| India on Roll, but China West's Darling | |||
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By: Hari Sud January 03, 2007 Views expressed here are author’s own and not of this website. Full disclaimer is at the bottom. 
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Last quarter (July-September) has the best performance of the Indian economy, since independence. Economy grew at an astounding rate of 9.2%. This is an achievement if maintained, could herald India into big leagues sooner than later. As we see it there is nothing to stop this trend. In about seven years Indian economy would cross $1.5 Trillion mark. The reformer Prime Minister has allowed the private sector to take the lead. The latter are setting a progressive trend for the future. Stock market has taken a cue from all these happenings and has scaled new heights. External money in the stock market in form of Foreign Institutional Investment (FII) is providing the much needed cash for businesses and industry. In addition, $10 Billion in FDI (Foreign Direct Investment) has arrived in the country this year. This is a record. FDI, the brick and mortar money is building new factories and infrastructure and putting India on a path of rapid growth. All this is a remarkable performance. Not only the current Prime Minister, but also the previous Prime Minister deserves the credit. They both have pulled India out of the rut. Foreign media has taken some note this performance, but they still love China. There is never one nice sentence written in the Western media (especially British) about India without dragging extra-ordinary performance of China into it. They pretty well know that all Chinese statistics are faulty, yet they heap huge amount of praise on China. If possible they scorn on India’s performance. But consider this: if Indian economy can put up a spectacular performance with little bit of money ($10 Billion in FDI and $5 Billion in FII) then why does Chinese economy needs $60 Billion in FDI a year to have 10% growth. Something seems to be wrong there. It is either that the statistics are wrong or the Chinese are misusing the western funds in a big way. Now the question arises: why is the West playing the Chinese game. Are they afraid of them? The biggest culprit is the Western media, who are unable to contain themselves, singing praises for the Chinese. They almost forget India. If they do remember it then it is in a negative sort of way. Let me reproduce a few passages from the Economist of London (November 23rd Issue, under the heading – Too Hot to Handle). “INDIA"S curries can be even hotter than the fieriest of Chinese hotpots; likewise the temperature of the two economies. Despite widespread claims that China's economy is overheating, actually India's shows more signs of boiling over……..” “India"s trend growth rate has almost certainly increased but it is still nowhere near as high as China's………” “It is, however, wishful thinking to believe that India can now run as fast as China without a higher investment rate and a more flexible labor market. The danger of red-hot curries is that they can leave one gasping and in tears……” Writing on behalf of China, the Economist (print edition) wrote in its Nov 16th edition: “For China, which tends to look on India not as a rival but as a poor neighbor afflicted by bureaucracy and democracy, suspicion springs less from fear than from pique at India's spurning of Chinese investment. These are English media views. These views are made in England, to placate China and upset India. Why Do I Argue Against Lionizing China to a Mythical Status? First, Chinese statistics are always a suspect. Second their FDI data is a suspect, since returning profits from abroad is classified as FDI, which it truly is not. Third a Communist controlled economy where prices and wages are fixed by the state cannot have inflation; hence any reporting of these numbers is a misrepresentation. Fourth, they have a huge acid rain problem with SO2 spewing coal-based power plants. This is eating away their cultivable land. Wheat output has steadily been falling in China. Fifth the much-touted prosperity in China is for the 200 million souls living in the eastern seaboard. Much of the China is as poor as any other third world country. Sixth, with per capita income well below South Korea including poor Latin America, they suddenly cannot claim to be an advanced nation to be felicitated all round with praise. Seventh, only 42% of Chinese economy is internally consumed, rest is for export, hence a lot of money is chasing a fewer products left over after exports. Eighth, with $800 Billion of Chinese money stuck in the Western banks in lieu of security for huge FDI investment in China, they cannot pretend to be rich. This money is not recoverable until they pay off all their debts. I can go on and point out some more fallacies, but my point is that the West has to look a bit deeper into China before they lionize it. What is Behind the recently Reported Economic Data in India? There are two numbers, which are important in any economic analysis of a country. First, the GDP growth rate and second the inflation. India’s performance in the former is spectacular, the latter at 5.2%. This is a bit high. When you factor in all the economic activity and investment occurring in a last little while in India, inflation is expected to be high. In a labor-intensive country, where labor is key to all the activities, higher wages result in higher inflation. Labor component in the economic growth in India is about 40%. When labor gets paid better, prices rise. It is not unusual. When US after WWII, put up a 7to 8% growth rate for 15 years, inflation ran at about 5 to 6%. It was an investment induced economic miracle with manufacturing (labor) at its heart. It changed US into a super economy. Before that, this honor belonged to Europe. My point is that high growth with little bit of inflation is part of the growth process. It will be a worst scenario to control inflation with hasty measures like quick tightening of money supply. The latter will kill the investment, hence the growth. Conversely high inflation without growth induced by excessive wage demand will also kill the economy also. Hence a balance is to be found. Money supply is to be tightened only when investment driven inflation could not be controlled in any other way. It is the last measure. I do not believe that the situation is out of hand. Already a number of steps are in the works, which will hold the inflation. What does inflation do to the masses? It eats away their savings. In addition it also delivers higher wages to them, if the benefits of economic activity are well distributed. Will they be complaining about the inflation? Not excessively, if wages keep pace. Then, who is complaining? It is the rich and well to do who are the most vocal about it. They see their assets depreciate faster. Hence, as I said before a happy medium is to be found where inflation is tamed and economic activity continues at a rapid pace. Is the forgoing comparable to China? No. Chinese do not have the forgoing development model. There, the state fixes both wages as well as prices and outsiders provide the money for development. Hence, inflation there is for show and tell. It is not a real activity. Moreover, Chinese love publicity. The lower number gives them better publicity; hence they report a lower number. How India & China will Fair in Next 20 Years If you believe the recent Credit Suisse report then India will overtake China in growth statistics in 2007. They base their optimism on, increasing local consumer demand and public investment in infrastructure. Their estimate for India is that it will grow by 10% in 2007 and surpass China as a top growth performer. Chinese economy is supposed to grow by 9.5% according to the same report. There are many upcoming pitfalls for the Chinese economy namely slowing US economy, declining consumer confidence in US, reduced consumer demand, high inventories of merchandise goods etc. All these will negatively impact China in a big way. A recession in US will cut imports of manufactured goods from China, which in turn will shave off 2 to 3% points out of its growth prospects. India is a bit insulated from these happenings in US. First, there is no huge merchandise export from India to US, second export of IT and BPO services grow as the corporations in US, try to cut cost by outsourcing to India during recession. That does not mean that India is completely independent from the happenings in the world. The point is that China is in a worst shape than India, if US goes into recession. Credit Suisse has factored this in their forecast of growth prospects for both India and China. By 2025, China will still be ahead of India in the size of its economy (after duly depreciating China’s overly optimistic statistics publication), but India will be right behind it. The per capita GNP in India will be higher. This, I base it on the published reports that China after being stung by the stigma of being described as an old folks nation, will abandon its one child policy in favor of two. Next 20 years will see more young people in China, which will put a significant pressure on their per capita income as well as overtly optimistic living standard they believe they live in. India had no one-child policy. Its current block of young people is key to its future. Hari Sud
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