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HindustanTimes Fri,19 Sep 2014
Chindia's challenges
Jaswant Singh, Hindustan Times
August 03, 2011
First Published: 22:53 IST(3/8/2011)
Last Updated: 22:55 IST(3/8/2011)

India's democratic credentials do not impress Francis Fukuyama, who two decades ago, prophesied the 'end of history' as being a catalyst for the country's economic growth. Fukuyama finds excessive "patronage politics and fractiousness" in India - flaws that stand in stark contrast to China's speedier, though not necessarily cleaner, political system.

The reality is, however, somewhat different. China's local governments have been accumulating mountains of debt to fund their construction binges, raising serious concerns about potential defaults. Premier Wen Jiabao himself recognises the urgent need to address the country's inequitable growth, calling for means to be found to "share prosperity evenly", and thus to reduce the widening gaps between "rich and poor, cities and countryside".

The economist Nouriel Roubini predicted that China's economy will most likely slow down sometime between 2013 and 2015, the point at which its fixed asset investments of nearly 50% of GDP will demand social and monetary returns. Until now, says Roubini, China's export-led growth has depended on "making things that the rest of the world wants, at a price that no other country can match", a consequence of cheap labour and economies of scale. This cost advantage is diminishing fast.

India is facing severe difficulties as well, but of a different nature. For example, outward investment by Indian companies is expanding fast. Some believe that this is a natural development for a rising power, but critics view outward investment as a reflection of the scarcity of opportunities at home.

Rising interest rates, high inflation, and severe policy gridlock amid a spate of government corruption scandals have impeded both foreign and domestic investment in India, thus slowing economic growth to a level that is below its potential. An unpredictable regulatory environment, inadequate infrastructure, and a sluggish, monsoon-dependent agricultural sector are adding to the economy's problems.

Clearly, economic turbulence is roiling both of Asia's major economies, the giants of the so-called Bric (Brazil, Russia, India, and China). Consider inflation. On July 6, the People's Bank of China raised its benchmark interest rate for the fifth time since October 2010. This has generated apprehension about property markets, and fear that local governments could default on part of their staggering debt of $1.65 trillion.

In India, the government's failure to contain rising prices, pursue structural economic reforms vigorously, attract foreign direct investment, advance infrastructure development, manage expenditure, and avoid liquidity crunches underscores the many challenges it faces. Also, a continued stand-off between government and opposition has weakened political effectiveness, further undermining India's growth prospects.

India's core challenge remains political. With food prices rising sharply, the poor are being hit the hardest, fueling greater poverty, inequality, and resentment. But the same is true in China: In both countries, prices of  energy, food and raw material are rising, with food accounting for one-third of household spending in China and around 45% in India. The fear now is that inflation shocks could turn into a self-reinforcing price spiral. As the International Monetary Fund cautions, "core inflation - excluding commodities - has risen from 2% to 3.75%, suggesting that inflation is broadening".

One reason that Indian prices are rising is that infrastructure growth remains sluggish. Progress on roads, railways, and power projects - all of which could prevent food from perishing prematurely, and energy and commodities from being unnecessarily wasted - is essential to stabilising prices.

China, meanwhile, finds itself at a critical juncture. Its leadership will change next year - at a time when income inequality is on the march and the Party lacks any consensus on how to stop it. Given that less than 9% of China's ruling communist party members are actually 'workers' nowadays, the regime's leaders must be even more uncomfortable with growing inequality. But, in the absence of serious political reform, income inequality will widen as crony capitalism sinks its roots more deeply.

India and China both need a renewed commitment to structural reform to sustain their economic growth. Cheap labour and monetary management will not do the trick on their own. The credibility that both governments gained after their countries avoided the worst of the global financial crisis of 2008 is beginning to wear thin. For, as inflationary fears in the Bric giants grow, second thoughts about the shift in the world economy's centre of gravity are beginning to gain currency.

What both countries need are short-term corrections and long-term structural changes. China needs to prepare itself for an economy whose performance is not dependent on exports and low domestic wages. India must find other drivers of economic modernisation than new information technologies (as welcome as these are). Workers in both countries are now demanding better living standards - a demand that even China's tightly controlled political system cannot ignore.

India, for its part, needs to open up its economy further in order to take advantage of its continuing rapid population growth and the ongoing changes in the structure of the global economy. It must recommit itself to feeding its population - and thus to attaining its stated objective of a 'Second Green Revolution' in agriculture.

China and India have used very different political models to achieve their ambitious GDP-growth targets. Nonetheless, as their economies mature, both will need to embrace structural change - and address the challenges of overdue political reforms.

Jaswant Singh is a former finance, foreign and defence minister of India and is a BJP Lok Sabha MP. The views expressed by the author are personal.


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