By Nirvikar Singh
In my last column of 2022, I offered qualified optimism on India’s immediate economic growth prospects, based on assessments from a range of sources. Meanwhile, the world has not stayed still. The World Bank just cut its projection for global growth in 2023 from 3% all the way down to 1.7%. The culprits they identify are well-known: “elevated inflation, higher interest rates, reduced investment, and disruptions caused by Russia’s invasion of Ukraine.” But something else is also happening that this forecast may not capture—China is opening up its economy with suddenness and speed. What will all this mean for India?
China accounts for almost a fifth of world GDP and close to 15% of world trade. Its contribution to global GDP growth has been even higher, approaching 30% in the recent past. China matters for the global economy, second only to the US in that respect. China’s long-running zero-tolerance response to the pandemic was unique for such a large country, with major consequences for economic activity within the country, and its abrupt U-turn will have significant implications for the world economy, and thereby for India.
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An immediate impact of China’s reopening may be increased spending by its people, including on international travel. Depending on the patterns of expenditure, this could give another boost to inflation, which could prolong the monetary tightening that the US Federal Reserve and other central banks are engaged in. As China’s production capabilities return to normal, however, that should help to increase supplies of certain kinds of goods, and restore supply chain structures. Demand from consumers and producers will increase the demand for energy and drive up prices there, also slowing the rate of bringing down inflation, but, on balance, it does seem that China’s reopening will help the global economy. For India, this may be a mixed blessing, since Covid restrictions in China were providing more room for India and other countries to increase their presence in global production networks at China’s expense.
On the other hand, some of the factors that have prompted governments and corporations to consider alternatives to China are still operative. In particular, the risks from political tensions, natural disasters or pandemics are more clearly recognised and this remains an opportunity for India and other countries to try and leverage. But China’s reopening and its refocusing on its economic progress shrinks the window of opportunity for India, compared to the situation a few months ago.
Surveying the situation more broadly, China’s trajectory can be instructive for India’s leaders and policymakers as they target economic growth themselves. In all countries, rulers care about internal security, external security, and economic progress. Cultural pride and individual egos also matter.
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One can view the history of China over recent decades as a fluctuating balance between these various drivers of policy. The years just before and after the start of the new millennium were perhaps a sweet spot for China’s rulers in terms of feeling in control of their people, and being safe from external threats. This enabled a focus on economic growth.
The global financial crisis, Trumpism, and the resistance of Hong Kong’s residents to suppression of democracy all contributed to China’s rulers refocusing on internal control and external security. Some of the changes in China’s policies and actions reflected this refocusing. Cultural pride—always present in the minds of the elite, and perhaps more broadly—and leaders’ egos may also have come to the fore for reasons that aligned with political and security concerns. If this characterisation is accurate, then it may be that China will return to its strategic focus on economic growth. Ultimately, growth brings wealth and the power to achieve other objectives more fully.
India’s society and polity are very different from China’s, so comparisons can be difficult to make and lessons difficult to draw. But China’s recent trajectory and leadership decisions suggest that its strategic focus on economic progress will continue to be strong. Considerations of internal stability and external security, while important, should not be allowed to derail that focus in India’s case. For that matter, cultural pride and leaders’ egos should also take a backseat. To repeat what is already known, but needs to be more firmly embedded in India’s economic policymaking, the country’s demographics are favourable, but the creation of “good” jobs and of a system of imparting the skills to young Indians so they can fill those jobs productively, is something that is still falling short even after decades of economic “reform.” Many analysts are emphasising a retreat from globalisation—with negative effects on investment in developing countries and on international trade—along with the problems of accumulated debt. But India’s share of world trade is less than 3%, and its saving and investment rates are still below previous peak levels.
There is ample room for high growth, and China’s strategic approach should increase the urgency in India of focusing on that goal.
(Professor of economics, University of California, Santa Cruz)