“Both will move on to become middle-income nations and would have attracted hundreds of millions of people out of poverty,” opines Gurcharan Das, referring to India and China. He famously chronicled the economic ascent of India through his best-selling books.
It is famously known that in AD 1700, India and China jointly accounted for nearly half of the world’s GDP. Having taken in the wide benefits of colonization, their portion had decreased to about 5% a piece of global GDP by 1950. Even so, the recent increase of both Asian neighbors has been extraordinary, and it is commonly imagined that if the trend is confirmed, both economies could recapture their historical share of world GDP.
In 2004-2005, when India was growing at 7.5 per cent, Prime Minister Manmohan Singh’s government was praised by the International Monetary Fund (IMF), which said, “Notwithstanding high world oil costs and a weak monsoon, the economy showed remarkable resilience in 2004-2005, with growth (at 7.5 percent) remaining robust and becoming broader based.”
About the same time (commencing in the early 2000s), there were slightly different opinions about China’s even more impressive increase. Major trading partners, particularly the USA and the EU, were becoming more and more anxious about their “Made in China” worries. Organized labor, politicians and experts were blaming China for the deprivation of millions of manufacturing jobs, a currency which was impervious to appreciation, and a generous trade imbalance giving China a trade surplus of hundreds of millions of bucks.
Like China but with two notable differences exports have aided India’s economic growth- with trading partners Indian exports have largely consisted of services (primarily IT), and the absence of huge surpluses also in bad times meant less dependence on foreign markets.This problem came to light in the planetary financial crisis of 2008, when China’s exports fell for the first time since 1978.
Ironically, the “Communist” State had a head start over India with respect to economic reform and economic development, both of which India hopes to catch up with, putting interminable (and normally unflattering) comparisons to rest. Deng Xiaopeng initiated economic reform in 1978, succeeding Mao and famously declaring that “to become rich is glorious”, and by direction of strategy offered, “let many flowers blossom”.
These simplistic statements represented a profound shift in the established Chinese policy of denouncing wealth (well, capitalism, but often evils of the capitalist economy does create wealth), and a proliferation of enterprises, not state-owned enterprises (SOEs) alone owned ultimately by the monolithic government in Beijing.
China’s population (962.6 million) and GDP (The US $364.5 million), were both higher than India’s (667.3 million, and US$ 139.7 million), but the per capita income of both economies was comparable (US$ 1090 China vs 1160 India in 1991). When India liberalized its economy in 1991, Chinese GDP had been already twice as large as India’s, and today, China’s GDP is about US $18 trillion (in PPP terms), whereas India’s is over the US $7 trillion.
Economic reform in China can broadly be separated into two stages: pre- and post- Chinna’s accession to the World Trade Organization (WTO). For three decades, China focused on strong, albeit insular, policies that drove staggering economic growth. Deng’s famous innovation of SEZs allowed China to tinker with FDI and capitalism, while limiting the potential downsides to say SEZs, both geographically and politically.
As its earliest FDI investors — unlike India, which is still to truly leverage the full potential of a large and prolific diaspora, so China successfully reached out to its diaspora (initially from Hong Kong).
India’s successful “Green Revolution”, was substantive in creating food security for hundreds of millions and it is the success of China’s agricultural reform. Deng implemented “Decollectivisation”, to help the disastrous farmers’ collectives, by permitting them to sell excess produce in the open market through the “Household Responsibility” system.
This market incentive worked, and China’s agricultural output doubled over 6 months.
An intriguing byproduct of the excess profits of farmers were the town and village enterprises (TVEs), essentially socialist organization owned by local and provincial government agencies to invent labor-intensive products. Finally, 22 million TEVs grew 30 percent per year, creating 140 million line of works.
Though not everything worked per plan, The “One Child” policy, applied with great zeal through fines, sterilization, and worse, did half of the population increase to below one per cent, but has produced a demographic worry of the “inverted pyramid”. As a potential spoiler to the China story, this threatens to emerge put next to with India’s demographic dividend.
The “Management Responsibility” system for SOEs (State Owned Enterprises), Deng tried a version of agricultural reform which controlled the market share and employment. Unlike agriculture, there wasn’t a comparable open market for industrial commodities, nor were employee layoffs an option, so it fell upon a Deng’s successor, Jiang Zemin to privatize SOEs. Intriguingly, around the same time, India also undertook “disinvestment” of its PSUs.
