India: Borrowing from China's Playbook

Despite vastly different styles of government, Delhi is looking to Beijing for ideas on keeping up and balancing the wealth

A four-hour road trip from Delhi to Agra, the home of the Taj Mahal, offers a crash course in economic disparity. It's not that India's capital is a beacon of conspicuous wealth, it's just that the rural population has clearly been sidelined from the country's economic growth.

India's recent expansion has been impressive. Since 2002, GDP has risen 7.5% per year or more. In 2005 and 2006, it hit 9% and 9.2% respectively. At the beginning of this year, economists spoke of India and China's growth being neck-and-neck, while investment bank Credit Suisse went as far as to do say India would overtake China for the first time, posting 10% and 9.9% growth respectively.

Four months later, this scenario looks unlikely, as China continues to power ahead. But India seems more than capable of staying in the race. It is pursuing the infrastructure development and foreign investment that have formed the bedrock of Beijing's economic plan while at the same time expanding into areas that have underperformed in the past, particularly agriculture.

"The growth momentum has picked up substantially," said Dr Amitendu Palit of the India Council for Research on International Economic Relations (ICRIER), a policy think tank.

"In the last four years growth has been more than 8% and, in the last two years, over 9%. Three years ago we had not expected we would grow at 9%. What would be the rate of growth five years from now? It might even be 12%."

Stuck in a rut

Since India launched economic reforms in 1991, growth has been disproportionately urban and this has created myriad stumbling blocks. Many of these are encountered—quite literally—on the road to Agra, where potholes are ubiquitous, crashes common and traffic routinely brought to a standstill. Crossing the border between Haryana and Uttar Pradesh states, dozens of trucks sit idle waiting for permission to move.

Throughout the country, crowds, delays and ramshackle infrastructure are the norm. In many places outside of a handful of cities, reliable power is little more than an elusive dream.

This poor infrastructure, said Palit, is a bottleneck that could slow down growth and has created demand-led inflationary pressures, particularly in food, as there is no consistency to product delivery.

Meanwhile, below the tip of the population iceberg occupied by India's famed army of accountants and computer programmers, a third of people can't read or write. For many of the country's lower class—and lower cast—young, school is a luxury they can ill afford.

"In 1997, the dream was to tell the world that we are ready to join the world," India's finance minister, Shri Chidambaram, told reporters after releasing the yearly budget on February 28. "In 2007, the dream is to tell the people of India that they are part of the growth process.

"There is no dearth of funds. There is no dearth of schemes. The only thing now is to achieve the expected outcomes."

The annual budget is the most significant economic statement the government makes every year. It is the culmination of a high-intensity process that includes television shows, newspaper supplements, countless interviews, photo ops, speeches and press conferences. Industry groups lobby to get concessions and preferential treatment, associations push their agendas and critics tear the document apart looking for flaws.

India's budget process is very public and very loud—it is able to bring down governments.

The economic policies Chidambaram put forward this year offered little new in terms of perks or protections for industry. Instead, he focused on two main themes that reach out to the core of India's population that has been left behind: agriculture and education.

The following day, Chidambaram challenged business leaders to stand on their own with decreasing government protection. Promising a reduction in import tariffs, a move that will further open the domestic economy to foreign competition, he said industry is now strong enough to flourish in the global market.

"I don't fully agree with that," said T. S. Vishwanath, head of international trade policy with the Confederation of Indian Industry (CII), who had been hoping his members would receive more government backing.

This view was echoed by CII president R. Seshasayee as he noted that "with the economy moving at a good clip, we would have expected more of a boost".

Other comments from India's business elite were quick and cutting. Lobbyists denounced a new tax on cement, saying that it would lead to the industry's collapse. Representatives from the auto and manufacturing industries complained that little had been done to help them.

Chidambaram has the numbers on his side, though. Last year, manufacturing was India's main growth driver as the sector expanded by 11.3%. Services also performed well, rising by 11.2%. Agriculture, on the other hand, grew 2.3%—well below its 4% target.

This weakness in the agricultural sector, exacerbated by low infrastructure investment, was what made economists revise their January growth predictions.

