360° Analysis

China and India: Slowing Growth vs. Stalling Growth


March 29, 2012 01:26 EDT

By Manjeet Kripalani and Bob Dowling

China and India have grown fast, but each is now at a different crossroads.

At first glance, it's bad. Superstar China’s growth target is lowered to 7.5% for the year, down from 8% previously, but shockingly lower than the blistering 10% average growth China racked up over the last two decades.

Across the water, India is slowing to 6%, well below the mandatory 7% needed just to create jobs in the formal and informal economy for over 20mn new workers each year. This must be bad news for India, China, and the world. But the two situations couldn’t be more different. India’s slowdown is the result of lack of economic reform, derelict infrastructure, archaic laws and asphyxiating graft. Slowing to 6% is indeed a dire outcome for India. The country’s baby boomers are now bulging over 50% of the population. And they need livelihoods.

China's lower growth is a managed target, set expressly by 
the Beijing leadership to cool the economy from rising inflation, deflate
 a real estate bubble and
 most importantly, direct growth to China's home economy rather than primarily drive growth through exports. In other words, after three decades of automatic, on-time development as a producer for the world, China is taking a breather because it can afford a slowdown. It’s also politically convenient.

A political backlash is growing against China in the United States and Europe for taking the West’s jobs. Politicians brand China as a jobs vulture. It is a little late to blame China but it pays politically. In response, China is unfurling a banner that says "Rebalancing". That may reduce protectionist calls from
 the US and take the pressure off China to revalue the Yuan, now about 6.3 to the dollar. The rebalancing mantra also recognizes that China’s largest markets, Europe and the US, may be on the slow growth track for some years ahead.

Internally, China is accepting slower growth for its own interest. China now has to position itself to move from the factory that it is, to the service and value-added China that its leadership set as the goal in its last two five-year plans. So far, however, that transformation has not taken place. China has not shown an ability to reorient its economy in a value-added, new direction.

The new policy recognizes the end of an era. For the last 30 years, China has been leveraging its "population dividend" – the economic principle that allowed it to transform millions of villagers into cheap workers for its export factories. While China can still produce willing workers from its western states by building new highways and power plants, most economists believe its cheap labor days are over.

But that may be just as well. China will have fewer jobs to fill than the 10mn it needed to create annually in the past. The average age of a Chinese worker is 37 and it is expected that some 50mn employees will start leaving the work force in five years, gradually turning China into the world's largest aging society. China will need to increase social welfare spending and keep raising the minimum wage, which will put more money in the pockets of Chinese consumers. The benefit from this should be a bigger consumer market.

Contrast that with India, where the average worker's age is 23 and some 600mn are under 30. India inherits the population dividend but benefits only if it can create useful jobs for its young new workers. To do that it needs to ramp up growth in the 8% to 9% range. That is doable, argues Delhi economist Surjit Bhalla, who thinks India can cruise along at 9% while still keeping inflation in check. Inflation in January was 5.99%, but the long-term rate has averaged nearly 8%, a huge burden when it hits basic fuel and food for the poor.

So the India-China slow-growth story isn't about trading places. For China, it is a strategy. For India, it is stalling out. All this suggests that the time for India to act is now. India has no capacity to become a factory export machine; nor does it necessarily have to. Its domestic economy is so large and underserved, there’s plenty to go around at home alone. Just 15% of India is manufacturing; and as a democracy, it has a mandate to try and spread social and economic uplift for all its people.

But the old adage about China having to pedal its bicycle at 8% or fall off isn’t relevant to China anymore. Instead, that is the growth analogy for India. India can't afford to slack off, nor can it afford massive government spending to keep the bike upright. India has to clear the acres of regulatory brush and tax traps out of its path. With $3.2tn of cash reserves on its books, China can take a break, sit back like a fat cat banker, and watch the show.

Bob Dowling is an Editorial Advisor to Gateway House: Indian Council on Global Relations, and Manjeet Kripalani is Executive Director of Gateway House.

The views expressed in this article are the author's own and do not necessarily reflect Fair Observer’s editorial policy.

*[This report was originally published by Gateway House.]


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