Читать книгу The Political Economy of the BRICS Countries - Группа авторов - Страница 39

China is an investment-driven economy, and household consumption is just one-third of GDP; India’s investment rate is lower than China’s, and it further declined rapidly after the financial crisis. The consumption/GDP ratio in India is over 60%, with supply constraint still a matter of long-term concern. China’s debt is 260% of GDP; the ratio for India’s is just about 60%. Excess capacities in India are probably modest compared to China’s. China is over-invested in infrastructure and housing, whereas India suffers from shortages in these areas.

Question 1: Can China avoid further deterioration of growth rate, given the debt overhand and the limits of further debt-led growth? Can India engineer a turnaround with more reforms and FDI without public investment (as envisioned by current policymakers) — given the overhang corporate debt on the banking sector?

Answer 1s: In both China and India, after the financial crisis, growth was sustained by easy credit extended to PCS by domestic banks and by foreign capital inflows (facilitated by QE) — China much more than India. Growth in China’s debt/GDP ratio is unprecedented; in India, the rise in the ratio has been modest (if at all).

It is a question of degree, not kind: External debt in both the countries is higher than officially reported because of debt taken on by subsidiaries of private corporate firms (as highlighted by Shin of BIS).

Can China avoid a debt crisis? Given China’s huge foreign exchange reserves, the possibility of external debt crisis seems remote. But if there is panic, no amount of reserves probably matter, as evident from last year’s episode when China almost lost $1 trillion in no time at all.

However, since the majority of China’s private sector debt is denominated in domestic currency, which in principle can be rescheduled without destabilizing the external sector, the question arises if China can avoid getting into Japanese-style debt deflation, which is another matter entirely. Japan’s debt was (and continues to be) mostly in the domestic currency, more so than China today.

Similarly, China’s real estate market seems to be in the bubble territory. The Chinese government seems unable to regulate it adequately since much of it seems financed by shadow banking. So, whether China can avoid a real estate crash remains an open question. Admittedly, Chinese authorities are tightening the rules for real estate lending by increasing the equity or the contribution of the buyer.

India’s external debt is modest in a comparison to most EMEs, and especially China. Even if the global interest rates rise, India is unlikely to face a debt crisis, though there could be instability in the foreign exchange market in the short run. But the question of whether India can avoid a prolonged period of slow growth (without a change in policies) is another matter.

Question 2: Can China change its debt and investment-led growth, given the incentive structure of local governments and their access to bank credit? In other words, can China disembark its credit-led investment growth strategy to keep employment growth going without causing political unrest? In other words, is it a case of Chinese policymakers riding the political tiger?

Answer 2: Given China’s seemingly solid macro foundations, there is no apparent reason why the government cannot shift public investment away from physical infrastructure (road, rails, bridges, and urban housing) to schools and hospitals, and make them available for free for poor. Descriptive accounts show how Chinese struggle to get treated in good public hospitals (Burkitt, 2012). The answer probably lies in China’s contradiction between centralized politics and the decentralized economy.

India, on the other hand, may find it hard to reverse the declining domestic investment rate given: (i) the NPAs of the banking system, (ii) reluctance of foreign private capital to step up investment given the debt situation of the PCS, and (iii) government’s reluctance to raise public infrastructure investment given its commitment to fiscal orthodoxy.

Question 3: Can China embrace consumption-led growth given the interests of local state for revenue from land sale and property development? Can India curb its consumption-led growth towards public investment- and capital good-led industrialization?⁶

Answer 3: It is well known that China’s social infrastructure and personal consumption growth are modest, though claimed to be improving. These need to be stepped up and physical infrastructure growth needs to curtailed if China is to change its growth pattern. But very little of it seems evident on the ground (despite avowed objective). China’s disposable income is just 44% of GDP. Why? (comparable figure for India is 86%). The answer, perhaps lies in the incentive structure of the local party-state. Building public hospitals and better schools or providing better facilities does not seem to bring in revenue for the local governments and the private benefits to party-bureaucracy in the same way as infrastructure and real estate investments do.

Question 4: Housing starts and sales are declining, but prices continue to rise. Why? Access to non-bank credit (shadow banking) seems to be a cause for concern. Will the inflated real estate prices deflate gently as demand grows, or could it result in a burst causing a disruption?

Answer 4: Could China’s high-debt ratio trigger a financial crisis is the million dollar question among China watchers, but the answer is anybody’s guess. Economic literature provides very little guidance in this matter.⁷ Those raising a red flag about it are mostly guided by the debt–GDP ratio and its steady rise since the GFC in 2008. The ratio is among the highest in the world. My cautious answer to the question is as follows: Though very high, China’s debt is mostly domestic, and China’s domestic saving and investment ratios are also very high by any standards. Moreover, the party state has enough instruments (though some of them blunt) to quell any financial meltdown. However, Japanese-style prolonged deflation or stagnation cannot be ruled out if return on investment falls drastically, and the state is unable to stimulate domestic consumption faced with an aging population.

India, on the other hand, needs to get its fixed investment rate back to 38–39% of GDP (to secure East Asian-like economic outcomes). Given the current levels of bad debts, it is really wishful to expect PCS to resume a fresh investment cycle, unless the government writes off loans (or socializes their costs). Perhaps a better option would be to step up public infrastructure investment by adopting a flexible fiscal deficit targets. The ‘Priority sector’ lending for agriculture and SMEs needs to be revived, boosting capital formation in the unorganized or HH sector, implying a stronger role of the state in steering the economy. Correspondingly, the objective of FDI needs to be to augment capacity expansion to meet ‘make in India’ campaign, not for augmenting import-led consumption growth (as mentioned above).

If India cannot get its policy act right, the reasons for this would be policymakers’ commitment to fiscal orthodoxy not the economy’s objective conditions.