International rating agency Moody?s has said that China and India, both facing strong inflation threats, have adopted divergent macroeconomic strategies for tackling the problem.
Even as India is actively injecting liquidity into the financial system, China is actively removing excess liquidity. The divergence in macroeconomic management was highlighted by the respective central banks in commentaries this week. Both central banks have been tightening monetary policy settings to contain inflation pressures, said Moody?s.
Even as China remains reluctant to increase interest rates, India will continue to hike rates in the new year. Despite the rhetoric regarding the similarities between the neighbouring economies during this week?s summit between India and China, the differences between the two emerging giants remain extensive. Though both may boast of billion-plus populations with increasing education and entrepreneurial potential, but China and India?s respective paths to macroeconomic prosperity remain starkly different.
China has focused heavily on export-oriented goods? production to drive growth and has generated immense economic potential through meticulous central planning. India, meanwhile, has fostered service-producing industries and cites the strength of its democratic institutions as the foundation for future success.
The central bank?s move to lower bank capital requirements to inject liquidity into the system at its mid-quarter monetary policy review on Thursday is in stark contrast to the People?s Bank of China?s three successive increases in reserve requirements delivered in the past month to soak up excess liquidity in the Chinese system.
In India, constrained liquidity is making it difficult for the banking system to sustain credit delivery, whereas China is actively trying to limit rampant credit growth as bank lending has already exceeded this year?s target.