Column : Weak economies, hesitant governments

Written by Meghnad Desai | Updated: Jan 14 2013, 06:00am hrs
A simple India-China comparison to begin with. I left Delhi last Monday sailing through T3 with no problem. I returned to London T4; again no issue. I arrive at Beijing airport by Wednesday morning and the contrast was sharp. The luggage took ages to arrive, around twenty minutes. The distance between the place where the plane docked to where the luggage is delivered is too long. Then, all manner of confusion while trying to get out of the airport. No one, even on the airport information desk, knew enough English to direct me to the exitI tried in my best bada sahib style to speak loudly and slowly, but it didnt work. Only the cleaning ladies helped with a grunt after I had gestured my helplessness. Out in the open, the pollution was worse than in Delhi.

Otherwise, there are more similarities between China and India than one normally admits to. Both the economies have slipped from their spectacular growth performance earlier in the new century. China has just installed a new team in power. By all appearances, it will be weaker than the predecessors. An article in The China Quarterly explains that there is a sharp division between the princelings and the appartchiks. Xi Jinping is a princeling who has risen without any trace of ability thanks to who his father was (remind you of anyone) while Li Keqiang has been clawing his way up by sheer ability. But the two factions have evenly divided all the top spots and the tension between them is likely to persist till one faction wins. Bo Xilai, who was a princeling, fouled his copybook and thus weakened the princeling camp, among whom was Hu Jintao. This is why Hu resigned all his positions including chairmanship of the military commission, unlike Jiang Zemin had done. The immediate result will be a stalling of reforms. China badly needs to rebalance its economy away from exports and towards domestic consumer spending. As of now, it does not look likely there is the capacity to do so. The investment bubble launched three years ago still has its after effects; there are 78 million housing units built but unoccupied and yet the regional satraps ask for more loans to keep building infrastructure. It may be a dictatorship, but it is not one in charge of the economy.

India is not very different. The elections are yet sixteen months off, but the nervousness is there. Having wasted all of 2011 and a lot of 2012, UPA-2 began to act decisively in autumn. There may yet be a tight fiscal budget reducing deficits and persuading RBI to cut interest rates. Yet, despite all the efforts of Chidambaram, it does not look likely. The spenders and the reformers are evenly balanced. Their truce since September may not last long. Given the electoral pressures, the Budget may be a Santa Claus one, deficit notwithstanding. Divestment may yet turn a success, but one doubts it. The Direct Cash Transfer is a weapon in the governments armoury. But there will be teething troubles and in any case the first rollout deals with quite modest transfers. It may yet be that a big rollout will occur before May 2014, but that is not certain. Even if it does, the fruits of such a bold policy may not accrue to UPA but may go the successor government. After all, this is what happened with the BJP/NDA reforms of 1998-2004. The UPA tasted the fruits while the BJP/NDA lost the election.

Both China and India are thus unlikely to reverse their slippage in GDP growth any time soon. Nor are their private investors happy. Chinese investors are looking abroad for opportunities to invest and are eager to buy technology from the West even if it means they have to take over some companies. Chinese wages have risen sharply in the last ten years and China no longer enjoys a cost advantage due to its cheap labour. It has to begin to move higher up the value chain and for this it needs better technology and better management. There is open talk of productivity problems at home. Indian multinationals have been moaning about the regulations even as people complain about crony capitalism. The uncertainty of the two years, 2011 and 2012, and the prospect of a weak government after 2014 does not inspire much confidence.

Of course, this may all change. China may find its rhythm for reform with Xi Jinping and India may have a decisive outcome after 2014 There is a potential for rapid growth in both places, but the myriad little needling problems are sapping political strength in both ruling elites. The global economy is no help; indeed everyone is waiting for China and India to come to their rescue. If only the politicians in both countries can look upward and forward rather than gaze at their collective navels, there may yet be hope for the rest of this decade. But dont hold your breath.

The author is a prominent economist and Labour peer