The Hindu Business Line : Industrial growth in China and India

It is easy to go overboard in our admiration of the Chinese experience. But a recent comparative study puts things in perspective by pointing out the flaws in China's industrial strategy and specifically highlighting the `waste' of resources implicit in its rapid industrialisation model. Each country has to progress according to its own inherent strengths, says S. Venkitaramanan, explaining that no country's model is completely replicable.

THERE have been many recent studies of the springs of China's industrial growth. I was particularly struck by Prof R. Nagaraj's comparative study of India's and China's industrial performance in the Economic and Political Weekly of May 21, 2005, presented at a Conference at the China Development Institute, Shenzhen.

At the outset, Dr Nagaraj disposes of the doubts regarding the statistical infirmities of Chinese data. He points out that while during the pre-reform period statistics in China used to be closely linked with targets, things have improved since then. Nagaraj cites an OECD study that makes a detailed analysis of China's industrial growth. Nagaraj quotes Prof Bardhan as having remarked that China was more socialist than India during the planning days and better capitalist than India during the reform era.

Nagaraj notes that China's industrial growth has been decidedly better than that of India's in the post-reform period. India's rate of industrial growth has actually shown deceleration during the period. One of the features of China's growth, he points out, is its emphasis on capital goods as against consumer goods.

China's capital goods industry has gained massively due to its emphasis on infrastructural investments, which naturally need capital goods as essential inputs. Nagaraj is not quite explicit on how China managed to protect its capital goods producers in spite of low tariffs and apparent removal of non-tariff barriers.

Be this as it may, the cycle of increased public investments leading to greater capital goods industry growth was evident in the eighties in India, but with the level of public sector investment going down in reform period, there was an inevitable slowdown in capital goods industry. China did not allow such a decline, thanks to its investment in infrastructure through the public sector.

It is sometimes argued that the decline in public investment in India in the post-reform period was made up by increase in private investment. This argument misses the qualitative difference in the two investments. Public sector investment was primarily in items, like railways, irrigation, power and roads, which had a tremendous spread effect and helped nurture many small and medium industries.

Capital goods industry has got forward and backward linkages with small and medium industries in various parts of the country. China's industrial sector also benefited from this policy. Its industries, including textiles, benefited not only from the increased availability of capital goods, but also from the greater income enjoyed by the labour employed in manufacturing.

China has been able to increase its output of capital goods through increase in demand for them by a liberal financing of enterprises, including what are known as town and village enterprises. The liberal finance was an offshoot of increased lending by state-owned banks without undue (?) concern for viability of enterprise and or avoidance of duplication of investments. This has resulted in a large volume of non-performing loans in the books of state-owned banks in China, amounting to as much as 50 per cent of GDP according to some reckoning.

Much of this has had to be periodically written down by the Government by using public funds. While this is, no doubt, a flaw in the Chinese mode of industrialisation, the fact remains that China is ahead of India in respect of the real industrial sector. Whether India can move ahead equally rapidly ensuring adequate finance while maintaining banking prudence, is a test of ingenuity of our financial regulators and bankers.

It is easy to go overboard on our admiration of the Chinese experience. Nagaraj mentions a few of the warts on the face of China's industrialisation strategy. One of the specific points mentioned by Dr Nagaraj is the "waste" of resources implied in China's model of rapid industrialisation. He shows that based on China's known high savings ratio of 40 per cent of GDP the rate of industrial growth of 8-9 per cent implies a high capital output ratio.

This means that for every unit of additional output, China spends more resources than it would need to under more carefully monitored programmes. This may very well mean that there is excess capacity available for manufacture more than is justified by current domestic demand. But, it also implies that China is ready to meet any peaks of global demand. The result is that China has positioned itself as a manufacturing hub of the world. It has planned to meet the challenges implied in manufacture of essential goods, which the world at large may need.

Nagaraj has a telling Table which shows that there are some advantages to be seen in the slower and steadier Indian model. He points out how, for instance, Tata Steel has significantly lower costs per tonne of steel compared to its Chinese peers (see Table for the comparative costs).

There are other industries in which China has ignored the profit content. Perhaps, it is the hangover from the earlier stabilised mode of production planning, which emphasised physical targets. All this only shows that India also has strengths compared to what China has achieved. But where does it actually show up, either in domestic or international competitiveness?

China is, by all indications, the winner, through its superior trading tactics, partly aided by its currency value, which it has succeeded in keeping at 7.8 yuan per dollar for nearly a decade.

Reflecting on the flaws in China's model of growth, Nagaraj highlights another significant aspect of China's industrial structure, viz. its fragmented nature, resulting from highly decentralised decision-making. OECD's comments on this aspect as cited by Nagaraj are significant:

"Despite the country's (China's) integration into international markets, domestic markets remain highly segmented and fragmented. Industrial growth has been concentrated in pockets of regions, sectors and firms while the rest has lagged. Although some highly efficient and internationally competitive Chinese firms have emerged, most Chinese firms are relatively small, under-capitalised and poorly managed. Over-capacity and inefficiency that characterise many industrial sectors of China have been shielded from competition".

How exactly this shielding takes place, is not clear. There are obviously many infirmities in the Chinese model, which we have to guard against while trying to copy its successful ways. Each country has to progress according to its own inherent strengths. No other country's model can be completely replicable.

Nagaraj points out how India has the advantage of a strong private sector, an entrepreneurial culture and "efficient" capital market. By and large, India's intellectual property rights scenario is better than China's. It seems that Nagaraj's conclusion is that India is poised to grow faster provided it is able to overcome its bottlenecks, such as those in infrastructure and availability of long-term finance. Above all, the availability of finance and markets matters.

Nagaraj does not touch on the inter-linkage of public policy on expansion of infrastructure and the growth of industry while he hints at the relationship. It is not clear that industry can progress only in a conducive public policy scenario where public investment in infrastructure and protection of essential capital goods industries to the extent needed go hand in hand with provision of finance and removal of impediments.

The availability of finance is not merely a question of more liberal regulation. It is also a question of RBI prodding banks in their corporate debt restructuring. The provision of markets requires a conscious policy shift in favour of domestic capital goods industry and infrastructure.

It cannot be the case that the markets by themselves will deliver, if the Government remains passive. The present Government's strong pro-active policy in regard to infrastructure spending augurs well for capital goods industry and therefore for manufacturing in general. So too does the shift in favour of finance for agriculture, which has to provide the basic pool of demand for goods which the manufacturing sector produces.

Ultimately, India's economic performance will be judged by how it fares in respect of the goal of increase of GDP, which has to result in creation of jobs and removal of poverty. To achieve these goals, it has to bestow a lot more attention for manufacturing as that alone generates more jobs for the blue-collared workers, as distinct from the service sector, which helps to create the white-collared jobs.

It is inevitable that this needs a loosening of our self-imposed constraints on financing of infrastructure and of industry. Public-private partnerships may be one answer, but not the complete solution.

Ultimately, there can be no shirking by the state in the provision of infrastructure. It is the state's increased investment which is key to the growth and sustenance of the capital goods and metals industries. This is the key lesson to be learnt from China's example, with all the caveats that its experience may teach us.

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