Can In­dia han­dle bad times bet­ter than China?

The Pak Banker - - OPINION - Michael Schu­man

THE lat­est In­dian bud­get will be re­leased next week, and as usual, busi­ness lead­ers and econ­o­mists will dis­sect its de­tails for an in­di­ca­tion of where pro-mar­ket re­forms might be headed. They're likely to be dis­ap­pointed. Each year, the world's in­vestors hope for faster change in In­dia, and each year, they com­plain the govern­ment's am­bi­tions never go far enough. That peren­nial let­down is part of the stan­dard crit­i­cism about In­dia, es­pe­cially when com­pared to its high-oc­tane neigh­bour, China. While the Chi­nese regime can in the­ory im­ple­ment re­forms with clin­i­cal ef­fi­ciency, In­dia's tu­mul­tuous democ­racy ties up change in end­less de­bates and dis­sent, mak­ing ef­fec­tive gov­er­nance prac­ti­cally im­pos­si­ble. Even hard-charg­ing Prime Min­is­ter Naren­dra Modi has been stymied by par­lia­men­tary op­po­si­tion in his at­tempts to lib­er­al­ize In­dia's over-reg­u­lated econ­omy. The re­sults speak for them­selves: China's na­tional out­put is five times larger. Yet this dis­tinc­tion be­tween China and In­dia has al­ways been sim­plis­tic, and in light of cur­rent events, it's even less ap­pli­ca­ble to­day. As both coun­tries con­front eco­nomic head­winds abroad and struc­tural weak­nesses in­ter­nally, In­dia's more flex­i­ble and trans­par­ent democ­racy is look­ing bet­ter suited to tack­ling many prob­lems than China's tightly-wound sys­tem. Mean­while, the lim­i­ta­tions of China's cen­tral­ized pol­icy process are be­ing ex­posed, to the detri­ment of the global econ­omy.

Note, for in­stance, the dif­fer­ent ap­proaches the two coun­tries are tak­ing to­wards their strained banks. Bad loans, which present a threat to sta­bil­ity and growth, are ris­ing in both sec­tors. Of­fi­cially, In­dia's banks are in much weaker shape than China's, with bad loans ac­count­ing for 5.1% of the to­tal, com­pared to less than 1.7% in China. But to a de­gree, that dif­fer­ence is the re­sult of a more proac­tive pol­icy on the part of In­dia's reg­u­la­tors. Re­serve Bank of In­dia (RBI) gov­er­nor Raghu­ram Ra­jan launched a re­view of state banks' bal­ance sheets last year, forc­ing them to iden­tify and de­clare sus­pect loans, with the aim of fix­ing the mess by March 2017. Mark Young, head of Asia-Pa­cific fi­nan­cial in­sti­tu­tions at rat­ing agency Fitch, says that Ra­jan's ag­gres­sive stance is a "prime rea­son" why non-per­form­ing loans have been ris­ing in re­cent quar­ters in In­dia. "To the ques­tion of what comes first, clean up or growth, I think the an­swer is un­am­bigu­ously, ' Clean up!'" Ra­jan said ear­lier this month.

China, on the other hand, doesn't seem par­tic­u­larly ea­ger to shed light on what could well be a loom­ing bank­ing cri­sis. Pri­vate es­ti­mates of bad loans at Chi­nese banks run sig­nif­i­cantly higher than the of­fi­cial data. Yet when Chi­nese mag­a­zine Caixin con­ducted an ex­ten­sive in­ter­view in Fe­bru­ary with Peo­ple's Bank of China Gov­er­nor Zhou Xiaochuan, the sub­ject of the health of the bank­ing sys­tem didn't even come up. In fact, while Ra­jan is ac­tively forc­ing In­dian banks to ac­knowl­edge their prob­lems and make pro­vi­sions for them, Zhou and his com­rades are run­ning the risk of adding to China's pile of bad loans. Hop­ing to prop up growth, the govern­ment has en­cour­aged a hefty bout of new lend­ing. The amount of new credit un­leashed in Jan­uary hit an all-time record. A good chunk of that money is prob­a­bly go­ing to heav­ily in­debted state en­ter­prises and mori­bund "zom­bie" com­pa­nies, to help them pay off cur­rent loans and thus stay afloat. Un­less they can grow their way back to health-an un­likely out­come in the cur­rent en­vi­ron­ment-Chi­nese banks are go­ing to face even steeper prob­lems in the fu­ture. Th­ese diver­gent ap­proaches to the bank­ing sec­tor should ex­plode a cou­ple myths about In­dian and Chi­nese pol­icy-mak­ing. First, in­vestors er­ro­neously as­sume that In­dia's lead­ers are ham­strung by demo­cratic pol­i­tics while Chi­nese cadres, im­mune from such pres­sures, can craft pol­icy in the best in­ter­ests of the econ­omy. But the con­tin­u­ing ex­plo­sion of debt in China is very much the re­sult of in­ter­nal pol­i­tics. Pres­i­dent Xi Jin­ping must main­tain high growth lev­els and em­ploy­ment in or­der to pre­serve the govern­ment's political stand­ing. Lo­cal gov­ern­ments of­ten re­sist ef­forts to close down zom­bie com­pa­nies, which re­main valu­able sources of jobs.

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