How well will India fare?
The latest Indian budget will be released next week, and as usual, business leaders and economists will dissect its details for an indication of where pro-market reforms might be headed. They’re likely to be disappointed. Each year, the world’s investors hope for faster change in India, and each year, they complain the government’s ambitions never go far enough.
That perennial letdown is part of the standard criticism about India, especially when compared to its high-octane neighbor, China. While the Chinese regime can in theory implement reforms with clinical efficiency, India’s tumultuous democracy ties up change in endless debates and dissent, making effective governance practically impossible. Even hard-charging Prime Minister Narendra Modi has been stymied by parliamentary opposition in his attempts to liberalize India’s over-regulated economy. The results speak for themselves: China’s national output is five times larger.
Yet this distinction between China and India has always been simplistic, and in light of current events, it’s even less applicable today. As both countries confront economic headwinds abroad and structural weaknesses internally, India’s more flexible and transparent democracy is looking better suited to tackling many problems than China’s tightly-wound system. Meanwhile, the limitations of China’s centralized policy process are being exposed, to the detriment of the global economy.
Note, for instance, the different approaches the two countries are taking towards their strained banks. Bad loans, which present a threat to stability and growth, are rising in both sectors. Officially, India’s banks are in much weaker shape than China’s, with bad loansaccounting for 5.1 percent of the total, compared to less than 1.7 percent in China.
But to a degree, that difference is the result of a more proactive policy on the part of India’s regulators. Reserve Bank of India Governor Raghuram Rajan launched a review of state banks’ balance sheets last year, forcing them to identify and declare suspect loans, with the aim of fixing the mess by March 2017. Mark Young, head of Asia-Pacific financial institutions at rating agency Fitch, says that Rajan’s aggressive stance is a “prime reason” why non-performing loans have been rising in recent quarters in India. “To the question of what comes first, clean up or growth, I think the answer is unambiguously, ‘Clean up!’” Rajan said earlier this month.
China, on the other hand, doesn’t seem particularly eager to shed light on what could well be a looming banking crisis. Private estimates of bad loans at Chinese banks run significantly higher than the official data. Yet when Chinese magazine Caixin conducted an extensive interview in February with People’s Bank of China Governor Zhou Xiaochuan, the subject of the health of the banking system didn’t even come up.
In fact, while Rajan is actively forcing Indian banks to acknowledge their problems and make provisions for them, Zhou and his comrades are running the risk of adding to China’s pile of bad loans. Hoping to prop up growth, the government has encouraged a hefty bout of new lending. The amount of new credit unleashed in January hit an all-time record. A good chunk of that money is probably going to heavily indebted state enterprises and moribund “zombie” companies, to help them pay off current loans and thus stay afloat. Unless they can grow their way back to health - an unlikely outcome in the current environment - Chinese banks are going to face even steeper problems in the future.
These divergent approaches to the banking sector should explode a couple myths about Indian and Chinese policy-making. First, investors erroneously assume that India’s leaders are hamstrung by democratic politics while Chinese cadres, immune from such pressures, can craft policy in the best interests of the economy. But the continuing explosion of debt in China is very much the result of internal politics. President Xi Jinping must maintain high growth levels and employment in order to preserve the government’s political standing. Local governments often resist efforts to close down zombie companies, which remain valuable sources of jobs.
Secondly, India can benefit from the multifaceted nature of its governing system. Even if New Delhi is paralyzed by political wrangling, other players in the economy have the authority to step in and fix problems. Rajan can harangue banks to clean up because he heads a truly independent central bank. In the Chinese system, Zhou enjoys no such freedom of action.
Nor is the increasing centralization of power in China leading to better policies. Indeed, the more control Xi has claimed over the government, the slower reforms seem to be progressing. In that great contest between India and China, conventional wisdom doesn’t always apply.
*The author is a journalist based in Beijing and author of “Confucius: And the World He Created.”
by Michael Schuman