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March 06, 2007
India's Advantages over China
This came in overnight as a comment on an earlier post, but, because of its thoughfulness, I'm posting it up here so it gets more eyes.
In an article published in 2003 called “Can India overtake China?” Tarun Khanna of Harvard Business School and I argued that India’s domestic corporate sector – strengthened by the country’s rule of law, its democratic processes and relatively healthy financial system – was a source of substantial competitive advantage over China. At that time, the notion that India might be more competitive than China was greeted with wide derision.
Two years later, India appears to have permanently broken out of its leisurely “Hindu rate of growth”– an annual gross domestic product increase of around 2 to 3 per cent – and its performance is beginning to approach the east Asian level. From April to June 2005, India’s GDP grew at 8.1 per cent, compared with 7.6 per cent in the same period the year before. More impressively, India is achieving this result with just half of China’s level of domestic investment in new factories and equipment, and only 10 per cent of China’s foreign direct investment. While China’s GDP growth in the last two years remained high, in 2003 and 2004 it was investing close to 50 per cent of its GDP in domestic plant and equipment – roughly equivalent to India’s entire GDP. That is higher than any other country, exceeding even China’s own exalted levels in the era of central planning. The evidence is as clear as ever: China’s growth stems from massive accumulation of resources, while India’s growth comes from increasing efficiency.
The microeconomic evidence also casts India in a better light. While India’s stock market has soared in recent years, the opposite has happened in China. In 2001, the Shanghai Stock Market index reached 2,200 points; by 2005, half the wealth wiped out. In April 2005, the Shanghai index stood at 1,135 points. This sharp deterioration occurred against a backdrop of GDP growth exceeding 9 per cent a year. It is difficult to find another country that has this strange combination of superb macroeconomic performance and dismal microeconomic performance. It is a matter of time before the two patterns converge.
Why, then, is India gaining strength? Economists and analysts have habitually derided India’s inability to attract FDI. This single-minded obsession with FDI is as strange as it is harmful. Academic studies have not produced convincing evidence that FDI is the best path to economic development compared with responsible economic policies, investment in education and sound legal and financial institutions. In fact, one can easily think of counter examples. Brazil was a darling of foreign investors in the 1960s but ultimately let them down. Japan, Korea and Taiwan received little FDI in the 1960s and 1970s but became among the world’s most successful economies.
An economic litmus test is not whether a country can attract a lot of FDI but whether it has a business environment that nurtures entrepreneurship, supports healthy competition and is relatively free of heavy handed political intervention. In this regard, India has done a better job than China. From India emerged a group of world-class companies ranging from Infosys in software, Ranbaxy in pharmaceuticals, Bajaj Auto in automobile components and Mahindra in car assembly. This did not happen by accident.
Although it has many flaws, India’s financial system did not discriminate against small private companies the way the Chinese financial system did. Infosys benefited from this system. It was founded by seven entrepreneurs with few political connections who nevertheless managed, without significant hard assets, to obtain capital from Indian banks and the stock market in the early 1990s. It is unimaginable that a Chinese bank would lend to a Chinese equivalent of an Infosys.
With few exceptions, the world-class manufacturing facilities for which China is famous are products of FDI, not of indigenous Chinese companies. Yes, “Made in China” labels are still more ubiquitous than “Made in India” ones; but what is made in China is not necessarily made by China. Soon, “Made in India” will be synonymous with “Made by India” and Indians will not just get the wage benefits of globalisation but will also keep the profits – unlike so many cases in China.
Pessimism about India has often been proved wrong. Take, for example, the view that India lacks Chinese-level infrastructure and therefore cannot compete with China. This is another “China myth” – that the country grew thanks largely to its heavy investment in infrastructure. This is a fundamentally flawed reading of its growth story. In the 1980s, China had poor infrastructure but turned in a superb economic performance. China built its infrastructure after – rather than before – many years of economic growth and accumulation of financial resources. The “China miracle” happened not because it had glittering skyscrapers and modern highways but because bold economic liberalisation and institutional reforms – especially agricultural reforms in the early 1980s – created competition and nurtured private entrepreneurship.
For both China and India, there is a hidden downside in the obsession with building world-class infrastructure. As developing countries, if they invest more in infrastructure, they invest less in other things. Typically, basic education, especially in rural areas, falls victim to massive investment projects, which produce tangible and immediate results. China made a costly mistake in the 1990s: it created many world-class facilities, but badly under-invested in education. Chinese researchers reveal that a staggering percentage of rural children could not finish secondary education. India, meanwhile, has quietly but persistently improved its educational provisions, especially in the rural areas. For sustainable economic development, the quality and quantity of human capital will matter far more than those of physical capital. India seems to have the right policy priorities and if China does not invest in rural education soon, it may lose its true competitive edge over India – a well-educated and skilled work-force that drives manufacturing success.