China practised a dual currency system to great effect between 1978 and 1997, with great success. At that place was the domestic yuan (Renminbi) and the foreign exchange certificate (fixed at 10 to the dollar), which investors bought on the open trade market. Deng initiated efforts to join the WTO in the 1990s, but some of these policies — and more grievously, China’s dismal human rights record — were a constant stumbling block. China failed to join the WTO under Deng, Though negotiations began under him.
In 2001, China agreed to a swathe of reforms to gain WTO membership. These reforms were targeted at promoting free trade, facilitating foreign enterprises and making laws more transparent and predictable. Chinese growth really took off post-WTO. Nominal GDP growth rose to 10-11 per cent, from the 8-9 per cent average of the previous two decades, commodity exports became more advanced than the earlier generation of labor-intensive products (toys, garments, and so on).
The usual refrain is that Singapore could achieve growth because of its little size, and China due to an authoritarian structure. On the flip side, India has strengths and weaknesses that neither of these countries has to the same degree. While taking account that every nation is unique and accepting that India has experienced its percentage of missed chances, the US $20 trillion target does seem within reach.
China reached its spectacular growth by utilizing the three drivers of growth — capital, labor, and a total factor of productivity — to heavy effect. Moving forward, the means used to achieve growth will get diminishing returns (as economists would say).
Massive governmental spending no longer sustains competitiveness, especially as demographics and rising labor rates chip away at price arbitrage. Technical and institutional reform could possibly pave the route to sustained development, merely as the recent economic slowdown demonstrates, it is difficult to shrug off economic sluggishness.
In contrast, the productivity will be increased by India’s demographic dividend and effective institutions. The regime will continue to create conditions to attract FDI (as against China’s internal stimulus through spending), and by extrapolation, attract investment from Indian companies, which have been piling up capital over a closing couple of decades.
It is virtually a given that India will grow because the capital formation has been increasing over time (that is, not completely hooked on foreign capital), we have inherited robust institutions (of financial governance and rule), and a burgeoning home market. But India needs to resolve some large issues — labor reform (so people hire more, and women participate more); judicial backlog; corruption; banking the unbanked; maintaining peaceful borders; ensuring ease of business for Indian and foreign occupations. Not an exhaustive list, only possibly an overly simplified one.
One intriguing development is that as India tries to emulate the manufacturing-led Chinese growth model, China has now declared it wants to propel aside from investment and manufacturing-led growth, to a model based on services and consumption — very much the India model since the 1990s.
It is frequently said of governments that bold decisions are produced only in a crisis, or when a bold person is at the helm. India’s radical liberalization of the economy was the issue of a dire economic crisis8 in 1991 (and stipulated by the IMF).
Mr Analjit Singh, who had a ringside view (as the founder of Max Telecom), of India’s legendary leapfrogging of copper wires and into mobile telephony, opines that leapfrogging is possible in whatever is more technically or mechanically driven, and involves a minimal human interface, bias, interpretation, or ordinance. Only he also credits the leapfrogging to Sukhram, the telecom minister of the day as the only single person responsible for the telecommunication revolution.
Mr Singh, president emeritus of the US $2 billion Max Group, also warns of how far success stories can slide. “Telecom was the golden goose of this land, and straightaway, since A Raja’s time, it’s become untouchable, and a few other sectors are also becoming so,” he admonishes.
Experienced and accomplished businessmen like Mr Singh often cite the Singapore government as an enabler of business. And looking at the example of its first Prime Minister Lee Kuan Yew and how Singapore was able to flex around the business climate of the small nation before World Bank’s “ease of doing business” rankings became a catchphrase, they permit themselves to be optimistic.
Mr Singh believes we could be in one of these inflexion points. ” as the leader is giving right messages and Our PM is very bold, there’s criticism around: ‘Should the PM talk about clean toilets, or using unused infrastructure after 1 pm for vocational training?’ — Yes! He should,” he asserts.
The prevailing omens — economic indicators, political stability, bold leadership and favourable demographics — would argue that India should be growing at a much quicker rate than China. And then in some ways, the real question India faces is: How do we ensure we don’t mess it up?