So far, this column has been restricted to talking about India and its economic prospects, and has not looked much at key global events that are of consequential impact. There are two developments not so far away from Delhi that are important as they will have implications for global growth prospects. The first of course pertains to the happenings with regards to Evergrande, a big Chinese real estate firm that has built up massive piles of debt. Many are not aware of this, but China’s growth prospects had started to slow down before its inclusion into the WTO. After that, China got another opportunity to rapidly expand its share of exports, thereby giving a fresh growth impetus to its economy. However, after the 2008 crisis, growth started to falter. In response to slowing growth, there was a pick-up in lending activity, which fuelled the next stage of economic growth as companies built up debt on their balance sheets. All of this seems familiar, as India too had its own share of bad debt problems after 2008. The difference, however, is that construction and real estate, along with related sectors, account for 24% of the Chinese economy.
A debt-fuelled frenzy leading to growth is just building up of liabilities. Such a growth is not sustainable. More so, it brings with itself massive consequences as there is destruction of wealth, slower growth and more importantly, weaker lending activity. It looks like the last one is being encouraged in China, although we are not sure if there was recognition of what weaker lending would look like for the growth prospects over the coming years.
Evergrande is not the only crisis at hand, as the rising world fuel prices have created a problematic situation for China. The country at present is facing a huge energy crisis due to a variety of reasons. One of them is the higher emission standards that discourage the use of coal while the other is the order to not pass on the higher energy costs to consumers. This effectively is an attempt to artificially reduce the profit share in production activity and it may very likely result in a reduction in wages. Consequently, it may hamper attempts by China to shift towards a more domestic consumption-driven economy. The power crisis has already resulted in leading banks slashing China’s growth prospects to zero in the present quarter, which means the production facilities there now face yet another exogenous shock.
It is, however, interesting to observe that on the one hand, the weaker demand for key resources used in construction activity from China (which is their largest buyer) could push commodity prices downwards over the coming quarters. On the other hand, the supply disruptions due to the power crisis can create shortages, thereby resulting in supply-induced inflation like the oil shocks of the 1970s. Nobody should therefore underestimate the criticality of these developments as whatever happens in China will have implications for global growth and commodity prices in the future.
The reluctance to accept slowing growth has led to a perennial attempt to resolve such crises swiftly in China, which has meant that the economy could not adjust to deal with such macroeconomic balances. Consequently, such a settlement could be painful now given that a slower growth may be inevitable going forward.
The curious point here is that even as there are downside risks to their growth prospects, there has been an attempt to go after big-tech or put in regulations to restrict consumption of some items such as video games. In a very subtle way, it appears that the China of 2021 is beginning to revisit some of the policy tools that were used to expand the space of the government into the functioning of the economy and society. While this may be a response to the slowing of growth over the coming decades, we must remember that several such policies were also deployed by India and as a consequence, the country lost at least a decade, if not more, of impressive growth.
What has emerged as evident thanks to the experience of the last few years is that global supply chains need to diversify and that India serves as a viable alternative that offers both scale for production and scope in the form of a large domestic market with a booming aspirational middle class. Perhaps, it would be instructive for all of us to revisit this issue a decade from now with a simple question: Will India be able to compensate for slowing growth in China? Or, put differently, will this decade see India emerge as the global engine of growth? The answer to this will be revealed with time.
Karan Bhasin
New York-based policy researcher
(karanbhasin95@gmail.com)