Oct 15, 2016
The world can’t depend on Western demand and consumption, financed by printing more money. China must team up with India, Brazil and Indonesia to restructure the IMF and World Bank.
There is a misplaced notion prevalent in India that China’s slowdown means an opportunity for India. Even chief economic adviser Arvind Subramanian, 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 the cost of building infrastructure has come down due to a fall in commodity prices. This will boost infrastructure development. India will remain an attractive destination.” To expect foreign capital to build India’s infrastructure is naïve. Foreign funds invariably come with a short-term perspective, and 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. China’s GDP is three and a half times bigger than India’s. Its GDP is in excess of $7 trillion while India has just scaled $2 trillion. How China moves and acts in future will affect developed economies enormously as it has been the major provider of growth in the past 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 seven per cent still adds $490 billion to global growth, while a speeded-up India now growing at seven per cent adds a mere $140 billion. For India to pick up the Chinese slack, it has to post a more frenetic 9-10 per cent growth in the next decade or more. There isn’t even a glimmer of that now.
While the Chinese economy doesn’t 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 India needs rethinking. If the global economy slows down further as part of the results of Chinese economic restructuring, it is difficult to see how a sluggish world economy will help India’s economy.
There are many factors that have hampered the Indian economy, and the most important reasons lie in exercising policy options and level of domestic development rather than the external environment or international factors. The Indian economy is in a more favourable demographic transition: how this will translate into the kind of growth China has experienced in the past three decades depends on the sagacity, determination and vision of our leaders.
Let’s therefore be clear about one important aspect: the present financial crisis in China does not affect its overall economic prospects even a bit. Financial crises are inevitable, as greed and irrational expectations will always drive the market upwards till reality catches up and pulls it down.
The real problems in China will get accentuated, as exports to the United States and Europe slow down, with the US in particular determined to reduce its trade gap. Also, low-cost production is shifting to other low-cost 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.
But 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 of. Where will the world get its next growth engine? Demography favours 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 labour cost exports, and hence skill levels will be low. Internal consumption will demand goods of higher sophistication and the retraining of labour will be a problem.
As demands rise and domestic standards of living rise, people will expect more from the system. Psychologist Abraham Maslow has theorised that there is a hierarchy of needs, and so when one demand is satiated, people will want more. This will increasingly take the form of demanding more political and social freedoms.
As China becomes upper middle class-dominated, the challenge to the Communist Party’s primacy will be from upper middle class values. These values are universal. Thus growth, 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 organisation. 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 be allowed to continue for very long.
China must invest more in rebalancing the international economic system. The world can’t depend only on Western demand and consumption, financed by printing more money to finance it. China must team up with large developing economies like India, Brazil and Indonesia to restructure the IMF and World Bank. The Brics nations which will meet in Goa this weekend have a great opportunity if the discussions progress to weightier issues than the usual cosmetics that professional diplomats are habituated to post on the agenda. Chinese President Xi Jinping and Prime Minister Narendra Modi have the responsibility of looking well ahead and take a more cosmic view of how our world should look in the future. They can then prepare China and India to assume the roles that beckon.
The writer, a policy analyst studying economic and security issues, held senior positions in government and industry. He also specialises in the Chinese economy.
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