Where's the money to spend?

Differently challenged in the present global economic context, China is better placed than India in terms of fundamentals, though not free of problems.

For us in India, harried as we are by the multiple effects of the downturn in Europe as well as the domestic adversities, it would be natural to look across to see how our northern neighbour is faring. The global economic crisis of 2008 was the last occasion when such a comparison was found instructive.

China experienced more unemployment in her export industries on that occasion as exports fell by 16 per cent and she was obliged to spend far more than India on stimulus measures — 4 trillion yuan — in order to stave off a recession. But at length it turned out to be a happy ending for both countries, with 8.7 per cent of economic growth for China and 7.4 per cent for India in 2009.

Today it is a different picture that emerges when the experiences and ground realities of the two countries are compared in the context of the current economic slowdown. Both find themselves challenged, albeit in different ways, but it is the luck of the Chinese that stands out.

Growth prospects

Growth prospects of both India and China have been revised in recent months in view of the impact of the Euro-Zone crisis and the slow growth in the US. The International Monetary Fund's forecast for India's GDP increase is 6.9 per cent in 2012 and 7.3 per cent in 2013.

The corresponding figures for China are 8.25 per cent and 8.75 per cent. On India, the international agency observes that lowered growth outlook owes much to a slowdown of investment, which in turn partly reflects structural factors. As for China, the Fund believes that if the European Union's economy fell into a prolonged slump all through 2012, the country's GDP could be impacted by as much as 4 percentage points — bringing into clear relief the substantial external dimension to the decline in China's economic growth.

The OECD's figures for the GDP growth of the two countries in 2012 and 2013 vary from those of the Fund. For India, the growth is projected at 7.1 per cent in 2012 and 7.7 per cent in 2013. The figures for China are 8.2 per cent in 2012 and 9.3 per cent in 2013.

In its prognosis for India, the OECD refers to weakness in manufacturing and investment spending, on the one hand, and the implications for monetary policy of inflationary pressures and the rising budget deficit, on the other. For China, however, the agency is optimistic that expansionary fiscal and monetary policy should improve the growth process in 2012 and stabilise it at over 9 per cent in 2013.

In brief, what the projections of the two international agencies indicate is that both India and China would progress towards recovery in two years, but the difference in rates of growth would remain and India's performance would hinge on how effectively it deals with the domestic and structural impediments.

India's weaknesses

The OECD data for 2012 starkly reveal the flaws in the Indian economy compared with the Chinese. The former has fiscal deficit of 7.9 per cent of GDP, current account deficit of 2.7 per cent of GDP and inflation at 7 per cent. In contrast, the latter has fiscal deficit of 1.3 per cent, current account surplus of 2.3 per cent and inflation at 3.3 per cent. China's superior economic indicators, not to speak of its over $3.5-trillion reserves, obviously provide her policymakers more resources to counter an economic slowdown through government spending and investment such as could boost domestic demand, although it would have to be on a smaller scale than in 2008.

Witness the Chinese Premier, Mr Wen Jiabao's announcement of a policy package on May 21, including loans for large investment projects by local governments and financial assistance and tax concessions for small and medium businesses. In contrast is the Indian situation where the high fiscal deficit, the fear of inflation, the resistance to reduction of public subsides, all set limits on what the government can do to stimulate the economy through increased public and private investment.

China's challenges

If earlier the Chinese feared about a drop in the value of the country's official dollar reserves, the current upswing of the dollar has been good news for China. But it is not luck all the way for the Chinese as they struggle to keep the level of economic growth at 8 per cent a year, the officially determined zone of comfort for the communist regime or at any rate to avoid a hard landing for the economy in these difficult times. As said earlier, China as the world's largest exporter is most vulnerable to a downtrend in global trade such as the Euro-Zone crisis might portend. As for stimulus measures the government is hard put to avoid deploying them through the banking system lest it generated a lending spree involving the inefficient state undertakings and add to the pile of non-performing loans. The banking sector needs to be reformed before it could serve the capital needs of the private sector and replace the ‘shadowy private-lending system' that keeps growing, but carries much disruptive potential.

The government has made a significant beginning with banking reforms, but is nowhere near enough to accomplishing the kind of systemic changes that the country requires at its present stage of development. For another, the property market in China has lately been moving in ways that have aroused fears of a bubble. The government, however, is taking no chances, as some of its recent measures make amply clear.

A shared pursuit

Like 2008, India and China are again at the crossroads. Between these two vast rising nations, there is much that is similar in the way they are addressing their problems and responding to the possibilities of a globalised world. Whether it is the Mahatma Gandhi National Rural Employment Guarantee Scheme, the Right to Education Act, the National Food Security Bill or the efforts to give shape to a universal old-age pension plan, the Indian endeavours have much in common with China's national objective of building a harmonious society. (Significantly, China's spending on health is only 2.5 per cent of GDP.)

Alas, the disconcerting fact is that unlike in China, the Indian exertions for inclusive growth and people's welfare are not drawing on such rising levels of national wealth and productivity. Therein lies the challenge for our leadership and governance.

(The author, a former Indian envoy to several countries, is honorary professor at Xavier Institute of Management and Entrepreneurship, Bangalore. )

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