India vs China: Which Has a Bigger Reform Challenge?

Both India and China are in the middle of their worst economic slowdowns in many years. If IMF projections for 2012 prove accurate, China’s GDP will advance at the slowest pace since 1999, and India’s at the slowest pace since 2002. There is a lot to learn from these downturns. One is that economies, no matter how promising, can’t grow at fantastically high rates indefinitely, with GDP ascending in neat, upward straight lines. We also learn that “decoupling” is still not a reality (especially for China). Despite rising domestic demand and burgeoning ties of trade and investment between emerging economies, the developing world is still connected to the developed, and what happens in the U.S. and Europe still matters a great deal. Perhaps the most important takeaway from the slowdown, however, is that even rapidly growing economies can’t be complacent. Though it is true that the poor performance of emerging economies everywhere is a function of the weakness of the global economy generally, that is only part of the story. Both India and China have been slowing down because neither country has done what they need to keep growth going, in a healthy and sustainable fashion. The big question going forward is: Will they? The answer matters to everybody. If India and China get their reforms right, the world economy will be better able to create jobs. These two markets are becoming crucial to major companies in the U.S. and Europe. Yum! Brands, which controls the KFC and Pizza Hut fast-food chains, now earns roughly half its revenue in China, for example. If India and China don’t move ahead on reform, the global economy will lose out on a key source of growth that is vital as the U.S. and Europe struggle with debt, deficits and unemployment. (MORE: Indian Business Elite Fret Over Growth) In many respects, the sort of reform necessary in the two economies is similar. Both require greater liberalization. India must continue to dismantle the leftover red tape of the License Raj to free up private companies and open

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