The Hindu Business Line : Is Indian tiger catching up with Chinese dragon?

Mr. Tarun Khanna (left) of Harvard Business School, Mr John Talbott (centre) of ISB and Mr Anwarul Hoda, Member, Planning Commission... What drives the Chinese growth engine? — A. Roy Chowdhury

THE Chinese never say no to a business proposition. And if they agree to do something, they usually complete the task. On the other hand, when Indians agree to do something, they do not always finish the job.

While the Chinese are outstanding sellers, the Indians are wonderful buyers. The "sea turtles" (the non-resident Chinese) return in large numbers and invest, while most non-resident Indians come back for the holidays or listen to concerts in the music season.

China's GDP growth has been more than 9 per cent for over a decade. Sceptics, who said that it was just a balloon that would burst anytime, have had to eat their words. Given this positive environment, foreign direct investment (FDI) into China since 1989 has been $450 billion. This is really high if you compare it with India's $80 billion from the same date.

In the light of his experiences with the burgeoning Chinese economy, Mr Gopi Gopalan, a consultant with GE based in Shanghai for the past 10 years, says the key to the success of the Asian giant is its outstanding performance in the manufacturing sector and positive outlook.

While the Chinese Dragon leaps ahead, will the "caged" Indian Tiger (as India was described in the early 1990s) finally break free?

Yes, says Mr Sanjeev Sanyal, an economist with the Deutsche Bank in Singapore. What does he base this confidence on? The high savings rate that young Indians are expected to work up post 2005 and the attendant factors that will fuel a high growth economy. This model is now well established in China, he said at a recent International Conference on "Will the 21st Century belong to China and India," organised by the Economic Forum of the Indian School of Business (ISB), Hyderabad.

The Chinese invest up to 42 per cent of GDP, which he said was the key driver of its sustained high growth rate. In comparison, India invests just 22 per cent of its GDP.

With India's savings rate set to head north, its present 22 per cent is set to grow to 33 per cent by 2015, resulting in huge funds with the banks. This, in turn, will make large funds available for development.

The savings rates are set to boom, thanks to the huge population of young employable Indians, who constitute 65-70 per cent of the population. Terming it as a great demographic opportunity in the next two decades, Mr Sanyal said increased savings will lead to an investment boom, the kind that China has already derived benefits from.

Attributing the investment boom witnessed in China to an increase in savings rate and a significant rise in the percentage of working population in the 1980s, he felt the China's inefficient banking system caused the funds to be randomly allocated to projects and this caused the failure rate of these investments to be considerably high.

However, regardless of the success rate, countries such as China and Korea demonstrated that the general populace is better off having randomly invested than not having invested at all.

The President, Dr A. P. J. Abdul Kalam and the Director-General, CSIR, Dr R. A. Mashelkar, also share this view that a large, talented youth force can transform India into a developed nation by 2020. Already, the more than 100 R&D centres established by multinational corporations employing young Indians is an indication of the unleashing of this knowledge power, says Dr Mashelkar.

The only stumbling block to reaping the investment opportunities could be issues such as foreclosure norms and bankruptcy, which the banking sector and the judiciary need to address urgently. That the country has made attempts to clean up the banking system will help the system absorb the savings better and make proper use of the deposits, says Mr Sanyal.

However, one worry is the absence of laws to empower creditors. This imbalance will restrict the banks' power to allocate funds efficiently, especially to entrepreneurs. Without adequate investment avenues available to banks, the impending investment boom may just be a wasted opportunity. Mr Sanyal fears that if things are not changed, and soon, we might face a monetary management crisis. He argues that, "We can avoid repeating the random investing that the Chinese made. However, we need to empower our banks to actually do banking and not just bond portfolio management."

Describing China's progress, Mr Peter Tan of McDonalds said it was the sustained economic reforms and political stability which attracted the FDI and drove the Chinese economy, which he termed a "miracle" in the past 25 years. Even the ruling political party has made major ideological adjustments and resolved to reduce levels of corruption to build confidence in investors.

However, the big risks confronting the country are how it will deal with the huge agrarian population (60 per cent) and tackle unemployment, even while maintaining a fast-paced, high-growth economy, he said.

If China chose manufacturing to drive its economy and benefited from its highly productive employees, India has chosen a different approach of cashing in on software and the English language advantage, Mr Tan pointed out.

Illustrating China's manufacturing success he said that in garments, China's high productivity has made it a global success. It brought capital, technology and management expertise, ensuring quality products that were globally competitive. In contrast, India suffered from low productivity and technology problems, he said.

In terms of how this "economic miracle" of China has translated to the common person, Mr Deepak Goel of McKinsey & Co, India, says: "The average Chinese person is today 60 per cent richer than an average Indian. In 1990, both were at the same per capita income."

The average Chinese has also emerged two-five times more productive than his Indian counterpart in various sectors. For example, the Chinese worker produces 35 shirts in an eight-hour shift compared to 20 by an Indian.

The overall, increasing prosperity led by the manufacturing boom could be attributed to the very low indirect taxes regime that China has managed.

The Chinese manufacturer is benefited by low import duties and interest rates, and high labour productivity. This is reflected in lower prices for consumer goods. While an Indian pays 29 per cent average taxes, the Chinese pays just 14 per cent on most products.

Presenting insights into the nine-month study of China and India, Mr Goel said though China has a Communist regime, since 1990, it has ensured that every Chinese employee is on contract.

Its growth is propelled by high investments and higher productivity, exports are pushed by the FDI and, since 1994, it has succeeded in reducing indirect taxes substantially.

India has also maintained a good liberalisation pace, bringing down taxes and duties, though perhaps slower in comparison to China, argues Mr Anwarul Hoda, Member, Planning Commission. The development of infrastructure is the key difference between the two economies now.

Not everything, however, is rosy as far as the Chinese economic miracle is concerned. Mr John Talbott, author and former investment banker with Goldman Sachs, said China was a poor model for development. Why?

Because, more than 50 per cent of Chinese bank loans are bad (state-owned enterprises consume 75 per cent of loans), Government funded projects are non-productive, 120 million people are unemployed, very low wages are paid, there are no unions, few consumer rights, and health concerns are not addressed properly.

Calling his presentation "China — Crouching Tiger/Hidden Dragon", he said that as the Chinese economy grows bigger, it could become more and more vulnerable to a crash.

Mr Talbott described China's economy as "unstable" and a big threat, as by 2040 it could be the world's largest economy in the hands of a powerful military dictatorship.

(Excerpts from a conference "Will the 21st Century belong to China and India,"organised by ISB, Hyderabad.)