The government in New Delhi talks of fighting the economic slowdown by investing more in infrastructure. China goes one step further, specifies an investment figure ($586 billion over two years, or Rs 29.30 lakh crore), and also lists the areas of investment—low-cost housing, rural infrastructure, water, power, new technologies and projects to improve the environment, and so on. Given China’s record of investing in large infrastructure projects, and implementing them in time, the investment plan that has been laid out is entirely credible. For good measure, the Chinese have clarified that the investment will be funded by state-owned banks; technically, therefore, this will not be fiscal expansion, although the Chinese system operates in a manner whereby it is hard to tell whether bank money is de facto government money, because the state eventually will have to recapitalise banks that give bad loans.
The proposed Chinese investment is on a huge scale because its economy is about three times India’s in size. A comparable investment programme here would be of the order of Rs 10 lakh crore over two years, but the problem would be effective delivery. The government has already outlined a $500 billion infrastructure investment requirement for the 2007-12 quinquennium, and has acknowledged that it does not know from where a good bit of the cash will come. Private sector investment is feasible, but requires as a prerequisite the kind of policies that will attract private investors. In most infrastructure areas, such policies are still not in place. And public funding is constrained by two problems: the fisc is already stretched because of the oil and fertiliser subsidies incurred this year, and because execution capability on a Chinese scale is simply not there. To be sure, there are stalwarts like National Thermal Power Corporation and the Delhi Metro Rail Corporation, but these are the exceptions. A third constraint that has emerged in recent years is the contentious issue of land acquisition. So, however much India may want to, it cannot invest its way out of trouble as the Chinese have announced they will do.
This points to the need to address key process and capability constraints in the system. Admittedly, decisions can be acted on faster and more effectively in a command-and-control structure, when compared to a loose, free-wheeling system like India’s. But that should not be an excuse for inaction; if anything, it should spur the search for enabling systems and procedures that facilitate focused and purposeful action. If the Indian system needs reform, it is this aspect that needs primary attention.
The Chinese announcement should be placed in its context. The scheduled meeting of the G-20 heads of government, near Washington this week-end, is expected to see the US and other western leaders pressing China to correct its exchange rate policy, which some have argued is the underlying reason for the US economy heading into a storm. Even at the time of the Asian crisis of a decade ago, the chain of events was set off by a Chinese devaluation of the yuan some months before the storm broke on one East Asian coast after another. So the leaders in Beijing must have been anxious to shift the debate ahead of the Washington meeting, and indeed wrest the initiative so that Beijing can present itself as the good boy of the global system, creating demand and lending reassurance to depressed markets that have bounced back as an immediate response.