Day: October 2, 2010

India, not China will be more prosperous in the long run

Ten years ago, it was unthinkable to compare China with India. The emergence of India and China as major global players heralds new realities.  In the past decades, India has been world number one in starvation deaths, foreign aid and bribery. In the 2000s, it was transformed from a chronic under-performer to a potential superpower.  The Economist has a good piece on why India will over-take China, putting them at odds with the recent swooning over China’s efficient authoritarian/capitalist model. They write that India’s demography is more favorable to long-term growth than China’s, which has been stunted by its “One Child” policy. The second driver of Indian growth, they argue, is its democracy:

The notion that democracy retards development in poor countries has gained currency in recent years. Certainly, it has its disadvantages. Elected governments bow to the demands of selfish factions and interest groups. Even the most urgent decisions are endlessly debated and delayed.China does not have this problem. When its technocrats decide to dam a river, build a road or move a village, the dam goes up, the road goes down and the village disappears. The displaced villagers may be compensated, but they are not allowed to stand in the way of progress. China’s leaders make rational decisions that balance the needs of all citizens over the long term. This has led to rapid, sustained growth that has lifted hundreds of millions of people out of poverty. Small wonder that authoritarians everywhere cite China as their best excuse not to allow democracy just yet.

No doubt a strong central government would have given India a less chaotic Commonwealth games, but there is more to life than badminton and rhythmic gymnastics. India’s state may be weak, but its private companies are strong. Indian capitalism is driven by millions of entrepreneurs all furiously doing their own thing. Since the early 1990s, when India dismantled the “licence raj” and opened up to foreign trade, Indian business has boomed. The country now boasts legions of thriving small businesses and a fair number of world-class ones whose English-speaking bosses network confidently with the global elite. They are less dependent on state patronage than Chinese firms, and often more innovative: they have pioneered the $2,000 car, the ultra-cheap heart operation and some novel ways to make management more responsive to customers. Ideas flow easily around India, since it lacks China’s culture of secrecy and censorship. That, plus China’s rampant piracy, is why knowledge-based industries such as software love India but shun the Middle Kingdom.

India’s individualistic brand of capitalism may also be more robust than China’s state-directed sort. Chinese firms prosper under wise government, but bad rulers can cause far more damage in China than in India, because their powers are so much greater. If, God forbid, another Mao were to seize the reins, there would be no mechanism for getting rid of him.

That is a problem for the future. For now, India’s problems are painfully visible. The roads are atrocious. Public transport is a disgrace. Many of the country’s dynamic entrepreneurs waste hours each day stuck in traffic. Their firms are hobbled by the costs of building their own infrastructure: backup generators, water-treatment plants and fleets of buses to ferry staff to work. And India’s demographic dividend will not count for much if those new workers are unemployable. India’s literacy rate is rising, thanks in part to a surge in cheap private schools for the poor, but it is still far behind China’s.
Advantage India

The Indian government recognizes the need to tackle the infrastructure crisis, and is getting better at persuading private firms to stump up the capital. But the process is slow and infected with corruption. It is hard to measure these things, but many observers think China has done a better job than India of curbing corruption, with its usual brutal methods, such as shooting people.

China will grow old before it gets rich, while India will get rich before it gets old. This is all due to demographics like the article says. India will have a bigger younger labor pool of workers to support and grow the economy while China will have a older growing and shrinking labor pool, and will be forced to revalue its currency. So its growth will decelerate, just as Japan decelerated in the 1990s after looking unstoppable in the 1980s. Having become the world’s second-biggest economy, China’s export-oriented model will erode sharply – the world will no longer be able to absorb its exports at the earlier pace. Meanwhile, India will gain demographically with a growing workforce that is more literate than ever before. The poorer Indian states will start catching up with the richer ones. This will take India’s GDP growth to 10% by 2020, while China’s growth will dip to 7%.

India will become the largest English-speaking nation in the world, overtaking the US.   So, the global publishing industry will shift in a big way to India.  This will be beneficial to the U.S. and broader English speaking world.  India has the largest gas hydrate deposits in the world, and so will become a significant voice and energy producer. This will enable India to substitute gas for coal in power generation, hugely reducing carbon emissions.
China faces shrinking workforce due to its one child policy. China’s working population will peak at 1 billion by 2025 and then shrink steadily and that providing retiring benefits would be a major problem. On the other hand India will have 1.6 billion population –  220 million more than China. Indians with half its population under 25 years means that the country will have no problem paying for elders’ future health care and pension costs.

