastructure is neither easy nor does it offer attractive returns.
The two economies are now in two entirely different stages of development. For a start China’s GDP is three and half times bigger than India’s. Their GDP is in excess of $7 trillion and India has just scaled $2 trillion. How China moves and acts in the future will affect the developed economies enormously as it has been the major provider of growth for the last two decades, and India’s growth had little bearing or derived little benefit from it.
They exist in different orbits of the world economy. A slowed down China now growing at 7% still adds $490 billion to global growth, while a speed-ed up India now growing at 7% adds a mere $140 billion. For India to pick up the Chinese slack, it needs to be posting a more frenetic 9-10% over the next decade or more. There is not even a glimmer of that now. Hope is a good thing but wishful thinking leads to serious consequences. We must be careful and realistic when we analyze our prospects and decide on our actions.
Although the Chinese economy does not compete directly with India’s, the effect the former imposes on the global economy is likely to influence the Indian economy. In this regard, whether a slowing Chinese economy will really create more opportunities for the Indian economy needs rethinking. If the global economy slows down further as part of the results of Chinese economic restructuring, it would be difficult to see why a sluggish world economy would help the Indian economy?
There are many factors that have hampered the Indian economy, and the most important reasons lie in exercising policy options and the level of domestic development rather than external environment or international factors. The Indian economy is in a more favorable demographic transition and how this will be translated into the kind of growth China experienced in the previous three decades depends on the sagacity, determination and vision of our leaders.
The success of the Indian economy in the years ahead depends on a number of crucial elements, and the most important ones are likely the leadership’s policy options and internal interactions. Seeing how major policies relating to a common and nationwide tax regime (GST), and land acquisition have been stymied do not present a very optimistic picture.
Lets therefore be clear about one important aspect -the present financial crisis in China does not affect its overall economic prospects one bit. Financial crises are inevitable, as greed and irrational expectations will always drive the market upwards till reality catches up and pulls it down.But when some people lose money others make money. So to judge China’s economic prospects by what happened to the stock market betrays an inability to separate issues pertaining to financial market behavior and the economic reality. Also to think that the housing bubble is a crisis that will not be surmounted would be unwise. Most of the unoccupied housing units in China, as is in India, have been paid for. Those who speculated in the property market will inevitably get hurt in the process, but the economy has already gained from the investment. Future investment in the Chinese real estate market will inevitably be slow. But that is also inevitable as population is aging and new housing demand will reduce.The real problems in China will get accentuated, as exports to the USA and EU will slowdown, as the USA in particular is determined to reduce its trade gap. Also low cost production is shifting to other low labor costs economies like Vietnam and Indonesia. China will naturally attempt to overcome this by stimulating domestic consumption and can even finance it by slowly reducing its foreign reserves, as Saudi Arabia and others are doing now.However much China may invest by running down its reserves, it will be irrational to expect near double-digit expansion when demographic trends are against it. The high growth period in China is petering off and that is the transition we must be wary off. Where will the world get its next growth engine? Demography favors India. But the Indian political discourse gives no inkling of any awareness of this or inclination to put immediate politics aside for a period to set course for the long term.
The transition from an export driven GDP to an internal consumption demand driven economy will be a daunting task. China’s exports are mostly low labor cost exports, and hence skill levels will be low. Internal consumption will demand goods of higher sophistication and the retraining of labor will be a problem.
As demands rise and domestic standards of living rise, people will expect more from the system. This will increasingly take the form of demanding more political and social freedoms as China becomes upper middle class dominated the challenge to the primacy of the Communist Party will be from upper middle class values. These values are universal. Thus growth, that is the increase of choice for the consumer in goods and services, will be increasingly accompanied by demands for more choice in immediate governance issues.
Obviously China’s interaction with the global economy and its size will only demand its greater participation in its organization. China also needs to invest more in other countries to create markets for itself. For instance if China invests in India, it will create a long and continued demand for Chinese goods. The current adverse trade situation will not allowed to continue very long.
China must invest more in re-balancing the international economic system. The world cannot only depend on western demand and consumption, financed by printing more money to finance it. China must team up with other large developing country economies like India, Brazil and Indonesia to restructure the IMF and World Bank.