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The Asian Growth Conundrum

Omkar Goswami


Some time ago, when the world was suffering the worst of the global depression, Hu Jintao, the Paramount Leader of the People’s Republic of China, and Wen Jiabao, Premier of the State Council, coined a phrase, ‘Maintain Eight’. It meant that come hail or high water, or whatever else they say in China, the country had to achieve no less than 8 per cent GDP growth. As far as the Party was concerned, it was the bare minimum to keep unemployment in check and maintain social and political stability.

China has succeeded, with some spare change to boot. According to National Bureau of Statistics, the Chinese economy grew by 8.7 per cent in calendar year 2009 compared to 2008. In Q1 it was 6.2 per cent; in Q2 it rose to 7.9 per cent; Q3 was up to 9.1 per cent. And there was a growth surge in Q4 to 10.7 percent. All of this, including the $586 billion two-year stimulus package, led to an average annual growth that was a good 70 basis points above Messrs Hu’s and Wen’s ‘Maintain Eight’. The consequence of being the fastest growing large economy of the world is that China now has a GDP of around $4.9 trillion; and it has overtaken Japan in the global GDP sweepstake. The forecast for China’s growth in 2010 is somewhere between 9.5 per cent and 10 per cent.

Move on to India. As we come closer to 31 March 2010, it seems pretty clear that India will achieve something like 7 per cent growth. When a conservative body like the Reserve Bank of India has for 2009-10 growth revises its GDP growth for 2009-10 upwards from 6 per cent to 6.9 per cent, you can pretty sure that number will be closer to 7.2 per cent or thereabout. That translates to a GDP of something like $1.3 trillion. Maybe even $1.4 trillion. The forecast for India’s GDP growth in 2010-11 varies quite a bit, but nobody is making a bet far below 8.5 per cent.

So, there we have it. The base case is of one $4.9 trillion economy growing at around 9.5 per cent compound; and another $1.4 trillion chap growing at around 8.5 per cent. That, ladies and gentlemen, translates to pretty stupendous growth. It is a $6.3 trillion behemoth growing at a weighted average rate of 9.3 per cent per year. And if this growth was to persist for five years, China would have a real GDP of $7.7 trillion and India $2.1 trillion — or $9.8 trillion adding the two.

Is this feasible given the current growth drivers? That’s my question to which I have no clear answer. But it is something that I want to get to the bottom of. Let me share with you my worries. Predominantly China, but also India, need a great deal of natural resources to fuel this growth. Here are a few: hydrocarbons (oil, gas and coal); base metals (mild and finished steel, copper, aluminium, lead, zinc, nickel, tin and silver); basic food (rice, wheat, edible oils, pulses, sugar, vegetables, fruit and dairy products).

My question is simple and yet all too difficult to answer: Can the world produce enough of these key commodities to fuel an average trend rate of growth of 9.3 per cent coming from China and India as a whole? Are their supplies elastic enough? Or will we see a period of rapidly rising commodity prices — as we did for eighteen months before Lehman became a household world?

My guess — and please note the word ‘guess’ — is that we are probably looking at a serious hardening of commodity prices as global producers keep running short of demand. Consider hydrocarbons, for instance. There is neither enough discovered resources to meet this stupendous growth over such a high base; nor enough refining or delivery capacity. That’s why China is in an all-out race to capture oil, gas and coal resources across the globe. It is the same with food. In fact, worse, because two things will happen. For one, demand for all food will increase in the aggregate. For another, as households get better off, they will spend relatively more on higher value food such as sugar, fruit, dairy products, meat, confectionaries and the like, which will further increase demand. Global food suppliers haven’t seen China and India together grow at 9.3 per cent from $6.3 trillion today to $9.8 trillion five years from now. I can’t see how they can ‘over-supply’ this growth.

If China and India stoked global commodity and food inflation, then we should expect tighter monetary policy in both countries to control price rises. What will that do to growth? Again, I have no answer. Except to say, forget about U- and W-shaped recoveries, and focus on the inflationary threats to Asian growth.


Published: Business World, February 2010


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