If China’s pain is India’s gain, won’t China’s gain be India’s pain?

Prime Minister Narendra Modi will feel embarrassed by the stunning announcement Thursday by the computer maker Dell Inc that the company will invest $125 billion in China over the next five years.

The company’s CEO estimates that the investment would add up to about $175 billion in China’s foreign trade and sustain more than one million jobs.

For sure, Modi must ask his aides why they misguided him and made him say only the other day at a prestigious meet of economists and captains of Indian industry that ‘China’s pain is India’s gain’. Modi was making out a strong case why investors disenchanted with China ought to flock to India.

Dell could have opted for ‘Make in India’. But it instead opted for ‘In China, for China’.

The Indian establishment thinking appears to have been that foreign cash flowing out of China will get drawn to India. But in reality, according to a Reuters report, in the first week of September, foreign investors have moved out selling a new $756 million of Indian shares. The Wall Street Journal reported that foreign institutional investors pulled out $2.6 billion from Indian stocks in August, which has been “one of the largest single monthly outflows from the country since the global financial crisis”.

The Reuters report noted: “Apparently strong headline growth (8 percent, as projected by the government) is undermined by doubt about quality of economic data and a slow recovery, with job losses in construction and a summer drought hitting consumer demand”.

Prima facie, Modi’s case is plausible – namely, that the wind should be blowing in India’s favor. The economy grows at impressive rates. The last GDP figures show that it grew as fast as China in the last quarter. A Chinese downturn has limited impact on India, unlike on many other Asian economies. The dependence on exports is not critical, accounting for a mere 20 percent of the GDP. Also, the export basket is such – services sector accounting for almost 50 percent – that there is no heavy dependence on merchandize trade.

India actually stands to gain from cheaper commodity prices (thanks to China’s slowdown) and low oil prices, which reduce input costs and keep current account in check. India’s economy is also relatively insulated from the weak global demand since 57 percent of the GDP comes from household consumption.

Thus, compared to most emerging market economies, India should look a bright spot to the investor – especially with a business-friendly government. At the very least, as the Wall Street Journal put it, investors would see India as the “strongest of the weak” emerging market economies.

There is a hype that India’s moment has come, which is reflected in Finance Minister Arun Jaitley’s remark to the BBC, “India certainly has viable shoulders to provide support to the global economy”. The junior minister Jayant Sinha even made a belligerent ‘move-over-China’ remark that India is ready to “take the baton of global growth” from China. He added in good measure, “In coming days, India will leave China behind as far as growth and development matter”.

Yet, there is serious skepticism about the claims by Indian official statisticians who have created an impression that the GDP is rapidly growing, whereas, on the ground the indicators contradict it. The reality is that businesses have virtually stopped investing. In February the government simply changed the way it calculated the GDP and added more than 2 percentage points to its headline growth rate. By the old yardstick, India’s economy ought to be seen as still limping at 5 percent growth. The manipulation to inflate the growth statistics no doubt contributed to the present euphoria.

The FT wrote last week, “India’s overly inflated statistics are breeding a false sense of security. Shining India is back. At least that’s what many hyperbolic Indians would have you believe… Yet the idea that India is poised to become the global economy’s main event is flawed, to say the least. If it induces complacency, it is positively dangerous. Hopes that India can replace China as the engine of global growth are wide of the mark”.

India and China’s global share of global GDP stands respectively at 2.5% and 13.5%. FT wrote, “Saying India can match this (China being a driver of growth for world economy) is like saying a mouse can pull a tractor”.

If China grows even at 5 percent annually, it would still add an India-sized economy to its GDP roughly every three years. With comparable population, China’s GDP last year ($10.3 trillion) was five times larger than India’s ($2 trillion). The Indian per capita GDP is a fraction of the Chinese per capita GDP, which is evident in the much lower living standards and abysmal human development indicators in comparison with China’s.

However, the fundamental issue behind this hiatus between illusions and reality is political. In a nutshell, Indian pundits love to exaggerate China’s woes. They keep scanning the horizons for China’s spasms and are only willing to read too much into them and rush to judgment that China is caught up in an existential crisis. It is a desperate attempt to cling on to the naïve belief that India still has a fighting chance to ‘overtake’ China.

Take the recent market spams in China. The Indian reading completely overlooks that China’s economic structure is improving. The services sector in China today contributes to half of the GDP and consumption is accounting for 60% of growth. The growth in high-tech sector is noticeably higher than for the entire industrial sector. Clearly, new economic growth areas have appeared in consonance with the structural reforms.

In the first six-month period, almost three-quarters of the target for urban job creation has been met – 7.8 million new urban jobs. Evidently, there is disposable income – the number of Chinese tourists traveling abroad, topping 100 million last year, is showing a 10 percent increase currently. Making allowance for the estimated 70 million Chinese people still below poverty line, the middle-income population has become sizeable enough to rev up consumer demands.

The point is, as the well-known Singaporean diplomat-scholar Kishore Mahbubani wrote last week, the fluctuations in the Chinese financial markets are partly a reflection of the robust push for restructuring the economy that is under way and partly symptomatic of the vulnerability of all emerging markets. Interestingly, Mahbubani made out a good case for India to work with China.

He wrote: “Going forward, the emerging markets could rise together and fall together. And if they were to fall, they can no longer expect the big rescue packages of the past. The insecure populations of the EU and the US have no appetite to help the rest of the world, and certainly not the larger emerging markets, which are often seen as future threats. This is why it would be wise for the emerging economies to begin planning for worst-case scenarios. Given the fickleness of modern financial markets, exaggerated by computerized trading programs, we can expect to see more gyrations in equity, bond and currency markets”.

Mahbubani went on to explain that if the US Fed were to proceed with its long-awaited rate hike, there is likelihood of a ‘global economic turmoil’ and, therefore, as leading market economies, China and India “should announce that they are engaging in high-level economic dialogue to work toward greater coordination of macroeconomic policies… Such coordination will of course not be easy. The political and economic interests… are not yet aligned… But there could also be significant gains if they collaborate”.

He added: “India has a $1 trillion infrastructure deficit that needs to be bridged if its fast pace of growth is to continue. China can provide investment and assistance to resolve this deficit more efficiently and cheaply than any other country. Initiatives like this could be clear win-wins for both countries… All of this will require visionary long-term leadership”.

Significantly, Chinese Communist Party newspaper Global Times featured Mahbubani’s article. But Modi’s remark – China’s pain being India’s gain – betrays a zero-sum mentality. Simply put, the ‘big picture’ is lacking. Maybe, the computer maker Dell’s planned $125 billion investment in China – China’s gain becoming India’s pain – will have a sobering effect.  By M.K. Bhadrakumar