Friday, August 27, 2010

India's Thrifty Hares and the Profligate Tortoise

There is now a subdued acknowledgement of the superior quality of India's growth when compared to the quantity juggernaut unleashed by China. Both save around 40 percent of their GDP, but in India it is households that save,unlike Chinese corporations, whose accounting practices are questionable, and who are subject to market ups and downs. India's growth is also much less debt-financed. Even the usually condemned rural sector is buzzing.  Indian entrepreneurs and consumers are managing to buy and produce at much higher rates of interest, which means they are generating a much better return on investment. Also, India's share of consumption at 55 percent of GDP is much higher than that of China; which means it is not as dependent on external markets.  India higher share of services in the economy makes its growth less polluting and energy-intensive.

But hanging over this optimism is the threat from a government which is getting deeper and deeper into debt. Mercifully, India has managed to grow quite strongly despite such persistently high deficits. Household savings cannot be freely converted into overseas capital, leaving them captive in the hands of the government. Even banks have to keep a quarter of their deposits in government bonds, giving the state another captive facility to finance its debt. The state also owns about a trillion dollars of productive assets through its enterprises. In fact, India is a curious study in contrasts: a feeble government, perhaps getting weaker by the day, and an energetic civil society whose aspirations and ambitions are soaring by the minute. The government must fix itself, or it runs the grave risk of converting aspirations into disappointments, and ambitions into anger.

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