China and India: In same choppy waters

China has been the main driver of world growth for a decade. Through the 1997 Asian currency crisis and through the 2008 international financial crisis, China continued to grow at an unprecedented rate.

Written by P Chidambaram | Published:January 31, 2016 12:02 am

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India became independent in 1947; the Communist Party of China (CPC) proclaimed the People’s Republic of China in 1949. However, the two countries are not siblings separated by two years.

India’s multi-party democracy is constantly compared with the one-party system of China. When China grew at a blistering pace, as it did for nearly three decades, India’s growth rates, pre-liberalisation and post-liberalisation, appeared tepid and insufficient. When China’s growth rate has slowed down, some in India — and many in the government — seem to think it is a cause for celebration!

China has been the main driver of world growth for a decade. Through the 1997 Asian currency crisis and through the 2008 international financial crisis, China continued to grow at an unprecedented rate. China became the world’s factory — from toys to shoes to steel to capital goods. China also accumulated the world’s largest foreign exchange reserves which at one point stood at an unbelievable USD 4 trillion.

It was only a matter of time before Chinese entrepreneurs got into the leaderboard in non-manufacturing. Among the world’s leading service sector companies are China Mobile, China Life Insurance and Alibaba. Among the world’s top 5 banks, three are Chinese banks.

China’s focus

Keen observers of China are agreed that China’s leadership remains focussed on two issues. The first is to maintain the absolute control of the CPC over all organs of the State and all entities in the country and the second is to promote rapid economic growth and become the world’s largest economy. In the pursuit of the latter goal, China’s economy has gone through many ‘transitions’ and is undergoing one today. It has to transit from manufacturing to services, investment-driven to consumption-driven economy, and export-led to domestic demand-led growth. Besides other causal factors, the pain and price of the transition are reflected in the slowdown of GDP growth and the depreciation of the currency (yuan).

Despite the slowdown to 6.9 per cent in 2015, China had a record trade surplus of USD 595 billion. Despite capital flowing out at an average rate of USD 100 billion a month during the last eight months, China’s reserves are at USD 3.3 trillion. Despite world demand falling, China’s exports in 2015 declined by only 2.5 per cent over 2014. And despite bad investments, rising debt and loss of confidence among savers, the yuan depreciated by only 6 per cent in 2015.

In comparison, India’s GDP growth in 2015-16 is not likely to exceed 7 per cent, India’s exports have declined by 18.08 per cent during April-December 2015 over the same period last year, there will be a current account deficit of about USD 30 billion, and the rupee has depreciated by 9 per cent during April 2015 to January 2016. The stock market indices are back to the levels they were in May 2014. Job creation has practically collapsed.

Empty boast

There is no reason to boast that India is “doing better than China” or that “India is the fastest growing large economy”. India’s economy must transit from consumption-driven to investment-driven and from services-led to manufacturing-led. We will also experience pain.

Competition among countries is different from competition among companies. It is not a zero sum game where the pain of one country will be the gain of another. If China’s demand falls, it will import less from India. If commodity prices do not recover, China will continue to dump its products in India and Indian producers will suffer. If the yuan’s volatility roils world currency markets, the rupee will also be hit. It is believed that the RBI may have spent USD 3.6 billion in the first two weeks of January to arrest the depreciation of the rupee. So, in the short run, China’s woes may cause us more pain, not less.

Last September, it was reported that the Prime Minister had called a meeting of industry leaders to discuss whether and how India could take advantage of the situation where the Chinese economy appeared to be in trouble. Some advisers are reported to have presented the situation as an “opportunity” for India. Even now, there are some commentators who believe that India can take “advantage” of the situation. Such advice is not only misplaced but could lead to misjudgments and wrong prescriptions for the problems that the country is likely to face.

The transition

The Prime Minister must indeed initiate a dialogue. The conversation should be about the real issues: the exchange rate and how India should deal with the probability of some depreciation; the travails of Indian producers and how the government can help them in the near term; how to arrest and then reverse the decline in exports; and how to enthuse Indian investors to make investments in the real economy (especially in manufacturing industries) when the reality is that many current projects are either stalled or have been scrapped.

Above all, the Prime Minister must begin a conversation on how to initiate and manage the transition of India’s economy that I referred to earlier.

China is not India’s sibling, nor is China India’s nemesis. It is a country that has recognised the imperative and the difficulties of transiting to a market economy and is struggling to find the right mix of policies. India is in the same situation.

