Suman Bery: As the World Turns

India deserves better treatment from the foreign press.

Regular readers of this column would have noted my addiction for the British economic press, notably The Economist and the Financial Times (FT); the latter enjoys a business relationship with Business Standard. While there is much to commend in both these newspapers, their coverage of India is occasionally susceptible to what I call the "British sneer".

This tendency has been abundantly evident in recent days. A leader in the The Economist's current edition (June 9) is dismissively titled "Goldilocks Tests the Vindaloo" with a follow-on article entitled "Waiting for the Monsoon". The burden of both articles is that monetary policy remains too loose and that "constrained by politicians, the RBI's tightening has been timid"; the underlying tone is of a gang that cannot shoot straight. The Economist concludes that Indian growth will need to slow for a period if inflation is to be curbed.

The Financial Times article, "Worlds Collide over Global Warming" (FT, June 9; BS, June 11), echoes this tone. Written by Jo Johnson, South Asia Bureau Chief of the FT, the article is a savage attack on the hypocrisy of India's position on global warming. To quote, "The biggest emissions in India come from wasteful and luxurious energy consumption by the elite and middle classes, who never had it so good ... That's why India must accept deep cuts in emissions, in particularly those relating to private vehicles, the profligate use of energy and water by the rich and the rocketing consumption of air-conditioners, washing machines, microwave ovens and plasma and liquid crystal display television sets." Mahatma Gandhi would approve.

A stock figure on American television was the late lamented comedian Rodney Dangerfield, whose plaintive motto was "I don't get no respect" (sic). This seems to be India's fate in the western media. No matter how well we do and how extraordinary our achievements, somehow it is never quite enough. We are always painted as Ambassador cars whose infirmities are all too visible. Meanwhile, China has smoothly morphed into a Jaguar, motoring along in the fast lane of one of their super highways. We lumber on with our Golden Quadrilateral.

We need not despair. Other coverage in the same newspapers suggests that where macro management and financial integration are concerned India has done a much better job than has China over the first years of this century.

This comes out very clearly in a recent piece by Martin Wolf in the FT (May 30). Titled "The right way to respond to China's exploding surpluses", the column brings together some stunning points on China's recent macroeconomic trajectory.

First, the ballooning of China's current account surplus is a relatively recent phenomenon. It was a modest $46 billion in 2003 to $250 billion in 2006 (9.5% of GDP). As I argued in my last column, this must reflect structural changes in the real economy, not just exchange rate manipulation. As noted below, Wolf confirms this.

Added to the huge current account surplus are net capital flows of around 3.5% of GDP (largely net FDI) leading to a surplus in China's basic balance of payments of 12% of GDP last year. This is the source of the growth in reserves, which are best thought of as official capital flows. Wolf points out these official flows are 50% higher, in relative terms, than capital flows out of London before the first World War (largely private), which were 8% of the GDP of Britain.

Wolf further notes that this export of capital comes on top of a towering domestic investment rate of 40%; also that the Government has been directly responsible for this huge bias towards capital accumulation and capital export through its financial policies. To quote, "The reserve accumulations are not, it should be stressed, in response to inflows of speculative 'hot money'. They reflect a policy of shipping out the foreign exchange received from huge trade surpluses and inflows of long-term investment, to keep the exchange rate down."

Such a current account surplus can only come about if there is a concomitant excess of domestic savings over domestic investment. We have already seen that the domestic investment rate is not wanting; the implication is that savings are in excess of 50% of GDP, a point that Wolf confirms. He also points out that the bulk of Chinese savings (and, even more, increases in the saving rate) are no longer by households but by governments and by corporations many of whom are owned by governments.

Quoting Nick Lardy of the Petersen Institute of International Economics, Wolf points out that household consumption is at a mere 38% of GDP; employment growth has been only 1% a year and financial repression that keeps interest rates slow is resulting in massive misallocation of capital. In effect, the Chinese system lacks any visible machinery (other than inefficient investment) to transfer its largesse to its own household sector; it finds it easier to lend these resources to the US. To misquote Paul Newman in "Cool Hand Luke": what we've got here is a failure to intermediate. This is state intervention run amok. Yet China is approvingly stroked by The Economist as the Tiger in Front, rather than the over-egged chop suey that it is.

Why does any of this matter? The issues and dilemmas facing Indian macro policymakers today are real ones, to which no facile answers exist. A classic illustration emerges from the account in this newspaper of the second report of the Deepak Parekh committee on infrastructure. I have not been able to lay my hands on the report itself. But the press reports suggest that what is being proposed is term transformation of our reserves via an offshore publicly owned investment bank.

From an industry perspective what is proposed may make perfect sense; whether it does from a macro perspective is something altogether different. Quoting JPMorgan, The Economist dubs as "foolish" the liberalisation of ECBs last year; yet as the newspaper notes that the only way for the growth constraint to ease in the long run is "unblocking its infamous infrastructure bottlenecks, notably its lousy roads, ports and power". If one believes Parekh, this requires bringing in more, not less, money from abroad, to compensate for remaining infirmities in our domestic financial system.

The lesson is the familiar one. Financial sector reform is perhaps the central issue facing India today, and fuller capital account convertibility is part of the answer. It is a pity that the political consensus for such reform remains so weak. Were these constraints to be lifted, India could indeed aspire to be the Lamborghini racing ahead.

The writer is Director-General, NCAER. The views expressed here are personal.

sbery@ncaer.org