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Sitting
in Mumbai traffic for two hours to travel a short
distance is enough to shake even the most enthusiastic
India bulls.
India’s
infrastructure needs are painfully apparent the instant
one arrives in the second-most-populous nation. From
bumpy roads to flaky telecommunications to clogged ports
to omnipresent shantytowns, India has a long way to go
to join the world’s most developed economies.
One gets
a very different view visiting major Chinese cities.
Beijing’s recently opened airport is Exhibit A. It’s a
hypermodern, state-of-the-art monstrosity that offers a
hint of the world-class infrastructure you will
encounter downtown.
The more
important divide between India and China is the pace of
growth. It’s something to which officials in New Delhi
are paying more and more attention, and that bodes well
for
Asia’s third-biggest economy.
China’s
success is increasingly acting as a catalyst for change
in India.
Investors have long since stopped viewing things in
simplistic India-versus-China terms. Even Indian Finance
Minister Palaniappan Chidambaram admits China has a
serious head start in terms of growth rates,
infrastructure and foreign investment.
Yet
there can be little doubt that, looked at through the
lens of one of Aesop’s best-known fables, India is
currently the tortoise and China is the hare. In the
fable, the hare races forward only to burn out before
reaching the finish line, allowing the slower-moving
tortoise to win the race.
Tortoise
and hare
The
moral of the story is avoiding complacency. Anyone who
has visited China recently or met with its policy-
makers knows smugness isn’t the problem. It’s more about
balancing conflicting needs to grow rapidly while
cooling things down to tame inflation. Pulling that off
is requiring more than conventional tools like monetary
and fiscal policies.
The idea
of China as the hare and India as the tortoise has been
mentioned before. Yet operating in China’s shadow is
lighting a fire under officials in
New Delhi.
The question is whether India’s infamous bureaucracy is
getting the message quickly enough.
“We want
to catch up with
China,”
Chidambaram told the Wall Street Journal last week.
Doing so, he said, requires “greater political consensus
on the needed reforms.”
The
trouble is, Chidambaram and Prime Minister Manmohan
Singh are hostages of a political system that often
moves at tortoise-like speed, thanks to a smorgasbord of
conflicting interests.
China dreaming
“I’m
talking about the fact that they are in the position to
take some decisions which we are not,” he said. “We have
to follow a process that is more consultative, more
deliberative and more amenable to judicial scrutiny.”
If ever
there was a time for India to look outward—and
forward—it’s now. Turmoil in credit markets, slowing
global growth and accelerating inflation are threats to
the outlook. This isn’t the time to let political
squabbling get in the way of longer-term prosperity.
India
will have to get used to growing more slowly for a
while. Some economists say growth will ease to about 7
percent, compared with the almost 9- percent rate that
India has enjoyed in recent years. It’s a setback for a
nation struggling to reduce poverty.
Rising
food and energy costs complicate things further. Reserve
Bank of India Governor Yaga Venugopal Reddy has been
steadily raising rates since late 2004.
Growing
better
The key
is to get more out of the growth that India produces.
That means deregulating most industries, cutting red
tape in New Delhi, attacking corruption and getting over
the nation’s aversion to foreign investment.
Governments in Asia tend to get hung up on
gross-domestic-product (GDP) headlines. They are often
misleading.
The
mathematics of such figures in China can overlook the
human element—how China is largely all hardware and no
software. World-class infrastructure can only take a
nation that censors Google so far. Rather than
empowering local entrepreneurs to create indigenous
companies,
China
is often more interested in buying overseas names.
China
also faces a challenging year with overheating risks,
swooning stocks and slowing US growth.
Nor do
GDP figures explain how some of India’s advantages
aren’t all they seem. The hype about
Bangalore
being Asia’s Silicon Valley ignores how the Old
Economy—poor roads, transportation systems and power
grids—holds back the New Economy. And having a young
population only helps if you create enough good jobs in
the future.
Indian
cappuccino
Dilip
Parameswaran, head of
Asia credit research at Calyon, Credit Agricole SA’s
investment-banking unit, finds it useful to think of
India as a cappuccino. “There’s coffee at the bottom and
lots of froth at the top,” he says. “It can take a while
to get to the coffee. People want more coffee and less
froth.”
Adds
Pranab Kumar Choudhury, vice chairman at ICRA Ltd., an
Indian credit assessor part owned by Moody’s Investors
Service: “India needs to keep investors from getting
frustrated that reforms are moving too slow.’’
Even if
India slowed to 7 percent, such growth is nothing to
sniff at. It’s no reason to delay efforts to replicate
India’s success with software and back-office operations
elsewhere in the economy. Here, China’s enviable place
in the spotlight is playing an unheralded role. |