 

Website: pchidambaram.in Twitter: @Pchidambaram_IN

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  1. S
    Sirius
    Jan 31, 2016 at 5:39 pm
    Mr. Chidambaram : Why did Dr. MMS have to say to the nation "...paise to ped mein nahi ugte..." ? So, you agree that the problems are structural and rectification is being done, including , continuing the beneficial policies of UPA. As a concerned citizen, we need to buy only Indian manufactured stuff (e.g. , clothes, household items, vehicles, food etc.), delay or cancel buying of imported stuffs (electronics items mainly), increase productivity , reduce wastage. Govt.'s need to enable entrepreneurs with better infrastructure, better law and order, reduction in taxation / red-tape on small businesses and hospitality , increase local tourism . India is a huge market and also has a huge entrepreneurial base and workforce. It is a contradiction that we are not a larger economy ...
    Reply
    1. H
      Haradhan Mandal
      Jan 31, 2016 at 6:51 am
      And the next generation children (sons and daughters) of those largely ILLITERATE and poor farmers (1950-1980/90) are now the leading scientists, technicians, engineers of today's China and they (the new (EDUCATED) generations ) are the core of the new Industrial China - the manufacturing HUB /FACTORY of the world. That was also a transition.
      Reply
      1. H
        Haradhan Mandal
        Jan 31, 2016 at 6:38 am
        This is a LONG OVER-DUE article for many of our 'desi' pundits, 'leading' economist /political commentators /columnists and the 'patriots' with a misplaced concepts of 'patriotism'. And an well written article on facts, and based on straight forward , honest and right ANALYSIS. Much like stan is obsessed with India - so are some of us with anything about China. China have made many transitions - but Chidambaram saab obviously did not want to mention the first transition - 'LAND REFORM and agricultural transition' . With a huge (1 B) rural and agricultural BASED potion back in in 1950, it is not a small feat to become a 'MIDDLE INCOME Country' from 1950 by year 2000.
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        1. K
          K SHESHU
          Jan 31, 2016 at 6:57 am
          All these years, while China developed its economy by sheer hard work of the people supported by the government, our country remained stagnant with the ruling and opposition parties mudslinging each other. There was no consensus on most issues relating to employment of the work force available aplenty. Consequently, poverty has increased and 'GDP' has... decreased.
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          1. K
            Kris
            Jan 31, 2016 at 12:03 pm
            Mr Chidambaram, PM Modi will require at least 5 years to level the pit you guys had dug from 2004-14, whereas your UPA government reaped the harvest which NDA sowed from 1999 to 2004. During 2004-14 you guys were busy in encouraging crony capitalism in India with so many mega scams which created havoc in the country. Additionally, in order to purchase votes you initiated various so called poverty alleviation schemes without really looking at the implementation of these programs. This was another way of helping your cronies in our rural areas where the money was pocketed by your local party leaders in the name of MNREGA. If you had sent some sincere politicians to independently essing the success of the program under the UPA government, you could have understood how the program was being misused for corrupt practices. Therefore, you have no right to criticize PM Modi or this government as this government is making every attempt to make our economy fee from the shackles and money thirsty politicians and bureaucrats. Looking at the abysmally poor performance of the UPA government, where you never cared for infrastructure development, sanitation in rural and urban areas, lack of accountability etc. you should share the entire blame for the country's least development. Just because we have some GDP growth in this country does not mean anything to the country, when the vast majority of Indians have no access to clean drinking water, toilets, health care and other basic facilities. Why did you not implement a well meaning crop insurance scheme for farmers? Did you the other day hear about what PM Modi spoke at ET's program the other day? He made excellent comparison of his government's achievement in 2014-15 as compared to the performance of your government in 2013-14. PM Modi has set a new performance benchmark for the government and the PM and whoever comes next as the PM will find it difficult to match. We know you cannot support this government, but do not try to undermine good things that this government is doing. If India has to succeed all Indians have to develop and the initiatives this government has already taken up such as Jan Dhan Yojna, Skill India, Start up India, Stand Up India etc. are not just slogans but the government has already started delivering results. I can go on and on the good work this government is doing and the misdeeds of your government. At least show some remorse of damaging the country's interest during your rule rather than criticizing someone who only did good during the last months. We do not want to be compared with China but at lease let the poor have some self respect which you guys never gave to the poor of India.
            Reply
            1. A
              Arun
              Jan 31, 2016 at 7:49 am
              Arun Jaitley is the worst FM in the history of India since 1947. He does not even understand that Indian economy is an agro based economy. He should follow the advise provided by Raghuram Rajan and Chithambaram.
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              1. T
                TrueLier RAGA
                Jan 31, 2016 at 10:09 am
                This writing confirms that Mr. Chidambaram has any understanding on India and China economies. Forget about his understanding on the situation of global economy. How can be expected that he could have brought down the inflation and tackled the pressures from global economy slowdown during his tenures.
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                  Narinder Dogra
                  Jan 31, 2016 at 9:12 am
                  Stupid article! I was not expecting such a low quality analysis by a minister of Govt of India. How stupid Indian public at large is to elect s like him to run the govt. God save India!
                  Reply
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