Unbalanced growth

The big difference in the Chinese and Indian growth stories this year is that the first is fired primarily by massive investment, the second more by consumer spending.

The figures that have come out on consumer finance and levels of debt, as well as some of the insights being offered on consumer behaviour at a retailing conference, suggest the need for caution about the rapid growth of consumer credit, even as observers warn of over-investment and consequently over-heating of the Chinese economy.

The Chinese defence is that while there is massive investment going on, there is no sign of over-heating because inflation is low, the external trade balance is positive and there is still large-scale unemployment.

No argument can be made about whether fiscal pump priming is going on because of the Chinese practice of using bank lending as a surrogate for budgetary spending. So, other than the unnerving level of investment and capacity-creation that is taking place in a whole array of industries "" and the breathless rate of GDP growth, widely believed to be under-reported in the official assessment of 9 per cent growth ""there is no visible element in the economy that should cause worry.

What of the quality of India's GDP growth, now officially projected at more than 8 per cent? Certainly, it is true that some of the fastest growing sectors (housing and car sales, to take two examples) owe their happy record of recent months to the growing willingness of consumers to take on debt-facilitated and encouraged, of course, by the falling interest rates.

In turn, bankers like to argue that the level of consumer debt in India is way below those prevalent in developed markets like the UK and the US, when seen in relation to income levels. So the absolute numbers in relation to GDP are small, besides which consumer finance is still a fairly small (though growing) component of total bank credit. By international yardsticks, therefore, India has as little reason to worry as China.

Nevertheless, it is worth keeping in mind that interest rates can rise, and boom-times can be followed by downturns. Both events can upset consumer calculations about the income stream with which they will service debt, especially since an increasing component of consumer finance is at variable rates of interest.

At the systemic level, this means that the delinquency ratio in consumer finance will not remain as low as it has been in the past; at the level of the individual consumer, a change of economic fortunes could provoke a crisis and depress spending at the wrong phase of the business cycle.

Since India does not have the social safety nets that the developed economies do, the issue cannot be brushed aside as the fears of habitual Cassandras.

In short, a more balanced growth pattern, with a greater role played by investment demand, would be healthier for the system as a whole. So far there has been little sign of an investment upswing, in either agriculture or industry.

Yes, there is the national highway programme, and there are signs now of a construction boom; capacity utilisation levels in many industries have also improved, suggesting that new capacity creation will start kicking in. But none of this has reached levels where it can be argued that investment is at levels that can sustain the current rate of GDP growth.