India spends a mere 4-5% of GDP on infrastructure. Increasing this to 8% could send economic growth into 12% territory, according to ICRIER's Palit.

"Without infrastructure it will be very difficult to support industrial development," he said.

Emerging elite

The lack of infrastructure has not stopped the rise of an urban middle class in India, most of whom are getting rich on the back of a small segment of ballooning manufacturing and service industries.

According to a JPMorgan study, 68% of India's urban households live on less than US$3,000 per year and this number could fall to 42% by 2015. Meanwhile, the segment earning US$3,000-5,000 will grow from 20% to 30% and the US$5,000-10,000 bracket will expand from 9% to 21%.

This is the consumer base targeted by foreign companies keen to take advantage of Chidambaram's lower import tariffs.

The challenge in building up a business focused on this expanding group of potential customers is creating India-centric products coupled with marketing strategies targeted at a very diverse population splintered along ethnic and regional lines. This is something Indian industry learned to do a long time ago but foreign multinationals are figuring it out as they go.

Haier, the uniquely successful Chinese household appliance maker, has tried to live by this philosophy. Since it first entered the market in 2004, the company has grown many times over. Sales multiplied up to eight times in 2005 and jumped 25% in 2006, all fueled by some idiosyncratic buying patterns.

"When a person has money the first think he buys is a television," explained Pranay Dhabhai, COO of Haier Appliances (India). The second thing he buys is a moped or a scooter—he wants to graduate from the bicycle. Then it is housing, then a refrigerator. Washing machines and dishwashers come way, way down."

Haier's Delhi offices occupy three floors of a stand-alone building in a business park on the city outskirts. The company has, to date, not manufactured directly in India but subcontracted to local firms, although an as-yet unannounced refrigerator production base is planned.

Its fastest-growing category is air conditioners, with sales growing at 25% per year; other products grow at 7-8%.

Aiming Haier

India is a relatively small market for Haier compared to China, the US or Europe, but the company sees massive potential. For Dhabhai, the country today is very much where China was circa 1995.

"We look at India as one of our key markets," he said.

This appetite for consumer durables is likely to be driven higher by easier access to financing. More credit facilities make it easier for low income families to buy more expensive products by spending a few hundred rupees a month instead of several thousand in one shot.

At the same time, it makes more sense to buy a refrigerator when there is a constant and reliable electricity supply, so slowly improving infrastructure will also help drive Haier's sales.

There are enormous challenges, though. While the feeling is generally one of barely guarded optimism, India's economic imbalances must be addressed.

Much as China has employed an incentive-led approach to drive investment into its western regions, the agriculture provisions in India's latest budget signal the start of large-scale efforts to spread the growth out into the countryside.

The China solution

This is just one way in which Delhi is looking to emulate China's growth, albeit with Indian characteristics, given the differences that arise from very different social and political systems.

"China was led by investment, India was led by consumption. But I think in India, slowly, slowly, investment is increasing. And in China too, consumption is increasing," said Basanta Pradhan, a professor of economics at the Institute for Economic Growth in Delhi.

When it comes to implementing change, the differences between the two are driven largely by political realities.

Chinese leaders face internal pressures as they balance the often conflicting agendas of local, provincial and central government, but they wield great influence and their decisions are rarely held answerable to public scrutiny and never to the electoral process.

Decisions in India, meanwhile, have to be made through compromise. Politicians are open to criticism from a vocal press and subject to the whims of an unpredictable electorate at the polls.

There are constant power struggles, not only between the states and the federal government but also between the myriad political parties.

The budget process highlighted these difficulties as Chidambaram went out on a limb to spread the wealth but lost political capital with industry lobbyists and the politicians who champion their cause.

The finance minister may find himself under further pressure as he pushes forward with further reforms, namely to create more urban centers where now there are none, boost agriculture, create more manufacturing bases and allow more foreign investment.

In short, they must do all the things China started doing in 1979.

"We are a large country by population so it's very important that the kind of growth you have creates new employment opportunities," said Palit.

"You have to think about mass production and manufacturing—something similar to what China has done."

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