China and India strive to keep economies booming

from The International Herald Tribune

Poverty, water shortages, environmental crises: China and India confront daunting challenges as they strive to keep their economies expanding fast enough to raise growing numbers of their 2.3 billion people out of poverty.

For each, the potential is huge, but then so are the risks.

By the numbers, both economies look poised to continue their remarkable performances in 2007. The Chinese economy grew 10.4 percent in the July- September quarter compared with a year earlier, with forecasts for growth in 2007-8 at about 10 percent.

The Indian economy is close behind. It grew 9.2 percent in the quarter that ended in September — its strongest performance since 1991. The International Monetary Fund estimated that inflation-fighting measures could slow growth to 7.3 percent in the year starting in April 2007, down from the 8.3 percent expected for this year.

Such stratospheric figures highlight China's rise as an export power and India's newfound cachet as an outsourcing center for the high-technology industry, as well as robust growth in its agricultural, industrial and services sectors.

But the gleaming new office buildings in cities like Shanghai and Mumbai, with their legions of newly affluent consumers snapping up the latest cellphones and new sedans, stand in stark contrast to the poverty that persists in both countries, particularly in rural areas.

Some 10 percent of the 1.3 billion people in China live on less than $1 a day, according to the World Bank. In India, with a population of 1.1 billion, about 40 percent do.

"There is an India of bursting growth, and there is an India of widespread want," Sonia Gandhi, the leader of the governing coalition in India, said at a recent business conference in New Delhi.

More than a third of all Indians can neither read nor write, and a fifth of them have no access to safe drinking water. Poverty and unemployment are fueling insurgencies and Communist-led rebellions in many parts of the country.

Still, both economies have proven remarkably resilient, adapting outdated trade and industrial policies while blunting the impact of those reforms on their poorest citizens with price controls and subsidies to farmers.

Tens of billions of dollars of foreign direct investment, coupled with strong domestic spending, is supporting heavy investment to build railways, ports and other infrastructure needed to support further growth. Steel making, cement and many other industries have prospered.

And in both countries, share prices have surged because of optimism over growth and rising corporate competitiveness, with Indian stocks trading at all-time highs and those in Shanghai just below the peak they hit in 2001.

But leaders in China and India are realizing that greater equity, better protection for the environment and stewardship of scarce resources are needed to sustain growth and lift tens of millions more out of poverty. Both governments have stepped up rural spending and increased subsidies to the poor while attempting to attract more investment for backward inland regions cut off from the growth centers along the coasts.

The Indian government plans to spend $26 billion in 2005-9 to build rural homes, expand irrigation coverage and provide drinking water, electricity and phone connections for all the nation's villages. It is too early to say whether those initiatives, as well as a rural employment scheme, will be able to meet their objectives or will degenerate into populist rhetoric.

The Communist leaders of China, who face no electoral pressures and do not tolerate public or organized dissent, have acknowledged the threat to their nearly six decades of rule as public anger increases over ubiquitous corruption and the widening gulf between rich city dwellers and the rural poor.

Raising rural incomes has become a top priority, both for ensuring political stability and for bolstering the domestic consumer demand required to sustain growth over the long term. Leaders in China have abolished farm taxes and made schooling free for rural families, hoping to help redress the huge gap with city dwellers. More such gestures are likely ahead of a Communist Party congress in late 2007.

"Can China sustain 8 percent to 10 percent growth?" asked Yiping Huang, an economist with Citigroup in Shanghai. "It has to do more to stimulate consumption, a lot more." He added, "It needs to do more for social welfare so that people can feel comfortable and spend more."

At the same time, China is just barely beginning to address the huge environmental costs of its headlong rush to industrialize: fouled water and air, rural villages drowning in waste and massive shortages of water and other resources.

Another risk that China faces is an overheating economy. Worried that soaring investment in real estate and construction could leave banks with bad loans, authorities have raised interest rates and implemented other measures to curb borrowing. In meetings this month, officials said they would continue those policies.

Economists have repeatedly warned that despite multibillion-dollar write- offs of bad debt and spectacular international stock offerings, state-owned Chinese banks could fall prey to bad debts, especially if growth slows.

"When the economy is doing well, we don't see big financial risks," Huang said. "But when economic growth slows, nonperforming loans rise."

India faces an uphill battle to rein in the insurgencies and terrorism that threaten the country's investment climate.

Beyond the unrest in Kashmir, analysts worry about a growing Maoist rebellion in parts of southern and eastern India that they have said is fueled by economic deprivation and uneven growth.

Insurgent groups are also active in remote northeastern India, where local people often accuse the federal government of exploiting the region's rich mineral resources without bringing much benefit to its inhabitants.

India is also vulnerable to domestic risks and so-called external risks like volatile oil prices and a resurgence of protectionism, which would crimp export growth.

And India has yet to bring surging prices under control: Finance Minister P. Chidambaram had termed the nation's 5 percent-plus inflation rate "worrisome."

Yet with growth at its highest level in 15 years, Chidambaram remains upbeat. "Just savor the moment," he said.

Beijing to push rural lending

China plans to give rural lenders more flexibility to set deposit and lending rates as well as to cut their tax burdens in a government effort to strengthen the rural economy, the chief banking regulator said Tuesday, Bloomberg News reported from Shanghai.

The government could also allow Agricultural Development Bank, one of the nation's three policy banks, to offer loans to small enterprises in the countryside, Liu Mingkang, chairman of the China Banking Regulatory Commission, said in Beijing.