China’s debt problem can have catastrophic proportions, harming the entire global economy. The country should be worried about that more than the economic fault lines of India

Amid the Doka La stand-off at the Sikkim border, Indians got a fair bit of economic caution from China’s state-run publication Global Times. An editorial that appeared in the daily on 6 August warns about the cracks in India’s struggling economy, reminding its ill health. It says while aggressive reforms like demonetisation and migration into the goods and services tax (GST) regime have contributed to short-term adverse impact on the economy, the real reason for the economic slowdown is its economic fragility.

To elaborate, the editorial talks about a bad loan-ridden banking sector unwilling to take further lending exposure to key sectors and the absence of revival plan to kick off private investments in the economy.

The Global Times editorial on Indian economy could very well be part of the Chinese psychological warfare — reminding the opponent how weak he is, create confusion and convince him why there are good reasons to surrender even before the battle begins. As Dean Cheng, Senior Research Fellow at Asian Studies Center writes in this article, the Chinese psychological warfare talks about “efforts (that) must therefore not only bolster one’s own side", but "cause the enemy to lose heart and disperse, so that even though they appear whole, they cannot exploit that." Probably, listing the fault lines in the Indian economy, the state-run daily is just doing that.

Indeed, the article is correct in saying India is passing through a slowdown phase. For sure, the demonetisation and GST have contributed to the temporary drag in the economy. While there are questions on the gains of the demonetisation exercise, most economists expect migration to GST to benefit growth with more clarity in the tax regime. The NPA problem in India’s banking sector is a pain on the economy but not an incurable one. Once the ongoing bad loan clean-up process is over, the government must begin to privatise the state-run banks to let private capital come in. It needs to also work on reviving private investments and keep the reform momentum on.

But, in the context of the Global Times article, the critical point to be noted here is that China has a much bigger bag of economic worries than India has. The state-run daily should be warning its state about its burgeoning debt problem, the actual size of which is not known to the outside world. This is a result of aggressive lending to corporations over years at a pace much higher than growth of GDP itself. Though most of these loans are state-backed, this is a ticking time-bomb that could explode if there is a major slowdown in economic growth. No one can rule out that possibility. Once this happens, the ramifications will be visible not just in China, but the whole world given the size of the Chinese economy and its economic linkages to rest of the world. As against this, India’s economic problems are more structural in nature that concerns only the domestic economy. Despite the short-term drag, India has much stable economic fundamentals. Its debt-to-GDP ratio is much smaller compared with that of its bigger neighbor.

Ticking Chinese time bomb

China, on the other hand, has to worry a lot about the course of its debt-ridden economy. The latest warning has come from global economist and Harvard economics professor Ken Rogoff who has issued a warning that China’s addiction to debt and reliance on investment-led growth will trigger a severe financial shock when its unsustainable economic model implodes (read a report here). Radhika Rao, economist at Singapore-based DBS Bank, quoting the IIF (Institute of International Finance) data, said China’s total debt is estimated to have touched 295 percent of GDP in the first quarter, while India’s added up to 132 percent in comparison. "As per the estimates, China’s household debt-to-GDP ratio hit an all-time high of over 45 percent in the first quarter of 2017 — well above the emerging market average of around 35 percent,” a CNBC report said.

It was only in May this year, global rating agency, Moody's Investors Service downgraded China's sovereign debt one notch to A1, doing so the first time since 1989. China's financial health will "erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows", the rating agency said in a statement.

According to this Bloomberg report, China’s total debt is now about two-and-a-half times the size of its economy. “It takes almost a third of gross domestic product just to service it. Corporations are by far the biggest debtors, especially state-owned enterprises,” the report said.

The Chinese must remember that despite these hiccups India is poised to emerge an economic power house in Asia. The world is already betting on India as the future economic power in the East.

According to a recent Harvard study, India has emerged as the economic pole of global growth by surpassing China and is expected to maintain its lead over the coming decade. Further, according to the Harvard University's Center for International Development (CID) growth projections, India will feature on top of the list of the fastest growing economies until 2025 with an average annual growth of 7.7 percent.

"The economic pole of global growth has moved over the past few years from China to neighbouring India, where it is likely to stay over the coming decade," the CID research suggested, adding that India's growth prospects are now better to also due to the economy diversifying its export base to include more complex sectors, such as chemicals, vehicles, and certain electronics," the growth projection pointed out.

The point here is, India’s economic problems are mostly on account of its bad loan ridden banking sector and inability of the government to attract enough private investments to pump up economic activities, while China’s debt problem could emerge in catastrophic proportions that could harm the entire global economy. It is about that possibility China should worry about more, before pointing fingers at the economic fault lines of its neighbor.