India’s democratic credentials do not impress Francis Fukuyama, who two decades ago prophesied the “end of history,” as being a catalyst for the country’s economic growth. Fukuyama finds excessive “patronage politics and fractiousness” in India — flaws that stand in stark contrast to China’s speedier, though not necessarily cleaner, political system.
The reality is, however, somewhat different. China’s local governments have been accumulating mountains of debt to fund their construction binges, raising serious concerns about potential defaults.
Chinese Premier Wen Jiabao (溫家寶) himself recognizes the urgent need to address the country’s inequitable growth, calling for means to be found to “share prosperity evenly,” and thus to reduce the widening gaps between “rich and poor, cities and countryside.”
Economist Nouriel Roubini has predicted that China’s economy will most likely slow sometime between 2013 and 2015, the point at which its fixed-asset investments of nearly 50 percent of GDP will demand social and monetary returns.
Until now, Roubini says, China’s export-led growth has depended on “making things that the rest of the world wants, at a price that no other country can match,” a consequence of cheap labor and economies of scale.
This cost advantage is diminishing fast.
India is facing severe difficulties as well, but of a different nature. For example, outward investment by Indian companies is expanding fast. Some believe that this is a natural development for a rising power, but critics view outward investment as a reflection of the scarcity of opportunities at home.
Rising interest rates, high inflation and severe policy gridlock amid a spate of government corruption scandals have impeded both foreign and domestic investment in India, thus slowing economic growth to a level that is below its potential. An unpredictable regulatory environment, inadequate infrastructure and a sluggish, monsoon-dependent agricultural sector are adding to the economy’s problems.
Clearly, economic turbulence is roiling both of Asia’s major economies, the giants of the so-called BRICS (Brazil, Russia, India, China and South Africa).
Consider inflation. On July 6, the People’s Bank of China raised its benchmark interest rate for the fifth time since October last year. This has generated apprehension about property markets and fear that local governments could default on part of their staggering debt of US$1.65 trillion.
In India, the government’s failure to contain rising prices, pursue structural economic reforms vigorously, attract foreign direct investment, advance infrastructure development, manage expenditure and avoid liquidity crunches underscores the many challenges it faces. Moreover, a continued standoff between the government and the opposition has weakened political effectiveness, further undermining India’s growth prospects.
Indeed, India’s core challenge remains political. With food prices rising sharply, the poor are being hit the hardest, fueling greater poverty, inequality and resentment. However, the same is true in China: Anti-inflation protests are now roiling both countries, owing mainly to rising energy, food and raw-material prices, with food accounting for one-third of household spending in China and about 45 percent in India.
The fear now in both countries is that inflation shocks could turn into a self-reinforcing price spiral. As the IMF cautions, “core inflation — excluding commodities — has risen from 2 percent to 3.75 percent, suggesting that inflation is broadening.”