Opinion India,China face supply side issues
As policy makers in India grapple with an economy straining to cope with supply side constraints...
The India-China comparisons have almost always been a study in contrast. The situation on the economy,as things stand now,is no exception. As policy makers in India grapple with an economy straining to cope with supply side constraints of all kinds,the biggest problem confronting Chinese authorities is over-capacity.
In India,a contraction in the mining sector led by coal and iron ore has clearly emerged as a big drag on growth,combined with domestic infrastructure bottlenecks. The slack in manufacturing activity due to slowing demand and a deceleration in electricity generation on the back of the coal and gas crunch are some of the takeaways from industrial output data in recent months,the latest being Fridays IIP numbers. Added to this are supply side shortages in the agricultural sector,especially in the non-cereals segment.
In China,its a different story altogether. According to a post by Yu Yongding,the President of the China Society of World Economics,and Director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences,the problem of over-capacity in China is proving to be the biggest drag.
For instance,Chinas annual production capacity for crude steel,according to the estimates,is one billion tonnes,even as its total output in 2012 was 720 million tonnes a capacity utilisation rate of 72 per cent. With per capita income at less than $6,000,home ownership in China is estimated to be around 90 per cent,compared to less than 70 per cent in the US. China has 696 five-star hotels,with another 500 on the way. Five of the ten tallest skyscrapers under construction worldwide are in China.
The Chinese overcapacity is largely a factor of the Communist Party realising that an investment-driven model is critical to sustaining the high growth rate necessary for political and social stability and needed for employing a large and growing workforce rapidly transitioning out of agriculture.
The high growth,in turn,provides the Party with the mandate to continue the political status quo. The biggest threat for China,apart from the prospect of a slower than expected recovery in its key markets of the US and the EU,are the strains on the heavy exposure that its banks have towards construction-intensive sectors and debt-laden corporate balance sheets.
In India,the infrastructural bottlenecks continue to fetter industry,along with supply side issues on the raw material side,which have a spillover effect on both inflation and growth. While some progress has been made in sorting out the coal imbroglio and this years agricultural output is likely to be much better,question marks abound on the fate of the supply-side issues afflicting most other sectors.
Anil is a Senior Editor based in New Delhi.
anil.s@expressindia.com
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