As India breaks out of policy paralysis, China sinks deeper

For years, Indian business leaders looked forlornly at the frenetic pace of policy action in China, wondering why their own paralysed government in India couldn’t bestir itself out of the stupor it had sunk into.

As Chinese leaders, who don’t quite have to subject themselves to media criticism or public accountability, earned accolades for propelling the economy into high-orbit growth even if it meant taking unpopular decisions, Indian leaders were, by contrast, seen to be leaden-footed, and incapable of initiating the most urgently needed economic course correction efforts.

But what a difference a week makes. The UPA government’s blizzard of policy announcements since last Friday, however much they may be rooted in a cynical attempt to change the tenor of the political discourse, have lit a fire under the Indian stock market and enthused international investors.

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[caption id=“attachment_463992” align=“alignleft” width=“380”]  Is China’s economy headed for a hard landing? Reuters[/caption]

For sure, the government’s new-found all-out embrace of ‘reforms’ is more than a little unconvincing, given its own record of the past eight years, when it turned the clock back in the name of promoting inclusive growth. As columnist Ashok Malik points out in Tehelka, the government’s actions “have a strong element of window-dressing… At the tail end of its term, there is only so much the Manmohan Singh government can achieve, even if it decides to miraculously overcome the self-imposed inertial of a decade.”

But just the fact that a hopelessly cornered government has come out with its market-friendly policy initiatives in the hope of changing the headlines that had been on a downward spiral has been well-received by overseas players. In particular, the wholly unexpected - and still intensely controversial - announcement on FDI in retail has perked interest among some of the big-box retail giants.

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Wal-Mart’s president and CEO for Asia Scott Price, for instance, told the Wall Street Journal that the retailer was hoping to open its first stores in India within two years.

Price acknowledged that the FDI proposal was still politically controversial, but added that he felt confident that the reform measure would not be rolled back, and that his company was committed to India’s long-term future.

Which perhaps makes it the first time in a long while that any foreign player has said anything glowing about India. As recently as three weeks ago, NR Narayanamurthy had narrated how difficult it had become to sell the India story overseas, particularly relative to China.

“I keep meeting lots of corporate leaders outside India,” he said. “About 6 or 7 years ago, if China was mentioned three times, India would be mentioned once. Today, China is mentioned 30 times, India is not mentioned even once. That in some sense tells the whole story. There is nothing more I need to add,” Murthy noted.

That long-term story of growth trends cannot be rewritten overnight, but China too is today in the grip of a policy paralysis that afflicts its leadership at just the point where its own economy is already facing a punishing downturn - much worse than in India.

Official GDP growth data out of China still paints a glowing picture of the economy: in the second quarter, for instance, GDP grew 7.6 per cent year-on-year. But analysts who have drilled beneath the headline number claim that China is in the throes of a hard landing. Charles Dumas, chairman of Lombard Street Research, an economic consultancy, concludes that China’s quarter-on-quarter GDP growth rate fell to 0.4 per cent in the second quarter, which translates to about an annualised growth rate of just 1.6 per cent.

That’s the kind of hard landing that the headline numbers mask. But its leadership, which is the middle of sweeping change at next month’s Communist Party congress, appears to be afflicted by the same kind of policy paralysis that might have done the UPA government proud. As leadership factions jostle for power, key policy decisions that analysts say are required to change the structural drivers have been put off till later.

The macroeconomic fundamentals are weakening, in many cases much worse than in India. A Pricewaterhouse Coopers report noted that overdue loans at China’s ten largest listed banks by assets rose sharply in the first half of the year, raising concerns over asset quality in the banking sector.

Worse, a confrontation with Japan over disputed islands in the East China Sea has whipped up nationalism, with the party stoking it. Japanese businesses in China have been targeted for attack, and even international car dealerships have posted inflammatory slogans on their premises. At a Chinese Audi dealership, for instance, a banner proclaims: “Even if the whole of China is covered with tombs, (we) must kill all Japanese.”

The burst of reform intiative in India since last week, of course, still faces formidable political opposition, which will test the government’s willingness to push through with unpopular decisions. But for the first time in a long time, India is drawing the attention of foreign businesses and investors in a way that was reserved for China.