India has grown steadily at an average 6 per cent since the country embraced market economy. Last two years have been eventful with more than 8 per cent of growth. While India has an economy that is growing from the grassroots, China’s economy’s roots are not set from the individual up but from the government down. China’s economy is not demand driven but performance/producers under strict guidance set down by the government. Foreign investors have looked China for term opportunity where political and internal unrest can wipe out gains at one blow. India on the other hand offers long-term possibilities for growth, even though the returns may not be that huge in the short term.

India’s population is just 200 million short of China’s 1.4 billion, nevertheless, India’s medium age is just above 24 years while that of china is into thirties.

In the last decade, India has emerged next to China in their growth rate. Empowered by engine from IT, and exporting its manpower throughout the world that has increased the credibility of India, and made it an economic powerhouse for the 21st Century; and it has shown that it has all the guts to be in that ceremonious position.

India is world leader in IT Services and BPO off-sourcing with 65% and 46 %  share of the global pie. The World off-shoring market currently is valued at $300 billion, of which $110 billion will be off-shored by 2010 and India has the potential to capture 50% of it employing up to 8.8 million people.

The Indian BPO industry has grown at a mind-boggling 60–70 percent annually, with revenues rising from US$565 million in 1999–2000 to more than $3.4 billion now – China’s was only a fraction of it – $210 million.

With huge investments flowing into China and with robust domestic demand, it’s a paradox of plenty as far as China is concerned. The higher you go, the harder you will fall. Policy makers in China seem to understand this well as they have taken deliberate measures to slowdown the surging economy.

India is better placed than China for future growth. Its capital markets operate with greater efficiency. They are also much more transparent. Companies can raise the money they need. India’s legal system, while too slow, is much more advanced and is able to settle sophisticated and complex cases. Its banking system has relatively few nonperforming assets.

India’s democracy and news media are alive and vital, which provides a safety valve for the incoherent changes that modern economic growth brings. India has religious riots, secessionist movements, urban squalor and bitter rural poverty. But the voters know they can throw the rascals out, and they regularly do.

For decades China has benefited from the wealth and the investment potential of its Diaspora and the economic energy of Hong Kong and Taiwan. After years of ignoring its Diaspora, India is now welcoming them back – and they have much more “intellectual capital” to offer than China’s. The remittance inflow from overseas Indians during 2005 was more than 21 billion dollar, much more than Chinese Diaspora has remitted.

India seems all set to outperform China 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 years ahead of India in economic liberalization. Today it lags behind in critical aspects, such as reform that would permit more foreign investment and domestic private entry in the financial sector.

In the long run, India will overtake China in economic growth owing to home-grown entrepreneurship, stronger infrastructure to support private enterprise and companies which compete internationally with global firms, a media report has claimed.

The real issue is not where China and India are today but where they will be tomorrow. The answer will be determined in large measure by how well both countries utilize their resources, and on this score, India seems to be doing a better job.

The danger for both China and India, however is that the race to the top will create such huge income disparities in both countries which will lead to revolution in China and riots in India.  It is not surprising that China is taking active measures to channel some of its huge financial reserves into the rural areas.  India too is addressing the issue aggressively.

India has also developed much stronger infrastructure to support private enterprise. Its capital markets operate with greater efficiency and transparency. Its legal system, while not without substantial flaws, is considerably more advanced.

Indian policy makers have an opportunity to change India, fortune of its 1.2 billion people. Both India and China are cruising through eight lane super highways. The Chine superhighways are paved well with side walks but it has lots of political bumps and pot holes ahead of it whereas the road for India looks smooth but with several challenges. With foundations of reforms in place and the dreams of all Indians to beat all in this race, I am convinced that India will eventually overtake China.

The international system is changing towards an age where human and trade union rights will be an important currency of power. Military and economic might alone would not do. Although China has 450 million people in its globalize economy compared to India’s 250 million, the participation of Chinese workers in the economic progress is limited only to “production” without any rights. Chinese workers are denied their basic trade union rights. China does not respect internationally recognized core labor standards.

India finds its strength in democracy, whereas China believes in imposing laws. This will hurt China in the long run.
Here is a good economic investment discussion on both countries that high light my points.

Jayashankar M. Swaminathan, senior associate dean of academic affairs and the Kay and Van Weatherspoon Distinguished Professor of operations, technology and innovation management of Kenan-Flagler Business School, is the author of the new book Indian Economic Superpower: Fiction or Future? The book provides a deep understanding about the potential of the Indian business economy.

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