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Asian giants China, India strive to keep ahead of problems

For each, the potential is huge, but then, so are the risks.

By the numbers, both economies look set to continue their remarkable performances in 2007.

China’s economy is forecast to continue growing at a rate of about 10 percent a year. India’s economy grew 9.2 percent in the quarter that ended in September — its strongest performance since 1991. The International Monetary Fund estimates that inflation-fighting measures may slow growth to 7.3 percent in the fiscal year starting April 2007.

Such stratospheric figures highlight China’s rise as an export power, and India’s newfound cachet as a star outsourcing center for the high-tech industry, as well as robust growth in its agricultural, industry and services sectors.

But the gleaming new office buildings and legions of newly affluent consumers in cities like Shanghai and Mumbai, snapping up the latest cell phones and brand new sedans, contrast sharply with the poverty that persists in both countries, particularly in rural areas.

Some 10 percent of China’s 1.3 billion people live on less than a dollar a day, according to the World Bank. In India, with a population of 1 billion, about 40 percent do.

“There is an India of bursting growth, and there is an India of widespread want,” Sonia Gandhi, the Italian-born leader of India’s governing coalition, told a recent business conference in New Delhi.

More than a third of India’s population can’t read or write, and a fifth of its people have no access to safe drinking water. Poverty and unemployment are fueling insurgencies and communist rebellion in many parts of the country.

Still, both economies have proven remarkably resilient, adapting outdated trade and industrial policies while blunting the impact of those reforms on their poorest citizens with price controls and subsidies to farmers.

Tens of billions in foreign direct investment, coupled with strong domestic spending, are supporting heavy investment in construction of the railways, ports and other infrastructure needed to support further growth. Steel making, cement and many other industries have prospered in turn.

But leaders in both China and India are awakening to the realization that greater equity, plus better protection for the environment and scarce resources, are needed to sustain growth and help lift tens of millions more out of poverty. Both governments have stepped up rural spending and increased subsidies to the poor, while attempting to attract more investment into backward, inland regions cut off from the growth centers along the coasts.

China’s communist leaders, who face no electoral pressures and do not tolerate public or organized dissent, have acknowledged the threat to the party’s nearly six decades’ old rule from public anger over widespread corruption and the widening gap between rich city dwellers and the rural poor.

“Can China sustain 8 percent to 10 percent growth? It has to do more to stimulate consumption. A lot more,” says Yiping Huang, an economist with Citigroup in Shanghai. “It needs to do more for social welfare so that people can feel comfortable and spend more.”

At the same time, China is just barely beginning to grapple with the huge environmental costs of its headlong rush to industrialize: fouled water and air, rural villages drowning in waste and massive shortages of water and other resources.

Another risk that China faces is an overheating economy.

“When the economy is doing well, we don’t see big financial risks. But when economic growth slows non-performing loans rise,” Huang says.

So far, China has managed to cap inflation at about 2 percent, well below the government’s threshold for concern.

India faces an uphill task in reining in insurgencies and terrorism that threaten to impact the country’s investment climate.

Beyond the continuing unrest in Kashmir, analysts worry about a growing Maoist rebellion in parts of southern and eastern India that they say is fueled by economic deprivation and uneven growth.

Yet with growth at its highest level in 15 years, Indian Finance Minister P. Chidambaram was upbeat. “Just savor the moment,” he said.

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