The New Normal for China and India

By Frank-Jürgen Richter

Business Times, January 28, 2015

Many people go to Davos simply to meet other people, and heads of state are no exception. All are drawn to the discussions and formal presentations; one of the eagerly awaited presentations was that of the Chinese Premier Li Keqiang. He gave an eloquent presentation, full of hope for the future and stating that China was not going to have a hard landing as its economy slowed – or at least, as its growth rate stabilised at the “new normal” of 7 per cent or perhaps a little more.

As nations become “developed”, their growth as indicated by GDP figures year on year falls somewhat, and China is no exception. From 2012 it has alarmed some observers as its growth seems to be faltering, falling from 8 per cent to 7.3 per cent in the last two quarters. Observers seem to forget that China’s growth has, over the longer term, varied from 14.2 per cent to 3.8 per cent through 1989 to 2014 – sometimes rising and falling with rapidity. Premier Li sought to calm the markets by his embracing of the “New Normal”.

Premier Li’s presentation has been widely reported and analysed in detail, but I feel not enough has been presented on the relativities of his views (about China’s future) against those presented at the same meeting about India’s future. Just ahead of Davos, the International Monetary Fund updated its World Economic Outlook and posted that India’s projected growth in 2016 will be about 6.5 per cent, overtaking the 6.3 per cent rate that it had forecast for China.

This would make India the fastest growing major emerging economy. Naturally many listened with interest to the speeches of Indian officials.O ne session given by Arun Jaitley, Indian Minister of Finance, was led ably by Andrew Sorkin, columnist for The New York Times, who posed leading questions which were all easily and eloquently dealt with by Mr Jaitley.

Both countries have young leaders as well as new governments. China is guided by President Xi Jinping and Premier Li Keqiang (both from October 2013), while India is led by Prime Minister Narendra Modi (since May 2014). Each has begun their state operations with vigour but of course differently as India remains a democracy, albeit a noisy one, while China is managed by the People’s Republic and its various branches.

As each country developed it protected its institutions from potential takeovers by the more developed players in Europe and the US. But now each nation acknowledges it needs to reform its services sector to become more sophisticated and to be better able to mesh with the global markets.

India will soon be debating a wide-ranging Finance Bill, and China will investigate opening up its Banking and Insurances sector to outsiders while keeping its watchful regulatory eyes wide open. Premier Li was adamant they were looking to maintain medium to high growth and to develop ever more jobs across the whole of China over the next two decades.

Perhaps it ought not to be a surprise; given that India and China are two similar hugely populous Asian nations we hear similar stories from both governments. They both achieved their modern status at about the same time,and now each nation is firmly looking at deep reforms across the board to streamline outdated systems and to rationalise outdated policies. Although the IMF sees India growing faster in 2016 than China, the latter is far richer with US$7,000 per capita; India in comparison is at only US$1,500 (149th in global terms).

Let me opine that China will be more successful than India in the middle term. India has a much more open society than China, its press and other media, for instance, are clamorous. We hear that the Indian government faces many great challenges from its nearly autonomous regional governments, so what New Delhi wants may not be enacted across the nation: and for some development, like infrastructure, coherence is needed.

China has quietly grasped that it is facing a rural to urban migration that other developing nations have had to face.

“London’s streets are paved with gold” was a theme in one UK stage fantasy: but they never were, even though masses arrived in the capital looking for a fortune. China is not going to have this predicament. Instead, it has created vast new transport interlinks, numerous new towns, and is organizing the relocation of 400,000 million rural persons over the next decades into these new towns. These towns will have good local infrastructures to better support the people in schools, hospitals and importantly, new money-earning occupations.

Ministers mentioned that both China and India will take advantage of the falling oil prices to revise their high levels of energy subsidies yet maintain their eco-energy programmes. Mr Jaitley said they had already reduced some of the fuel subsidies and were to grasp a difficult kerosene subsidy that had been mismanaged as income redistribution for the poor. He was very clear that India had to play a neat balancing act as lower subsidies were not to be seen as a stealth tax within a tradition of low taxes, but rather as a re-balancing within budget constraints. Government ministers were clear that neither nation has sufficient sovereign wealth funds to disperse grand social welfare schemes – people must work for a living and to turn over their cash, in part as taxes, to support the nation’s budgets.

I see China and India as differently organized but with similar modern targets. Each nation is reforming hard and closing down on corrupt practices and rent-seeking, each using the same globally sound methods inclined to transparency, inclusiveness and the rule of law. As for the IMF forecast for 2016, the growth of China and India at about 6.5 per cent is so similar it ought not to be unduly commented upon: both countries will be winners!

The writer is founder and chairman of Horasis, a global visions community.