The Hindu Business Line : Playing catch with China

COMPARISONS, they say, are odious. That is perhaps true for ideal societies, not today's economies — rather than states — that thrive on competition. One corollary of competition is comparison. When constantly choices are being made, comparison is inevitable. Ergo, any discussion of the Indian economy must lead to a comparison with China. And comparable they certainly are. China and India are the world's two largest nations and have a number of similarities: Populations of more than 1 billion each, cultures dating back thousands of years, Western domination during colonial days, socialist legacies from misguided policies in the 1950s and the 1960s, widespread poverty, and an abundance of skilled workers produced by top-notch universities.

They also differ and starkly too: India's per capita income is $440 per year against China's $990. As per the official data from both countries, China has 3 per cent population below the poverty line compared to India's 30-40 per cent! In foreign direct investments China received $45 billion last year (including $32billion from non-resident Chinese) versus $2 billion (including $0.2 billion from NRIs) by India! China exports nearly seven times what India does; taking the exports of Hong Kong and Macau into account, China's exports would be 10 times!

The nimble Chinese dragon has outperformed the ambling Indian elephant in all economic spheres except software. China's GDP has grown at the rate of 10 per cent per annum over the last 20 years compared with India's 6 per cent. China has quadrupled its GDP over the last 20 years, while in India has only more than doubled. In terms of international trade, China has crossed the level of $ half a trillion in comparison with India's $ 85 billion. China enjoys a 3.4 per cent share of world trade, while India is targeting 1 per cent in 2007.

Can India catch up with China? In terms of purchasing power parity, India is the fourth largest economy, after the US, China and Japan, in that order; it recently overtook Germany. By 2010, India is projected to overtake Japan. But will it be able to get ahead of China, say, in the next 20 years? Many economic observers believe that in the next 20 years India's real GDP can potentially grow at 10 per cent if it pursues reforms vigorously. This should reduce the percentage of the population below the poverty line to less than 15 per cent, though with regional and State-level variations.

Despite all the excitement of reforms and a new path, India has ambled along, its software industry — acknowledged to be among the best — offering some exciting moments, and pharmaceuticals sector some upper; the country is just waking up to the potential of the drug industry. The services sector has done well, even as agriculture and industry remained lacklustre. Yet, India has little to show for itself, and the much-vaunted reforms of the last decade. Some multinationals talk of India being an important new market, especially as the US and other developed economies suffer from the global recession. But even here China is bigger.

If India concentrates on producing a significantly accelerated growth in agriculture, information technology, and exports in these 20 years, it may get closer to China. But the fiscal effort will have to be strenuous, especially to raise the level of investment to reach 30 per cent — a precondition for even taking the race with China. But is the polity up to it? A major disadvantage for India is its political set up that is constantly squabbling and not pragmatic enough to keep economics out of politics; it still remains a prisoner of populism. Witness the massive rollback forced on the Finance Minister, Mr Yashwant Sinha, of much of his Budget proposals in less than a month of their announcement, ironically, by his own partymen. Experts attribute China's recent phenomenal economic growth of 10-12 per cent per year to the fine foundation it laid of agriculture and small and village enterprises. Its special economic zones are hallmarks of success. Its abundance of cheap, expert labour, and the real opening up made China the outsourcing capital of the world. Another major contributing factor was the direct foreign investment (DFI). Like India, China's public sector has become highly inefficient. It is the DFI in the private sector that has kept the economy booming. But a recent study found that DFI flows into China will decline significantly because of bureaucratic interferences, imperfect market situations and restriction on profit repatriation. As a result, China's recently accumulated huge trade surpluses could become trade deficits. This will increase China's dependence on external debt significantly.

In contrast, India is likely to become the focal point of DFI. The large and growing market, a reasonable infrastructure, sophisticated financial sector, flexible regulatory environment, market orientation and stable economy make India an attractive investment destination. Further, none of the large Western companies is investing in India just because of cheap labour which is China's main lure. India's major advantages over China are increasingly open domestic market and the enormous pool of skilled labour. Every year more engineers graduate in India than both China and South Korea combined.

Both China and India are growing rapidly even in the wake of the global economic slowdown, benefiting from the demand provided by their massive domestic markets and the insularity from global shocks provided by having only partially convertible currencies. Beijing's strategy has been to develop world-class infrastructure, especially in its coastal regions. In fact on his recent visit to India, the Chinese Prime Minister, Mr Zhu Rongji, indicated that inquiries by his business delegation revealed that prices of most durable consumer goods, including IT products in India are three-four times higher than in China. He also acknowledged India's lead in software and in fact, suggested that the two countries should exploit each other's strengths. The Chinese software opportunity is said to be worth $ 6-7 billion and likely to grow rapidly, especially with China becoming a WTO member and the resultant emphasis on IPR protection.

The Chinese government is anxious to build up its local software industry so that it can start competing more directly with India. Beijing does not want China just to be a hub for info-tech hardware, since that business is often a commodity game with very low margins. In terms of e-readiness, a recent survey by a US multinational, placed China at the fifth position out of 38 countries. India was a lowly 37, despite the much-touted success in information technology. The reasons — China has an installed base of over 150 land lines and 130 million mobile phones and has overtaken the US in quantitative terms as far as mobiles are concerned. The same is true of PC penetration.

But more than competing, what if the two giants — even if one is barely awake — got together? There is much in what Mr Zhu told a gathering of India's top industrialists and financiers, "China and India are clearly complementary economies," pointing to China's strength in manufacturing and India's global prominence in software and IT-enabled services. "Growth in India and China will be driven by development of high technology, especially in the coming years. The level of cooperation between China and India is by no means commensurate with our respective strengths and status."

Mr Zhu told Indian business leaders that instead of fixating on China as a trade threat, India should focus on the potential for expanded trade. Chinese entrepreneurs, he said, should be encouraged to set up factories in India for the benefit of Indian consumers and industry. In turn, hi-tech Indian companies should set up branches in China. That created opportunities for Indian companies in telecommunications software, computer networking and system maintenance and other hi-tech areas in China. "Before coming here I spoke to a Chinese business delegation and said to them: Go to India. And now I am saying to you...welcome to China," Mr Zhu told the corporate leaders. He said it would be no problem trebling the two-way trade to $10 billion a year. So far, though, trade between the two countries is modest, last year totalling only $3 billion. By comparison, trade between China and Russia was almost seven times greater, though Russia's economy is a third smaller than India's.

Today, India and China would be driving the global market for decades to come. Both countries also represent large potential markets for each other's goods and services. While China has made significant advances in infrastructure and manufacturing, India has an edge in terms of intellectual capital for the future knowledge economy. If China with its hardware prowess and India with its considerable skills in software were to collaborate as also in biotechnology, the use of bioinformatics for drug discovery as well as in energy and environment is compelling. India could also provide significant support to China in the development of its institutional infrastructure in areas such as finance, law, civil service or higher education. The argument for a more serious engagement between the two countries is, indeed, self-evident. India has to ask itself if it wants to be a free-trader, cooperating with — and profiting from — China's attempt to build a software industry. Or does it want to turn protectionist, guarding its IT sector for as long as possible?

Some technologists have described a future where the two Asian giants stake out complementary claims to massive chunks of the global economy: China is well on the road to becoming a manufacturing export powerhouse. India aims to become "the world's back-office".

Can we look forward to cooperation, or are we condemned to comparison?

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