China’s slowdown: Good news for India’s economy?

NEW DELHI, India — China's red hot economy is cooling off.

This week, it reported economic growth of 7.5 percent, a steady clip for any other country but lackluster by China’s recent standards.

The Middle Kingdom faces several challenges, including an excess of investment and credit, which have fueled businesses unlikely to yield profits. Moreover, Chinese citizens prefer to squirrel their money away rather than spending it, meaning that consumption doesn’t contribute enough — in the United States, it accounts for more than two-thirds of the economy.

But China is also suffering from its own wild success. With employment maxed out, wages are rising rapidly, meaning that the Pearl River Delta factories that manufacture much of world’s goods are no longer as competitive as they once were.

That leads to the question, can India pick up the slack? India has a huge population of unskilled laborers, just as China did before its boom.

Is India next?

To find out, GlobalPost's Jason Overdorf spoke with Bibek Debroy, an Indian economist with the New Delhi-based Center for Policy Research.

The interview has been edited and condensed by GlobalPost.

GlobalPost: What does the slowdown in China mean for the Indian economy?

Bibek Debroy: The bottom line is this is bad news for us, because we're not really in competition with China, and because of the impact it has on global growth.

The competitive element is a minor one, because China is too far ahead. If anything, if I'm talking about garments, we're in competition with Vietnam and Bangladesh. [Meanwhile] the demand for India's exports to Europe or even the US is a function of what the Chinese growth is.

If Chinese growth is high, then the world is also growing, and if the world is also growing the demand for India's exports is also higher.

Can India capitalize on China's rising wages to increase its own manufacturing exports?

The first thing to note is our manufacturing is a mess, our exports are a mess. Yes, China has had a long history of manufacturing growth, and our manufacturing's share in GDP has not been as high as it should have been. It hovers around 17 percent.

But there is a long litany of woes that we have domestically, which have nothing to do with China.

What are the domestic problems that are holding back Indian manufacturing?

The historical domestic issues include poor infrastructure, an indirect tax system [in which multiple taxes on goods and service have a cascading effect], and [restrictive] labor laws. We've compounded that by adding problems of land, natural resources, and minerals. We've begun to import iron ore. We're beginning to import coal. We're beginning to import all kinds of things that we should be producing domestically.

Sounds like you're saying export-led manufacturing is more or less off the table.

We missed that bus, and we've done nothing to ensure that we clamber onto that bus, and just because China has slowed down a little bit doesn't mean we're going to get on that bus now. Wages is only one part of it.

Does China's slowdown help with India's problems attracting foreign direct investment (FDI)?

There are any number of reasons why foreign direct investment is not coming into India. The main reason is that regulations have made it very difficult for FDI — as well as domestic investment. Those reasons don't disappear now. If FDI doesn't got to China, it's not going to come to India. It's going to go elsewhere. It's going to go to Africa, or there are plenty of other attractive destinations. I see no particular reason why there should be a diversion from China to India.

So China's slowdown just means that everything across Asia, including India, is slowing down?

There's a lot of complacency in India, saying, “Hey look, China is slowing down. The BRICs are not doing so well.” But [the global crisis] is not hitting all of us the same. After being hit, China is still at 7.5 percent and we are at 4.5 or 5 percent, not higher than 5. The levels are completely different.

Why should India be concerned about those growth numbers?

If you go back three years, the hypothesis was that because of various factors, including the graying of the Chinese population, the Chinese growth rate would drop from 10 percent to 8 percent, and the Indian growth rate would be jacked up from 8.5 or 9 to 10 or 11 percent even. That was the broad hypothesis floating around before 2008. But China's still doing 7.5 and India's doing 5. In fact, the global slowdown should hit China much more, because China is much more exposed internationally because exports make up a larger share of GDP.

So, the problems are really indigenous to India.