Monday, 1 October 2007

Will India do a China?

Andy Mukherjee asks whether India has the same disinflationary potential that China had.

Goldman Sachs Group Inc. economist Jim O'Neill wrote a paper last year, titled "Globalization and Disinflation: Can Anyone Else 'Do a China'?"

The full weight of that question is becoming evident now.

In their report, O'Neill and his team argued that China's rapid urbanization, industrialization and rising openness to trade and capital flows had all contributed to keeping inflation in the developed world lower than expected for a decade.

The Goldman analysts said China would continue offering an "inflation discount" to the world with a nascent pickup in Chinese consumer prices and wages stabilizing in 2007.

"If we're wrong and Chinese inflation continues to rise, the consequences for the rest of the world may be profound," the economists wrote. "The search, in terms of disinflationary forces, would be on to discover 'another China.'"

That's where India comes in.

To avoid a surge in consumer prices, [Federal Reserve chairman Ben] Bernanke may end up needing India to produce the disinflation that China is no longer willing or able to export...

"With the possible exception of India, it appears that none of the countries can 'do a China' on their own," Goldman's report said.

With its high birth rate and persistent trade deficit, I wouldn't expect too much from India as a disinflationary force though. Any improvement in productivity would mostly be soaked up by its own consumption and investment needs.


Anonymous said...

While China has led to deflation in goods made by cheap labor, India can cause deflation in services that require cheap labor. That's one of the reasons higher commodity prices can't create an inflationary spiral on their own. The higher commodity prices have to be met with higher wages. If you demand a higher wage, your job gets outsourced to Bangalore.

lim said...

I'd agree that India exerts some disinflationary pressure through services. My point is that the net impact won't be as great as China's through manufacturing because the balance of domestic demand and supply in India is not as lopsided as in China.

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