Unless China embarks on bold institutional reforms, India may very well outperform it in the next 20 years. But, hopefully, the biggest beneficiary of the rise of India will be China itself. It will be forced to examine the imperfections of its own economic model and to abandon its sense of complacency acquired in the 1990s. China was light years ahead of India in economic liberalisation in the 1980s. Today it lags behind in critical aspects, such as reform that would permit more foreign investment and domestic private entry in the financial sector. The time to act is now.
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Couple of things in response to VJ's post:
The argument that India's growth rate has increased to 8.1% cannot be seen in comprison to China's growth rate as the base is different. Also, if the law of diminishing returns holds, then would'nt India also need to invest in capital to to sutain high growth rate over a period of time? After all, how much juice can be extracted simply through efficiency gains?
In VJ's comparison between India and China, one thing I find missing is the comment on the fact that perhaps not enough jobs are being created in India in the manufacturing sector. With India's large population, this surely must be of concern.
Posted by: Govind at March 9, 2007 03:09 AM
I am an Indian working in India. I travel quite often to China. The difference in the level of infrastructure is glaring, to say the least. Even a small city in China, has a much better infrastructure than the commercial capital of India, Mumbai. As of now, Mumbai & its suburbs does not have sufficient power, water or proper roads, its public transport is crumbling and there is no way that these ugly truths, can be brushed under the carpet. The current level of growth is unsustainabale with the present level of infrastructure. What's worse, is that nobody in the government is bothered about this either, no doubt they are preening with pride at reports of fantastic growth and opportunities here, which are reported by you? How long will the feel good factor last? No one knows but I suspect not for very long.
Posted by: Mandar at March 12, 2007 06:48 AM
What India should focus on is NOT high tech stuff but agriculture. India is still an agricultural society. Remember hundreds of farmers killed themselves last year in India?
Posted by: Michael at March 21, 2007 10:02 AM
It will be a combination India and China conglomerate called "Chindia".
Until then let the india/china debate continue with full vigor!
Posted by: tweezer at March 30, 2007 02:47 AM
I am not a financial expert, but I believe if you count the GDP generated by India's parallel economy (or the black market) in addition to the regular government figures of the GDP, the growth might be even on a higher path...
Posted by: Vinay at April 6, 2007 05:03 PM
My respects to Madar comments.
I agree that India does not have a good infrastructure as compared to China, but neither do we have as bad ethics as China. We do not promote child labor and have established laws to ban it, We are trying to get rid of our sweat shop while China is otherwise. We are working in providing world class education such as IIT, IIM, VJTI, etc. We are promoting entreprenuership more than ever before. Technology, pharmacy, service sector, jewellery industry, etc are far better in INdia than China.
Yes we are working on the infrastructure problem, but you can not expect one country to be the best in all aspects. Even the US and former superpower Russia are not.
Economic development is greatly important, but it is more important for us to take care of our people's interest than become a money hungry country. In the world we are able to see some examples of the latter, US = money hungry = Iraq war
I do have faith in India's growth and I do believe that we can become more developed all roundedly than just being money hungry and the next US
Posted by: Sanmitra at April 7, 2007 04:10 PM
You must be joking. Everybody know that India has a worst record on child labour and child abuse.
Posted by: David at April 15, 2007 06:18 AM
When coming to compare India with China, one of the most important evidence being frequently referenced is India's democracy. People keep saying that India would eventually overtake China because of India's democratic system.
I wish I could believe that. But my question is that if India's democracy has not worked well in solving all the problems India has been facing since August 1947 India became an independent state, what makes the people so sure that it would work well now ? What is different time time ?
Posted by: Downs at April 17, 2007 10:14 AM
"US = money hungry = Iraq war "
What an ignorant statement. How is the US 'making money' from Iraq?
As an Indian, I thought you people would actually support the creation of a democracy in Iraq. Your opposition to it shows how phony Indian democracy/values actually are.
Indians are the most money-hungry people in the world. They are super-materialistic and most of their conversations revolve around just 2 topics - money and weddings.
Is India fighting in Kashmir because it is money-hungry?
