China, India Grapple With Growth Challenges

China and India are both dealing with economic slowdowns but are on completely different footings to tackle the challenge. Beijing has a range of fiscal and monetary options to revive growth, while New Delhi must make tough political decisions to stem its decline.




China is better positioned to handle a shock than it was in 2008. It relies less on trade for growth: In 2008, China's net exports amounted to 7.7% of GDP; in 2011 the share had dropped to 2.6%. Beijing reported on Monday that inflation declined to 2.2% in June, compared with a year ago. With government debt at an estimated 22% of GDP, China has plenty of levers to pull to stimulate its economy in the face of declining demand.




"China is in a very comfortable position compared to the rest of the world," said Luis Kuijs, project director at the Fung Global Institute, a Hong Kong think tank. "It's more a matter of choice of what policy measures it will take to stimulate the economy, rather than whether it will be able to."








A large portion of China's economy is in the hands of its state-owned companies. That means the government can more easily get its economic decisions carried out—though it does present long-term problems for China as it tries to shift to an economy based on more innovation, competition and private enterprise.




The Chinese government recently has stepped in with stimulus measures. To boost demand for commodities and construction among other industries, the government approved two steel plants and several energy projects. On the monetary front, the central bank has cut interest rates twice in the past few weeks—the first such moves since December 2008—and in May reduced the level of reserves banks are required to hold. China has plenty of room for additional monetary moves.

"India's hands are tied, and because of that it's much more exposed to the global slowdown," said Frederic Neumann, co-head of Asian economic research for HSBC. "It has no fiscal ammo left to pump-prime the economy, so it has to endure a slowdown and take it on the chin."

India's main challenge is to stimulate business investment, which is drying up amid wariness among both domestic and foreign companies about shifting tax policies and regulations. The country's currency, the rupee, has tumbled against the dollar in the past year, partly due to growing investor concerns about India's high current-account deficit, which is roughly 4% of GDP. The rupee's fall has driven up real import costs for Indian companies and made foreign-currency loans more expensive to service.

The Reserve Bank of India in April cut interest rates for the first time in three years to fuel business lending. But when industry was looking for more last month, the central bank said it couldn't cut rates further with inflation uncomfortably high at 7.6%.