The Hindu Business Line : If China can, why can't India?

CHINA's economic success is stunning the world as it understands how to move with the times. It is the world's most competitive nation anddesires to modernise rapidly by attracting more foreign investment.

However, it must be remembered that the share of FDI in total investment in China is less than 8 per cent, reflecting the extent of capital formation in the economy. The entry of China into the WTO will make it a more transparent and less subsidised economy, meaning more access to Chinese markets.

The mantra of China is laser-focussed on becoming an economic superpower and everything else follows — foreign policy begins and ends with economic policy.

China is creating a national economy, and the result is a massive and painful restructuring of industry and society. Competition across provincial boundaries is becoming a reality. As a result, the country is experiencing deflation — a continual decline in prices. As prices fall, the economy stagnates. The comparison between India and China hides some other facets of China and positive features of India (Table).

India has individual liberty, political pluralism, and the institutional framework to take advantage of globalisation. However, it is constrained by mass poverty, lackadaisical government, growing fiscal problems, and a poor physical infrastructure. China has much less degrading extreme poverty that India has, more trade and investment links, and superior physical infrastructure. It is rapidly conforming to global behaviour patterns, and creating an internationally-accepted legal system. However, it too has fiscal problems, hidden in the banking system, and political risk.

The key strategy of Chinese reforms was to first effect a massive increase in incomes in the rural areas, and then meet the demand for consumer goods by encouraging the growth of Village and Town Enterprises (VTEs). The VTEs met the demand for basic consumer goods in the rural areas. There was continuous decentralisation, and a system of profit-taking with punishment for default. In India, the farm sector still accounts for about 70 per cent of employment, but its share in GDP is down to 25 per cent — in other words, the relative per capita income of the agricultural worker is going down.

China can help India in its globalisation efforts by cheaper imports from China and using them to produce low-cost products in India itself, through the joint-venture route. By trading with China, India can be a little more competitive in the global market. A strategy of engagement with China and facing up to competition can be India's policy for the future.

China is in fact "many small markets", rather than "the world's biggest market". China has good infrastructure — railways, roads and airports — so there is substantial inter-city and inter-provincial commerce, as one city can compete with "backward manufacturers" in another. Consequently, there is the rise of national domestic brands.

The FDI flow into China in 2000 was about $38.7 billion vis-à-vis $2.2 billion into India. Foreign exchange reserves stood at $160 billion and $45 billion respectively. The share of manufacturing in China's GDP is 49 per cent while services constitute 33 per cent. The biggest current draw for international investors is the "Western Development Project" (headquarters in Chonqing), initiating grandiose plans for Xinjiang and Tibet.

Sino-Indian relations should rise above the present border disputes. Relations should be non-hyphenated, and stand-alone, not guided by any third country. India occupies a special place — as the land of the Buddha — for the Chinese people. There is also admiration in India for China's economic achievements. India has an edge over China in terms of intellectual capital for the future knowledge economy.

Both countries should jointly leverage each other's complementarities. China represents a major market opportunity for Indian software companies, particularly in `verticals', and can be leveraged to move up the value-chain in other global markets. There is also collaborative potential in bio-technology. India can provide significant support to China in the development of institutional infrastructure, finance, law, civil service and higher education.

A look at some of the strengths and weaknesses of India and China.

China's strengths

Confucian ethic of discipline and obedience.

Authoritarian militarist state, with severe penalties for non-compliance.

Highly disciplined top leadership that implements decisions once agreed, without further argument.

China has a system of incentives and disincentives at central, state and town-level for performance.

Small-scale imitator of well-known brands, giving better quality for a lesser price. Chinese "under design" products to make them affordable by poorer households. Those who can afford to pay more for superior quality do so. In India, established manufacturers are unlike the Chinese; they are conditioned by the MNCs, whose practices evolved in markets that can afford high prices for superior products, and that suited an economy where capacities were restricted by license. China dominates export of labour-intensive products world-wide — India does not, except in gems and jewellery. Chinese manufactured goods exports, as a percentage of GDP, was 18 per cent against 4 per cent for India (1999-2000).

China has a system of incentives and disincentives at the central, state and town levels for performance and non-performance.

Foreign investment in China is in land, buildings, plant and machinery. Of the comparatively small foreign investment in India, a high proportion is in portfolios, and in buying existing capacities.

Weaknesses of China

The communist party still dominates, with no democratic dissent tolerated.

The Chinese legal system has still many weaknesses for corporate grievance redressal.

China is yet to adapt fully to rules and regulations of a free market economy.

China has lax labour regulations, and workers in many industries have to toil for long hours.

Working conditions are tough, as workers stay in crammed dormitories inside industrial zones to work from 8 am to 8 pm. They are not allowed to form their own associations at national or regional level. This advantage may not last long, as workers are becoming conscious of their rights. Though labour issues are not raised at the WTO, such practices could come under attack.

China's entry into the WTO will call for a "fresh look" at its global interaction and domestic re-structuring.

Corporate governance too is not of a high quality, as transactions are not wholly transparent. Managers of state enterprises indulge in various irregularities — such as siphoning of funds offshore which, in many cases, comes back disguised as FDI.

Chinese capital markets too are underdeveloped — regulations are not in tune with free-market earnings. Foreign investors can invest in B-group shares — only at Shanghai and Shenzen — and not in A-group shares, meant strictly for locals.

India's strengths

A stable and vibrant democracy.

Wide use of the English language.

Availability of world-class scientific, technical, managerial and professional manpower.

Established Western style corporate democracy and a functioning legal system for grievance redress and contract enforcement.

A growing and sizable middle-class estimated at 200 million.

India's culture encourages risk without reward, and as our defence forces have shown, we can be extremely disciplined and productive.

India's weaknesses

Hypocrisy of the political leadership.

Poor implementation capacity of the administration.

Speculative mentality of industry.

Rampant corruption, stifling the delivery system of any constructive programme.

"Vested interests" and "entrenched rural hierarchies" hampering societal changes.

The bureaucrats and politicians are yet to develop awareness that more trade and intensified economic relations will enhance India's security, power and influence.

China could overtake India as the next information technology power and business-outsourcing hub for countries such as the US, despite its lack of experience.

China's offshore services will mature within the next five years, and companies should begin looking at the country as a potential source for IT-enabled services.

Lower costs (roughly one-sixth of US counterparts), political stability, strong GDP growth (7.9 per cent in 2001), the country offers the kind of environment needed by interested global companies.

However, despite China's better image abroad, the image of Indians in the US is very high; in complete contrast the image of India is poor.

Despite loud proclamations, foreign investors consider everything unfriendly about India — the government, the bureaucracy and the infrastructure. India has to change the mindset and its institutions their operating ways.

The only hope for India is its people. They are well ahead of the institutions and even the leaders of India. India should thus learn a lot from the Chinese, and build on its advantages.

(The author is Associate Professor of Economics, Centre for Indian Ocean Studies, Osmania University, Hyderabad.)

Article E-Mail :: Comment :: Syndication

Stories in this Section
US foreign policy — Is there an India tilt?

Outsourcing to India — No other option for the US

Tea troubles

If China can, why can't India?

Leaders all

Challenges in rural credit — RBI Advisory Committee must sow the right seeds

Food industry

Agricultural reforms