【纽约时报】After Vote, Is It India’s Time to Shine?

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After Vote, Is It India’s Time to Shine?
http://www.nytimes.com/2009/05/26/business/global/26inside-asia.html

By ALAN WHEATLEY Published: May 25, 2009

BEIJING — As recently as 1990, the average income per head in China was still lower than that in India. Today, it is more than twice as high in China.

There are many reasons — from life expectancy to literacy rates and crop yields — why India has fallen way behind its neighbor. Among them is the failure of the vibrant Indian democracy, with its competing political interests, to replicate the laser-like focus of single-party China on growth and reform.

Now, after a decisive general election victory for the incumbent coalition, led by the Congress party, markets have been electrified by the prospect that political and policy continuity will allow India to start closing the development gap with China.

Investors hope that Prime Minister Manmohan Singh, no longer beholden to the anti-reform left, will seize the chance to reap the economic dividends of positive population trends.

China’s population will soon start to age, eroding the demographic dividend that has helped fuel 10 percent annual growth for the past 30 years. Every second Indian, by contrast, is still younger than 25.

“To harness that demographic sweet spot, you need really good policy and infrastructure, and China managed to deliver those conditions,” said Ajay Kapur, head of global strategy and economics at Mirae Asset Securities in Hong Kong.

“After this election result, the probability of these things happening in India as well is far superior than in the past five years,” he said.

Arvind Panagariya, an economics professor at Columbia University in New York, said the tiger economies of Asia had been unable to sustain 10 percent growth for more than about 30 years, suggesting that China would slow to a rate of 5 to 6 percent in a few years.

At the same time, Mr. Panagariya said India was likely to climb back to its pre-crisis growth rate of 8 to 9 percent a year thanks to the substantial liberalization already accomplished.

“And if the reforms get done, I have no doubt they can get to 11, 12 percent,” Mr. Panagariya said. “The gap with China will be closed. It’s an issue of time.”

So what are the fundamental changes needed?

High on Mr. Panagariya’s wish list is a more flexible labor market, a big expansion of the power grid and state-level changes to make it easier to acquire and develop land.

Mr. Kapur says India needs to learn from China and develop light manufacturing to provide employment for tens of millions of surplus farm laborers. Information technology may be the poster child of the Indian economy, but the sector creates relatively few jobs.

Better urban management will be an imperative as more Indians flock to cities in search of work. Seventy percent of them still live off the land.

Here, too, Mr. Kapur says China can show the way.

“India is terrible at managing large cities. China has powered ahead in connecting these cities and building out the transportation system. It’s pretty well planned and executed; in India it’s badly planned and badly executed,” he said.

New Delhi’s metro shows that China does not have a monopoly on smooth project execution if local government is efficient. But planners in China face far fewer constraints those in India.

Jahangir Aziz, chief economist at J.P. Morgan in Mumbai, agreed that changes to land policy were crucial to generation of investment to ease congestion and power cuts in big cities.

India has in fact increased capital spending, which leapt to 39 percent of gross domestic product in 2007 from 27 percent in 1995.

“India has been an investment-driven economy for the past five years, just like China,” Mr. Aziz said.

To sustain the trend, though, it would be critical to reduce the cost of capital through financial-sector liberalization, Mr. Aziz said.

The election results were widely interpreted as a reward for good governance. But that is not to say they were a vote for the sort of deep-seated changes anticipated by investors who drove the Mumbai stock market up 14 percent last week.

“What’s happened is a huge positive, but expectations are running way too high right now,” said Shumita Sharma Deveshwar, director of India research in New Delhi at Trusted Sources, an independent research firm specializing in emerging markets.

“Even within Congress, there is opposition to reforms. It’s not as though it’s a completely pro-reform party that’s going to change the entire face of India,” she said.

Some bills that have been blocked, like those to permit more foreign investment in insurance and to open up the pension system to private firms, are now likely to go ahead swiftly.

But Mr. Panagariya said it was not clear that the Congress leader, Sonia Gandhi, and her son, Rahul, were committed to serious labor and land policy changes.

“I want to wait and see. When the government is returned with this kind of strength, it’s probably going to feel that, ‘Well, the people liked what we did in the past five years, which was not a whole lot,”’ he said.

Mr. Aziz agreed that there had not been a clamor for change in India.

Moreover, Congress would be considering that it had been returned to power mainly for having stressed a fairer sharing of wealth; in 1996, by contrast, it was kicked out of office after pursuing a bold liberalization agenda.

For investors who want to choose between the billion-strong neighbors, Mr. Aziz said it would take a couple of years to see whether China succeeded in rebalancing its economy and whether India could raise its infrastructure game.

“There are always policy risks in India. It’s a democracy, and no matter how good the election results may have been, it’s still a fractured democracy, and policy slips can push back the economy quite far,” Mr. Aziz said.

“But I don’t see China and India being out of any portfolio on a 10-year horizon. They’re both going to be the fastest-growing countries on the globe for at least the next 10 years,” he said.

Alan Wheatley is a Reuters columnist.

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