The Chinese central bank has tried to bring inflation down by raising interest rates five times last year. It has also tried to take in by way of cash reserve ratio pre-empting more of bank deposits, to be kept with the central bank. Inflation is, however, stubborn, giving rise to demands for wage increases, especially in the urban areas. This leads, in turn, to high cost and price increases in China’s manufactured goods sector, with an inevitable impact on export price.

There is, however, another view of the Chinese economic phenomenon voiced by Martin Wolf, the famous economic analyst, in the Financial Times of October 9, 2007. He cites various economic analysts of the Chinese economy to say that the inflation may not be as such of a threat as some make it out because productivity often rises to offset the rise in cost of living and output. But the data before us on rise of consumer prices is irrefutable.

There is definitely a price pressure pressing on China’s economy. The price of food articles, especially meat, has been on the rise in recent months. The nation’s political and economic authorities are keenly aware of the challenges that inflation poses to economic and political stability. They have not forgotten that the Tiananmen Square incident, which shook the political fabric of China, was preceded by a bout of heavy inflation.

China’s inflation is partly the result of too rapid growth, which will inevitably put pressure on productive capacity. There will be demand-supply mismatches. Coming on top of commodity price increase from abroad, such as crude oil price, the inflationary pressure is inevitable.

Added to this is expansion of the monetary aggregates, as a result of excessive forex inflows, from export growth as well as capital flows. Although China has successfully sterilised most of its capital inflows, it still has a monetary overhang. The conventional remedy suggested is that China should further liberalise its capital outflows, allowing private and corporate sector to invest abroad more freely. This also China is doing within limits.

A third remedy suggested is for China’s yuan to appreciate, which again China has been trying to do. The net impact of China’s appreciating currency is, however, that its exports will become costlier to importers in the US and the rest of the world.

This means that China will no longer exercise a deflationary influence on the rest of the world economy, making it possible, for instance, the US Fed Chairman, Mr Ben Bernanke, to anchor his interest rates lower than he would have otherwise. The US will have to pay a higher price for goods imported from China. This can have impact on the US’ inflationary expectations and lead the Fed Reserve raising interest rates.

What happens in China today can happen in India also. Price rises are endemic to a growing economy, although so far Indian inflation has been relatively benign. Indian inflation, measured by WPI numbers, has been running at 3-3.5 per cent.

By CPI numbers, which vary from urban to rural, it may be higher, although lower than the Chinese peaks. As the production facilities strive to produce more to meet demand, there is inevitably a tendency for both prices and wages to rise.

Further strains are caused by increasing inflows of forex, which translate into monetary expansion, leading to a struggle between a high-growth trajectory of the economy, limited capacities of the production system and expanding monetary aggregates. How China faces up to the problem will be an example for India.

Inevitably, China has resorted to increased imports of food. So has India in its own fumbling manner. The entry of these two giants into the international grains market has led to prices moving much higher. This development can be avoided since the domestic grain production capacity can be enhanced only after a period of time, even given large investments needed in rural areas.

China’s encounters with inflation over time have been historically very painful. Indeed, the political conclave now meeting in Beijing — the Communist Party Congress — must be devoting considerable thought to ways of addressing this particular problem. So too in India, we have to focus on the possibility of higher inflation, given our high targets of GDP growth.

No longer can we rely on Chinese imports of manufacture to contain our domestic inflation. Added to this are prospects of further rises in crude oil, steel, coal and iron ore.

The prospects of fiscal excesses that might follow the Pay Commission’s recommendations are also disheartening. While I am all for growth, I would like to strike a note in favour of inflation fighters this time. Let us not strain the system to breaking point. If the price of containing inflation is to lower the rate of economic growth below 10 per cent, so be it. As our Prime Minister said on cooling off on the Indo-US nuclear deal, we have to toe with what is feasible. A rate of GDP growth less than 10 per cent is not the end of the world.

Poverty can be addressed by more inclusive growth. Let us adjust our targets to what is feasible economically and not strain the system to its inflationary limit. This is the lesson that China holds for India and the rest of the developing world.

I must admit that in my columns, I have been generally advocating an expansionary trajectory for India with high rates of GDP growth and corresponding monetary policies, as indicated in the Eleventh Plan.

China’s recent experience, however, shows that even with the very high degree of social discipline and political controls, a developing economy can get into an inflationary bind. This holds an important lesson for India.

The Eleventh Plan with its ambitious goals will come a cropper if we do not manage inflation. The Chinese experience is a pointer to the risks of overreaching limits of production capacity. Besides, we have our own problems in implementation. Let us learn from China’s experience and return to the drawing board, if need be, to adjust our growth targets to what is feasible.

The voice of reason is often mistaken for cowardice. Bravery does not lie in attempting the impossible. If the inflation tolerance of India is limited, so be it. Let us not risk the social, economic and political stability in pursuit of too ambitious targets of economic growth that China has shown lead to economic strains and inflationary possibilities.

Let it not be said later that we have not been warned. China is a living example of trying to grow beyond one’s limits. The roots of growth are inbuilt into the economy’s potential. As growth takes an increasing share of production, prices and wages inevitably soar.

We cannot risk this at the current fragile state of our polity and economy. We do not have the social discipline that China’s people have. China may yet manage the hurdle race of high growth with low inflation. We may not be able to do so.

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