China Can, India Can’t

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[The $586-billion package is focused on infrastructure (Bloomberg) During the asian crisis of 1998, the chinese government pumped in $190 billion to create more jobs in the economy. A decade later it has again announced a mammoth, $586-billion spending package, which is similar to the &lsquo;New Deal&rsquo; of post-World War II Bretton Woods system. While Keynesian theories seem to have become popular with the Chinese government, economists say this move is to let the world know that the country is insulated from any form of crisis, be it economic or otherwise. &ldquo;The intent is to attract more foreign investors in new projects when the economy looks up after such spending,&rdquo; says Ashvin Parekh, national leader, global financial services at global consulting firm Ernst &amp; Young, in Mumbai. He says that in 2008, the total foreign institutional investor investment in China was $1.2 trillion, and with such a move foreign money would come back to invest in the country if the government owned majority stakes in these new projects. China&rsquo;s foreign exchange reserves are close to $2 trillion. Money from the $586-billion package will go to building infrastructure such as roads and highways, railway lines and low cost housing. Although there are no clear details about the specific projects or their geographical location, the government plans to spend an additional $2 trillion over the next two years. &ldquo;The Chinese have created their ports and highways and, therefore, investing in additional infrastructure will render the economy weak if investors do not return,&rdquo; says Dong Tao, regional chief economist at Credit Suisse in Hong Kong. Investor confidence is weak just now, though the economy will probably grow at 8 per cent for the next two years. This also means that China will be focused on reviving itself rather than trying to bail out other Asian economies in these times of financial instability. The country is also banking on its population of 1.3 billion to boost consumption. This will offset the dependence on exports, which accounts for almost 40 per cent of its merchandise trade. Ha Jiming, China International Capital Corporation&rsquo;s chief economist, says the government&rsquo;s budget deficit could go up from 0.6 per cent this year to 2.3 per cent next year when this public expenditure programme is implemented. &ldquo;This is still an acceptable range,&rdquo; says Jiming, who is based in Shanghai. &ldquo;The country needs to increase its national domestic debt by $732 billion next year.&rdquo; Can India undertake a similar stimulus package to retard the decline in its economic growth? Sadly, no. Such spending is not possible because the country has a significant fiscal deficit &mdash; apart from a trade deficit, which is estimated to be $121 billion this year. Any fiscal stimulus would worsen the deficit, and raise inflation to unmanageable levels &mdash; a definite no-no. The Chinese stimulus plan may boost economic growth by 2 percentage points next year, says Xing Ziqiang, an economist at China International Capital Corporation. UBS and Credit Suisse had forecast expansion of no more than 7.5 per cent for next year. But some other economists think that the Chinese government&rsquo;s moves could be signalling something else: that the government&rsquo;s growth expectations could be even lower than those of the IMF, which reduced growth forecasts for global and Chinese growth more than three times over the past year. Michael Pettis, professor at Peking University&rsquo;s Guanghua School of Management, says that the world is looking for more demand right now, not more supply. With so much excess capacity, and with a marked tendency to excess savings, he is pessimistic about the domestic impact of China&rsquo;s fiscal expansion. Time will tell. vishal 'dot' krishna 'at' abp 'dot' in (Businessworld Issue 18-24 Nov 2008)