There is a lot of talk going around at the moment about China and their very robust economic growth rate. They have been trumpeting their 3% annual figure for some time now, though other analysts have pointed out that this figure is probably inflated due to government manipulation of the figures. Regardless, the fact remains that China's economy is growing at a phenomenal rate. And one thing that makes this so is the fact that China is now looking to other countries such as India for assistance with their own economy, especially in the form of infrastructure investments.
India too has embarked on a massive infrastructural drive of its own and is looking to other parts of the world to help fund these projects. In fact, there are new initiatives being looked into right now at how to jump start the economic revival in India, which is currently in shambles after a couple of years of economic slowdown. Infrastructure spending is the buzz word in Indian politics at the moment. Whether or not this initiative will take India's economic growth rate to 3% is an open question. But one thing is for sure, the government is allocating funds and looking to the private sector to foot the bill.
As China pushes forward with its economic stimulus plan, the Indian government has taken notice. The Reserve Bank of India has also announced a rate cut. All this means that now is the time for Indian businesses to get ready for the wave of stimulus. If China is successfully pulling in private capital for its economy, then it would only be a matter of time before similar moves by Indian government come to pass. If they do not, the whole concept of economic rebalancing will go bust like the Delhi tulip bubble of a few decades ago.
Now while it is always nice to have any nation as a backup plan in case something goes wrong, what makes India so attractive as a destination for Chinese investment is simple. The top three reasons are low labor costs, good infrastructure and an advanced entrepreneurial set-up. Of course all this comes at a price and China may not be willing to spend the kind of money required. However, as things stand presently, at least the lure of cheap labor is very much there.
Second, there are certain limits to the benefits of economic rebalancing. In particular, the rapid increase in infrastructure spending will only be possible if the growth rate goes beyond a . . . . . . comfortable level. In such a scenario, unless infrastructure projects in major cities are thrust with sufficient vigor, the gains accrued will only be limited to the initial euphoric phase which will quickly fade away.
Finally, China has developed a certain set of rules in economic rebalancing that no amount of economic growth rate hike can alter. To begin with, no central bank can hike the base interest rate in a country unless there is a sudden outbreak of inflation. And even then such a move would beuted to disastrous effects in a country where currency values have been strengthening for years now.