Saving China, rescuing India - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
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4 DECEMBER 2008

In 1949, said the speaker from Shanghai, Communism saved China.
He was, of course referring to the 20-year civil war in China and subsequent ascension of Chairman Mao as the ruler of China.

In 1982, continued the speaker, Capitalism saved China. He was, no doubt, referring to the fact that the Red Book of Chairman Mao had resulted in China joining the ranks of India and Africa as economic basket-cases of the world. Communism - as in Soviet Union and China - had failed to deliver the promised goods.

In 2008, ended the speaker with a flourish, China is being asked to save Capitalism.
He was, no doubt, referring to the fact that the world increasingly looks to China to save it from the economic crises that keep popping up everyday.

On November 26th, the Indian stock markets zoomed in the last hour of trade. Alas, this was not because the CPI (M) and other forms of communists that exist in India had decided to give up their effort to save Communism. But, rather, it was because China has announced that its key lending rate will drop by 1.08% to 5.58%. This, notes the Bloomberg article excitedly, is less than 3 weeks after China has announced a 4 trillion yuan (USD 586 billion) stimulus package.

As this news hit the wires, the European stock indices reversed their earlier decline and surged 2% to try and crawl into the positive territory. China may end up saving Europe, figured the punters.

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Under the sheen
But maybe all that China is really doing is trying to save itself!

Over the past two decades, as China’s factories churned out clothes, microwaves, stuffed toys, and television sets to be exported to the rest of the world, its humming factories needed workers. In response to promises of higher wages and some basic amenities, hundreds of millions of labourers have moved from the countryside to urban areas.

On the way up the economic steps of the golden export ladder, that was good. China’s industrial miracles gave it over USD 2 trillion in foreign exchange reserves. While that is one measurement of success, consider the potential harm from the unwinding of this export-led economic boom.

Says Bloomberg: ‘China, the world’s most populous nation, is targeting growth of 8 percent a year to provide jobs for workers moving to the cities from the countryside. A decline in economic growth to even 8 percent would be tantamount to a recession, said Tao Dong, chief Asia economist with Credit Suisse AG in Hong Kong.

The outlook for jobs next year is "grim", said Yin Weimin, head of the Ministry of Human Resources and Social Security said last week. Two thirds of small toy exporters closed down in the first nine months of this year, the customs bureau said this week.

About 1,000 police and security guards attempted to break up the demonstration as sacked toy company workers overturned a police car, smashed four police motorbikes and broke equipment in southern China’s Guangdong province yesterday, Xinhua News Agency reported.’

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If 100 million people - out of jobs - have to move from urban China to rural China that will be a Great Leap Backward. If another 100 million people cannot see opportunities in urban China and are forced to stay back in rural China, then that requires an alternative economic activity to be created for them.

The Chinese economic miracle needs to be juxtaposed with a "quality of life" factor. The monetary wealth created by paying higher salaries and increasing incomes to hundreds of millions of its citizens was at the cost of a lower quality of life - a problem faced by all countries when they are trying to break out of poverty. The people tolerated bad air, poisoned products, and lack of freedom because there was a monetary compensation - and a promise of good times. Much of that monetary wealth is under threat of evaporation - but the qualitative negatives still hang in the air.

What China is seeking to do is rescuing itself. Not from a disaster but the possibility of a disaster if their own economy slows down further.

Reducing interest rates and giving banks the flexibility to lend out more money (by reducing the reserve requirements) is in the hope that domestic consumption will increase. If factories stay occupied, jobs will be retained. China will be rescued.

India needs to build
And India, with its hundreds of millions of unemployed and under-employed, is also in a rescue mode. Luckily for India, the export-led boom was more limited to a few industries and to the mass export of human talent from subsidised institutes of higher learning.

The hysteria of the 8% GDP growth story excited - in an unlimited way - to the stock market and the finance companies, four million investors, and segments of the media that covered the Incredible !ndia stories.

Like China, India needs to find a solution - a visible solution - that will take hundreds of millions of Indians up the economic ladder. And find a way to climb the quality-of-life ladder. Not an easy task. Particularly when you have terrorists and politicians to deal with. But there is a way.

India’s job creation - and higher economic activity - can be led by infrastructure. The building of power plants, roads, bridges, railway lines.

True to form, there are a lot of announcements of infrastructure projects including the plan to double up and invest USD 500 billion for the five year period ending March 31, 2012. Well, we are 30% of the way there in terms of time, but are we likely to achieve that target?

Not that infrastructure is an easy thing to start. If you build dams and power plants, bridges and roads, there are environmental and social issues that need to be considered. Rightfully so - otherwise these "costs" come back to haunt you exponentially in the future.

India has the challenge of dealing with federal governments, state governments, and local governments - and political parties of all shades of the spectrum. Each one "represents" someone - or something. Each voice demands to be heard.

So it is with this similar challenge of finding jobs for hundreds of millions that China and India will write - and should write - their economic policy.

As countries, they begin from very different starting points. But, let there be no mistake. Neither China nor India can save the world - they first need to save themselves.

It is the failure of the "greed-capitalism" which has forced both countries to look within and start the more difficult work of building truly wealthy societies. And not be distracted by rankings and labels linked to market cap.

So - with apologies to the speaker from Shanghai - neither India nor China can save Capitalism or the global economy. But it is possible that the failure of "greed capitalism" will force both countries to look inward - and save themselves.


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