The Hindu Business Line : Two emerging giants: The global debate

Will India be the new Asian tiger or will it be a lumbering elephant caught in the trap of red tape and corruption, is the question international observers are asking. The answer lies with India's political leadership, which has much to learn from its Chinese counterpart, says S. Venkitaramanan.

WHEN discussing China, I always recall a meeting with the late Sirdar K. M. Panickar. He had come to Madras in the early 1960s, back from his latest posting as India's Ambassador to China. I had great admiration for him. Graceful to a fault, he answered my questions on the Indo-China border dispute with brutal frankness.

His view was clearly in favour of recognising the ground reality. He was in favour of a settlement. But one statement he made left a mark on me. "Remember, young man, India gave Buddhism to China, China will teach us how to grow an equal society — a new religion to India. Believe me, India and China will be friends". Fortunately, Dr Manmohan Singh has brought this healing touch to the relationship between the two giants of Asia, who have to learn to live together and learn from each other.

In a perceptive piece "Musings on recent history" (Business Line, May 3), Dr Bhanoji Rao had touched on the differences between China's and India's progress in recent years. I propose to touch on the same subject from a different perspective.

Thanks primarily to Mao's emphasis on the social sector — education, health and such other areas, China had a headstart over India in terms of human capital. Its illiteracy level was much lower than India's, even at the start of the reforms. That meant more qualified labour, ready to take on manufacturing jobs.

Research scholars have turned out reams of reports trying to identify why and how China is ahead of India. The Financial Times has come out with a well-written special survey of Asia's emerging giants. Some time back, The Economist of London had also produced a study of the two economies.

The consensus of all these studies is that China has raced ahead of India, both in terms of economic growth and human development. China has recorded rates of growth that are significantly higher than India's — 9.3-9.7 per cent in the 1980s and 1990s — during which time India's growth rate was 5-6 per cent.

China had also had a lower rate of growth of population, thanks to its strict enforcement of one-child norm. This shows up in per capita income growth.

In the 1970s when the two countries started growing, their gross domestic product per head at common international prices were broadly similar, at roughly one-twentieth that of the US. By last year, China's real income per head had grown to 15 per cent of the US level while India's stands at half China's.

Between 1980 and 2003, China's economy barrelled along at an average rate of 9.5 per cent per annum, while India's grew at 5.7 per cent. China grew at a faster rate than any other economy, while India was ninth fastest. At common international prices, India's income per head went up over this time by 125 per cent while China's grew by 300 per cent. China's national income per head in 2003 measured in current dollar terms was $1,000, compared with India's $530. This gap is truly staggering.

There have been comments that Chinese statistics are flawed and the figures about China's GDP have to be taken with a pinch of salt. But India's statistics are not much better. Both countries have recognised frailties in their estimates of national income. I do not think this is a rational explanation for the difference in the two countries' performance.

The figures of world trade are, by and large, authentic. Going by these figures, China's participation in global trade has also been growing dramatically — much more than India. The former's share of world exports in 2003 was 5.8 per cent — a rise from 1.9 per cent in 1990. India's share was less than 1 per cent last year. It is clear that India has a long way to go to catch up with China in trade.

China has, indeed, been a magnet to foreign direct investment (FDI). At the outset, I will dispose of the counter-argument that a lot of FDI in China is round-tripping — Chinese residents bringing back their personal or corporate profits from Hong Kong or Taiwan.

While there may be some truth in this, the global figures cannot at all be explained away thus. The FDI figures, as disclosed by UN Investment Report, do tell a story of the dramatic difference between India and China. No other country attracts as much FDI as China does.

In 2004 alone, China attracted $60 billion in FDI. This was more than twelve times India's share.

Between the 1980s and 2004, China drew in FDI of $560 billion. India's figures are much smaller. After all, we had a fundamentalist attitude against FDI for long. It is only recently that we opened our doors.

It is true that India has been a magnet for portfolio investments as distinct from FDI. Indeed, one point of view in this regard is that this preference for India by foreign investors in fact speaks of their greater confidence in India's stock market, corporate governance, the judiciary, and so on, compared to China's.

However, FDI does bring in its own advantages of greater stability, market linkages and technological transfer. India has to learn to exorcise its fears of FDI.

China has, indeed, had a few advantages in the economic race, which derive from its politics. Its one-party rule can afford to be very different in its reactions to events and challenges than the chaotic response of a coalition-driven political democracy such as India's.

For instance, China was able to introduce labour policy reform in its special economic zones, much before India has even started thinking about it. While India has been contemplating welcoming FDI into retail sector, it is a reality in China.

Further, China liberalised its FDI approval procedure by decentralising it to the level of town and village administrations, which precluded the need for central approval.

The time has come for us to do a repeat of what Chinese Buddhist scholars did with India in the past. Indian politicians should make a pilgrimage to China to learn what made its economy tick. A team of enlightened MPs and others can be usefully deployed to study and advise on how to make India attractive to FDI.

Admittedly, FDI has been attracted to China because of its better infrastructure. Infrastructure has been one of the leading sectors in China. Visitors to China are all agog at their infrastructure.

China has, indeed, broken the stranglehold of fiscal purists on infrastructure spending by liberalising the flow of credit from its banking system to infrastructure enterprises. In this context, it will be useful to ascertain how China's pricing policies for infrastructure services work.

Obviously, considering that according to IMF figures China's fiscal deficit/GDP ratio is low, its subsidisation of power tariffs and oil prices and such items should also be marginal.

At any rate, a study of China's pricing policies in this regard would help open our eyes to how a modernising economy gets fiscal space to finance its infrastructure investment.

China's forex reserves are high and rising. It is, of course, one of the principal pillars of the US' current deficit financing. No wonder, we see China being targeted by the US in regard to more flexible exchange rate policies — in effect, a remninbi revaluation. The impact of such a revaluation in China's exports can be damaging.

It can also have an effect on the US dollar-denominated securities held by China. A remninbi revaluation will mean a massive erosion in the central bank's assets. It may even lead to a sharp decline in the earnings of the central bank.

India has to learn a great deal from China. In particular, it has to understand how China has improved its productivity and export competitiveness.

A close comparative study of India and China in respect of various dimensions — labour law, taxation, banking structure — will be very revealing.

It was, after all, Hieun Tsang, who came to India centuries ago to study Indian Buddhist sculptures and translate them from Sanskrit into Chinese. It is time to do the reverse — to translate Chinese policy into Indian rules and regulations, or deregulations.

Will it be too much to ask our perceptive leadership to initiate a study and follow-up of what works in China and how it should be adapted to India?

The politics of the two countries is, of course, different. We have to evolve India's economic policies with Indian characteristics to suit our polity and society.

Will India be the new Asian tiger or will it be a lumbering elephant caught in the trap of red tape, caste and corruption, is the question international observers are asking?

The answer lies with India's political leadership. Of course, India has to adapt Chinese policies, keeping in view our democratic imperative. It cannot be a copybook China syndrome. We have a lot to gain from our open society, with all its defects.

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