something to learn from china in economic reforms

The Chinese advance to be watched these days is not only across the international border high up in the Himalayas. They are pushing ahead with economic reforms as well.

A statement this week from its state council, the main administrative agency in the country, said that China will make it easier for capital to flow in and out of its economy. This follows a statement in March by the state council that China would soon begin to ease controls on domestic interest rates and the exchange rate of the yuan. The Chinese government also said it wants to change the household registration system that constricts labour movement across the country.

These reforms come at a time when the Chinese economy is slowing. Wages are rising. There is pressure on China to rebalance its economy by encouraging consumer spending to replace the current overemphasis on investment.

China first tried to deal with the post-Lehman downturn with a massive $550 billion stimulus that propped up growth for some time but did little to address the structural challenges in the economy. The strategy now seems to have shifted from stimulus to economic reforms.

There are lessons here for India. To be sure, India does not have to pursue the same individual policies. For example, it has limited scope to open its capital account further at a time when the massive fiscal and current account deficits threatens economic stability. The bigger lesson is the importance of economic reforms when countries are in the midst of structural rather than cyclical slowdowns, as in both India and China.

There has been some policy action after P. Chidambaram returned to the finance ministry in August, but the moves to attract foreign capital in certain sectors or setting up a cabinet committee to clear investment projects will be more effective in addressing immediate economic problems. The more important changes required in areas such as labour laws, land acquisition, taxation or the financial sector are still stuck.

The 2009 stimulus in India at best gave a temporary boost to economic activity. Its long-term costs are now being borne through high inflation and a decline in national savings. What India needs now is economic reforms, but it has a government that has showed very little commitment to do so since 2004.