Hamish McRae: China races for growth, India muddles through. But failing to prepare means preparing to win

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The Independent Online

Bangalore – downturn, what downturn? The world economy really does look different when viewed from the other side. This year it has been China that has attracted the headlines, but the boom and the strains it has created are just as evident in the other Asian giant, India, as a brief visit to the capital of its hi-tech industries makes clear.

The thing to understand about Bangalore is that it has been hugely successful because it had to be ingenious to find ways round its infrastructure problems. Its location, 3,000ft up on a plateau in the middle of southern India, means it cannot ship goods by sea. It has a small airport that until recently had no international flights – a new one will open in the next few weeks but thereby hangs another tortured tale of delays. But what it has long had in its favour is a good climate (because it is high) and a mass of well-educated people (because it has been home to several research institutes).

So it had to figure out what it could export that did not need to be transported in physical form. The answer was software.

The result has been an extraordinary boom. This does not explain India's economic take-off, for the hi-tech industries account for quite a small proportion of the country's total economic output. But Bangalore exemplifies India's success – it is the part of the transformation that is most visible to the outside world.

It is also a symbol of success to Indians. I walked round a shopping mall that would be indistinguishable from one in the US or Europe. Here, though, people come in from the villages just to show their children what it looks like – to show them the world they will live in. The whole city is being rebuilt, with blocks of flats replacing old villas, shining office blocks (often with the names of Western multinationals) and hotels shooting up, and smart boutiques being opened in side streets.

That leads to the question of sustainability. In recent weeks, awareness of the strains imposed on global resources by the growth of China and, to a lesser extent, India has grown. China has been racing headlong towards the Western economic model, with its heavy need for energy and raw materials, and has been scouring the world to secure supplies. It has put in the infrastructure needed to support growth – the roads, the power stations, the airports – though at the cost of pollution and a continuing need to import energy to keep the show moving.

India has chosen a different path – allowing the private sector to press forward with its growth plans and then scrambling to catch up with the infrastructure. Bangalore is a good example of this: a shining new airport is being built in the distant countryside but without the roads to reach it. It will take so long to get there that companies are leasing flats close to the airport so that their employees can catch early morning flights.

The airport will eventually open. But capacity will still be insufficient because the number of passengers has doubled in the past three or four years. As part of the deal with the developers, the present airport, close to the centre of Bangalore, will be shut to commercial traffic. So some further agreement will have to be struck to keep the old airport open for some flights if the city is to meet the demand.

There are other growing pains. Like many cities, Bangalore suffers from power cuts, so every hi-tech business has to have its own diesel generators. More generally, the entire country has a power problem. Not only is there a lack of capacity but the coal supplies for India's existing power plants are at critically low levels. Coal production has come in below projections and it is hard to buy the fuel on the open market because China has snapped up any supplies that are going. (China became a net importer of coal last year.)

The only way to meet such needs is to build. Goldman Sachs has just produced a paper looking at the demand for infrastructure over the next decade from the "Brics" (Brazil, Russia, India and China), the next tier of developing countries, and the Middle East. It concludes that China will account for some 60 per cent of a total of between $4,000bn and $5,000bn of new investment over the next decade, with India at 14 per cent the next biggest.

Thus, air travel in China will triple, whereas in India it will double. China will more than double its electricity generating capacity, whereas in India this will rise by "only" about 75 per cent. It is, as Goldman Sachs notes "a China story, with India a distant second".

That leads on to a question starkly posed in the report: can the world cope?

Goldman Sachs's answer is yes, despite the pressure on resources. It does not expect the world to run out of resources in the next decade although the environmental consequences are troubling. The increase in electricity generation will be mostly thermal and could create enormous air pollution. People already complain of that here in Bangalore, though the air quality is much better than in most Chinese cities of a similar size. Goldman Sachs reckons on balance that the impetus for a higher standard of living will outweigh these concerns, and I think that will prove correct. It comments that the only way of squaring the circle will be through improved technology, and that creates opportunities too.

The other question is whether the Indian model, for all its messiness, may prove more sustainable than the Chinese one. India is more energy-efficient, but that is because it has to be: wealth per head is much lower and the gap will widen further. But on a very long view – say a generation – I can't help wondering whether India's system for making decisions on infrastructure, with all its political roadblocks, may score over China's headlong race.

Bangalore would function much better if it had been planned in a more orderly way. But if too little infrastructure causes all sorts of inefficiencies, too much can become a burden on a society too. Someone has to pay for it and that will be China's ageing population. Meanwhile, Bangalore at least manages surprisingly well.

Rate cuts will not rebuild the housing market

Meanwhile in the UK, it was a week of an interest rate decision. There was some weak economic data (a fall in industrial production, indications of weaker demand for services and solid evidence of falling house prices), so when the Bank of England did not move rates down, there was the usual flurry of concern.

Actually, the precise timing of interest rate movements matters very little and the markets now expect another quarter point off next month. What needs to be remembered is that the lag between a significant change in rates and any effect on the economy is both uncertain and long.

The easing of the cost of borrowing this spring will have some bearing on the economy next year, but save for one element – the impact on sterling – we won't see much effect in the next few months. Lower rates will feed some money into household budgets, assuming lenders keep in step with a cut in mortgage rates, but this will have only a marginal impact on the housing market. The problem there is not the price of a loan, it is whether the borrower can get one at all.

If housing is undoubtedly weaker than expected, consumer demand seems to be holding up. People say they lack confidence but they don't seem to have made radical lifestyle changes. They are upset that inflation in the basics – food and fuel – has risen much faster than inflation in the shops. There's no money to buy the things they'd like to buy because so much is going into things they have to buy. And while food and fuel may come back down, they are unlikely to fall to the level of a year ago. So while the economy is growing, real incomes are not.

I suppose you could say that while overall growth is running at pretty much the level expected – somewhere between 1.5 per cent and 2 per cent a year – the state of the housing market is worse. In the past three months, the Halifax index has fallen at an annual rate of more than 15 per cent. You can see why the pressure will mount on the Bank to make further cuts. It will, but do not expect it to have any immediate impact on house prices.

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