Posted by: Kartik at April 17, 2007 08:03 PM
To all self-praising Indians:
Don't accuse just the Chinese of illegal immigration and people smuggling.There are a hell of a lot Indians who are arrested all over the world for the same offences as well.It is not unusual to find illegals from India as well as other parts of south asia trying to enter Europe hidden in concealed cramped up spaces at the back of some vehicle on a very regular basis or trying to get into the middle east in crowded half sinking boats to look for jobs knowing well the reputation of arabs and their contempt for desis or washing up on the shores of North America like sea weed and asking for political asylum.Talk about India as being a country worthy of being labelled as developed and global power only when people seek to migrate to India and not from it.Atleast China can proudly show the world its measure of development in Shanghai and a host of other urban centers while the best India can offer is an eyesore like SLUMBAI.
India's dustbin democracy is nothing to feel proud of if every government that gets voted to power has the same corrupt self serving agenda and gets nothing done and who says India is more free than China? If having the freedom of starving to death on the streets like stray animals for hundreds of millions of impoverished Indians or having freedom and dignity as regulated by the caste system are the Indian's idea of freedom/democracy then I'm sure the Chinese are glad they don't have democracy.
I have been to India many times and travelled widely within the country and the apalling levels of grinding poverty was all too evident everywhere.India also has the highest number of AIDS cases in the world and increasing by the day and with a corrupt government and overall uncaring society in place,it's unlikely India will be able to arrest this catastrophy in the making.
I would agree that it is foolish to compare India with China as apart from similar demographic size the two share nothing else in common.China is light years ahead of India economically,militarily,development wise and even in terms of international prestige China clearly has the lead by a very wide margin.No doubt China has it's share of serious problems and challenges but atleast the Chinese "dictators" running the country have proved themselves competent enough to steer the ship while it navigates through stormy conditions.The same can't be said about "shining" India.
Indians should stop their shameless self-promotion campaign.With so little to show the world you Indians should concentrate harder on overcoming the problems facing you instead of thumping your chests in self-congratulation.
Posted by: Ben Johnston at April 20, 2007 03:38 PM
It doesn't take a lot of brain power to tell why Indians in every India vs China blog are so hoping for China to fail.Thats because jealous and defeatist Indians know for sure that India will never achieve the same level of success as China.
India will never develop into anything significant as long as Indians are controlled by such a mindset as wishing for the neighbour's house to burn down just because their own house is a disgusting mess.Nice going Indians!! (Two thumbs down)
Posted by: Ben Johnston at April 20, 2007 03:40 PM
surely india could come over china with its present status of education tech power &so on. But still we have to come in increasing the living standard of our poor millions,accessiblity&availablity of health svs to the peripherty&so on.gud luck india,keep going.
Posted by: minnu at May 4, 2007 08:25 AM
Having clients in both countries allowed me the chance to visit Chindia quite frequently. The insight into their individual tech sector also proves informative. Manufacturers of white goods esp. electronic/electric appliances in India are getting threatened & overhelmed by chinese imports that sell even below the bill of materials of the indian products. The development/manufacturing base in India, esp in Pune, Bangalore and Mumbai is especially crowded and fragmented. There can be thousands of small-scale plants producing these goods at a rate of maybe 3-4000/year while major Chinese plants bring out products in the hundreds of thousands /mth. The Indian design houses are understandably confident (same say proud) of their development prowess and stubborn enough to refuse to compromise or cooperate with anyone if it means deviating from their own modus operandi. If major distributors like Tata or Reliance have to reply on more than 20 suppliers for the same product range in any one state, it says alot on how badly organized the manufacturing infrastrature is esp regarding transportation hubs, supply chain, supply dependability, etc. The upside is of course if the indians persevere, they would truly obtain a market-changing piece of work and if even only a tiny fraction of the total number of houses achieve that, it would still propel indian economy by leaps & bounds. On the other hand china achieves its high volume of sales because there is already consolidation in the market plus relatively better marketing infrastructure and more robust manufacturing base. In their relentless attempts to cut cost, they partly offset the cost demanding portion of R&D by opening up a specimen of what sells best in the market and implements the same design bolt & screw into their own. The good part is a extremely rapid design-to-product turnaround time and much cheaper wares. The bad part is the killing off of local design houses that are intent on producing out of the blue workpieces and hollowing out the design/manufacturing base of that country. Each nation faces its own problems. For India & China, whoever recognizes and solves theirs first would overtake the other. In this equation, democracy is unfortunately a trivial factor, but pragmatism and drive are decisive.
Posted by: wombat at May 9, 2007 01:08 AM
China 1: Great Infrastructure
China 2: Good Discipline
China 3: Focus and Determination
India: Lot of talk
India: Enjoy the west and praise their mother(slum) land sitting in US and UK.
Posted by: Not Too Neutral at May 9, 2007 06:17 PM