South Asia

China, India weigh war costs
By Jayanthi Iyengar

NEW DELHI - Wars are generally bad for everyone. Yet the new Gulf War is more so for China than for India, given the fact that it comes at a juncture in China's political history when there's been a change in leadership, along with a change in approach to growth.

Until now, China's focus has been on growth and growth alone, with scant attention to the hardship that this course of action may have brought on its people. This has caused widespread labor demonstrations, unhappiness and dissatisfaction among the population, apart from sharp criticism from the international media and China watchers.

Despite China's phenomenal growth, the per capita annual income is still only about US$750 per person, and the new leadership under President Hu Jintao and Premier Wen Jiabao, though communist in nature, faces the daunting task of giving a human face to the country's reform process. To humanize reforms and to create greater acceptability, the new leadership is now committed to creating a greater number of jobs and greater opportunities and income for its people.

Hinting at the challenges ahead, Hu said in his first statement to the Chinese legislature, broadcast live nationwide, "China's development is at a new historical starting point." Both Hu and Wen have committed the Chinese government to "achieving the great rejuvenation of the Chinese nation". Just prior to being elected, Hu, who comes from a rural background, had visited the Chinese hinterland to check on the well-being of the people, an event unheard of under Jiang Zemin's leadership, clearly signaling a pro-people tilt to the Chinese style of capitalism.

At the ground level, these commitments mean that China must top the current 8 percent gross domestic product (GDP) growth to sustain current levels of employment, as well as to create new jobs. In economic terms, this translates into maintaining Chinese industrial growth at more than 20 percent per annum. For this, it needs oil to feed its industries and fuel growth.

Oil prices have fallen and stock prices have soared after the US attack on Iraq, but the fears continue that a cornered Saddam Hussein may fight longer than expected and oil prices might rise again. For China, this could spell disaster. It is the world's third-largest consumer of crude, after the United States and Japan. It imports one-third of its oil requirements, 60 percent of which comes from the Middle East. Western commentators were bemused as to why the Chinese were chasing oilfields in the Caspian Sea on the eve of the US attack on Iraq, but reports now indicate that China has no strategic reserves and its commercial stocks are estimated to be good for only two weeks. India also has not yet created a strategic reserve, though it claims that it has stocks to last for two months. The oilfields in the Caspian Sea cannot be immediately exploited, but China obviously is planning ahead to reduce its dependence on the volatile Middle East.

Estimates are already being put forth of how this war will shave reduce China's growth, and experts note that this limit could become substantial in the event that the war is prolonged. "If the war is over within a month, the effect won't be that big, but if it continues for more than three months, there could be a relatively large impact, mainly because of worsening trade conditions for China," said Zhu Jiangfang, an analyst with Huaxia Securities, in an interview with Reuters last week. China Development Institute analyst Liu Xianfa has forecast a slip of 0.3 of a percentage point if war ends within three months and 0.5 of a percentage point if it goes on for six.

To pay for its oil imports, which are expected to go up both on account of growth as well as an anticipated increase in oil prices over the long term, China will need more foreign-exchange earnings through exports, tourism and foreign direct investment (FDI). Foreign investors are not expected to abandon China, even in the postwar scenario - FDI inflows jumped by 54 percent in the first two months of 2003, despite the gathering war clouds - but China will have to prove that it is business as usual in the country despite the disruption in the Middle East. For this, it must maintain uninterrupted availability of power, water and oil supply. Its airlines have to be efficient and its transport system faultless if it wants to continue projecting the image of being the safe haven for foreign investors under all circumstances.

Since the US is one of China's largest trading partners - with trade exceeding $150 billion annually - it needs to maintain a weak yuan against the dollar to keep the terms of the trade in its favor. It could also do with a competitive depreciation of its currency against its neighbors' in competing markets to corner market share further.

Fortunately for China and India, the yuan, like the Indian rupee, both of which are pegged to the dollar, has been weakening along with the slide in the value of the US currency. This means that both countries can now get more value for the same quantum of exports, but there are predictions that this war will affect overall exports themselves, along with tourism. Thus, the gains booked through a weakening yuan and rupee are likely to be set off by the overall shrinkage in exports themselves.

