Puffed up growth

There has been a trend in recent years to treat China and India as emerging powerhouses and talk about a shift of global economic power eastwards. These two ancient and neighbouring countries have been aggressive in promoting economic growth with an emphasis on foreign trade and investment, and they offer useful comparative perspectives. In economic policy and practice, there are some similarities between India and China, as well as major points of difference.

The goal of economic growth adopted by India and China reflects the imperatives of providing employment opportunities and better living standards to their huge populations of which a significant part is young. This development coincided with the trend for greater international integration, mainly promoted by the United States in the post-Soviet world. In this phenomenon, termed globalisation, international commerce has been a major element. India and China have implemented the new economic paradigm for over two decades and now is a good time to review its impact.

A commonality between India and China is the adoption of the western model of development, based on consumption. This has Gross Domestic Product (GDP), which is the aggregate value of goods and services consumed, as the measure of growth. Other important features are large-scale industrial production of goods and services, the emergence of large companies and the stock market as major institutions. India has seen the rise of several companies in the information technology (IT) sector.

To a large extent, the course of development in India and China has been shaped by the demands of the western markets they targeted. For China, its ability to a range of commodities, from televisions to furniture, at a fraction of the comparable cost in western countries has been decisive, and the result is the now ubiquitous ‘Made in China’ brand.
Similarly in the growth of Indian IT industry, cost advantage was an important factor. The tangible benefits India and China have received from globalisation are, respectively, growth of the formidable IT industry in India and manufacturing in China. These industries now operate on a global scale.

Assessing how the two countries have fared in globalisation leads to interesting results. Since pre-independence times, India’s external balances position has been unfavourable, and trade and current account deficits have been regular features of her economic landscape. This trend continued through the 1990s and 2000s –when India found a new source of foreign exchange revenue from IT. Higher exports in the recent decades made little difference to the external balance because India’s burgeoning imports, ranging from petroleum to gold, luxury cars and expensive liquor, far outstripped the growth in exports. China has, however, had consistent surpluses in its trade and current accounts during its brush with globalisation. It has managed to build the largest exchange reserves in history.

Foreign obligations

The comparative statistics are telling. In 2011, India’s foreign exchange reserves were US$302 billion, which is more or less matched by its external debt of US $298 billion. With foreign obligations at levels roughly equivalent to foreign exchange reserves, it is questionable whether India made significant gains from globalisation– in financial terms.
India’s debt almost completely wipes out the exchange reserves with little net surplus.

China’s foreign exchange reserves stood at US $3.2 trillion in 2011. Against this, its external debt is US$ 697 billion. China, now the largest lender to the US government, has sufficient foreign reserves to cover its external obligations over 4.6 times.This is evidence of the prudence in China’s engagement with globalisation. By and large, China has lived within its means and completed two decades of globalisation with sizable net additions to its financial resources and capabilities.

These results offer sobering lessons for India. There are a number of explanations for its huge import bill and external deficits. For one, liberalisation of import rules in the last two decades was dictated by WTO membership and the need to integrate in the international markets. Another is the government’s mono-dimensional focus on economic growth; higher imports meant more GDP and this suited government’s agenda and its promotion of India as a market for overseas companies.

Equally important are Indian social habits, with a flair for ostentation and display. This became more pronounced in recent years, as evident from the grandeur seen in most middle class family weddings. Rising incomes have resulted in greater consumption and this is reflected in the import statistics.

Until now, the government has been able to carry on with its myopic policies because capital inflows – direct and portfolio – made it possible to finance the deficits in trade and current accounts. The external environment is now changing dramatically, with sluggishness in the US and debt crisis in Europe. It is unclear whether the style of foreign exchange management practiced currently can continue. Recent decline in the value of the rupee and deflation in share prices are significant contra-indicators.

Politicians and policymakers have failed in not promoting greater awareness of the weaknesses in India’s economic fundamentals and encouraging informed debates on the issue. Rather, they resorted to slogans and platitudes such as BJP’s ‘India shining’ campaign in 2004 election or Congress’ slogan of ‘inclusive growth.’

The situation offers an opportunity to introspect on making globalisation work better and promoting greater equilibrium in India’s external account. Imbalances of either kind – surplus or deficit – carry risks for stability. They are inequitable and inherently unsustainable. In the emerging international economic order, a challenge is to devise systems that promote greater balance, equity and a dynamic equilibrium. This is a lesson to be learnt from the experience with European colonisation of Asia and Africa in the 19th century and globalisation of the recent variety. Both proved to be parasitical, in which one part of the wealth lived off another, and consequently unsustainable.

(The writer is an assistant professor at the University of Ottawa, Canada)