Foreign-exchange earnings through tourism will undoubtedly take a hit, partially because of travel plans being set aside on account of the actual war and the warnings put out by Western countries to their citizens. Yet there is a threatening possibility that Americans may decide to stay at home even after the war - a decision that will hit the Chinese more than the Indians.

A New York Times/CBS News poll taken on the night that the United States first bombed Iraq shows that though 62 percent of the adult Americans polled felt that the US was right to go ahead with the attack, 59 percent said the hostilities had increased the threat of terrorism against the US. Only 8 percent thought the risk had decreased. A CNN/USA Today/Gallup poll, conducted at the same time, found that 65 percent of Americans did not "personally feel any sense of danger from terrorist acts", which meant 35 percent or one-third the population polled did consider themselves to be under enhanced terrorist threat.

In 2002, China topped $20 billion in foreign-exchange earnings through tourism, about $2.2 billion higher than the precious year, clearly unaffected by the September 11, 2001, attacks that hit tourism earnings for countries such as India.

In the case of India, the urgency to grow and maintain growth is not as pronounced. The coalition government led by the Bharatiya Janata Party (BJP) is in its fourth year of its five-year term. Its liberalization measures have already slowed down with an eye on the forthcoming national elections, scheduled for next year. The focus in India is now on populism rather than economics. Even this has worked to India's advantage when you compare it with the Chinese situation. Since it is widely known that India had debunked economic sense for populism, its information has been discounted by investors. This is unlike China, where investor expectations have been so high that even the smallest sign of its inability to perform would draw severe flak.

What cushions India from the repercussions of its economic irresponsibility at this point is its steady 5.5 percent annual GDP growth, which occurs irrespective of everything. Many experts refer to it as "the Hindu rate of growth" and the debate within India is on how this growth rate should be topped rather than basking in its glory. From the global perspective, however, there are few countries in the world that have consistently managed to notch this level of growth, and within Asia, India continues to be second to China in growth with its 5.5 percent GDP against the latter's 8 percent.

A competitive depreciation of the rupee should work as much to India's advantage as should a competitive depreciation of the yuan to China's. Yet for the nationalist BJP, the rupee is a matter of "national pride" and has been seen as being symbolic of the strength of the country. Hence, the party has been keen to keep the rupee artificially afloat, even if it means forgoing the competitive advantage against neighbors in competing markets. This might sound quixotic to outsiders, but it marks a fundamental difference in approach between the two countries to the reform process itself, with India adopting reforms to the extent that it suits its socio-political goals, while China goes whole hog on the economic, if not political, front.

This is one reason the focus in India is often on fiscal sops to exporters rather than on letting the rupee find its natural level against the dollar, which is generally considered to be about Rs50 at this time. Even now, there is talk in India of supporting exporters with "a war package" in the forthcoming Exim policy for 2002-04, rather than letting the rupee quietly slide against the dollar to find the real rate of exchange.

Further, India is not as dependent on tourism and exports for foreign-exchange earnings as China is. India's exports account for 0.6 percent of global trade and efforts are on to take it up to 1 percent. Against this, China's share in world trade is more than 2 percent.

In the case of tourism, too, India's foreign-exchange earnings from tourism have improved in 2002-03, but they are still lower than the levels in 2000-01 prior to September 11, 2001.

If one looks at the complexion of India's foreign-exchange kitty, it has been burgeoning primarily on account of non-resident deposits and private transfers by Indians residents working abroad. The latter comprise the multitude of technicians, workers, nurses and their ilk who work in the Middle East and repatriate their dollar earnings to their families back home. There's a possibility that this source could dry up - as it did during the last war with Iraq - if the war spreads to Kuwait and the rest of the Middle East, but otherwise, India's foreign-exchange earnings themselves should not be too badly hit on account of this war. That takes the pressure off the Indian government to a great extent.

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