The Hindu Business Line : India and China

China and India may well dominate the international economic and trading system two decades from now. But how and where India will stand vis-à-vis the powerful Chinese presence in the global market place depends on how well it builds on its st rengths, addresses the reform gaps and steers clear of doctrines that threaten stability.

IF THE flow of Indian and Chinese modern economic history is any indication, both the countries are heading towards a phase of momentous change. Growth trends in both the countries have been twice that of the global economic growth rate for almost two decades.

Together, they account for about 40 per cent of the world's working age population and nearly 18 per cent of the global economy based on purchasing power parity. With the present trends sustaining, the two new "arriviste powers" could well out-perform all others to become key global economic players in just about two decades.

China and India, together, may well lead the international economic and trading system two decades from now. But how and where will India stand vis-à-vis the dominant Chinese presence in the global market place. Not everyone tracking India's decade-long dalliance with economic reforms is willing to share the optimism. Analysts remain divided on whether the "sleeping Asian economic giant" can ever break free from its slumber and surpass the "raging Dragon".

During the past two decades, China's real GDP has grown 9.7 per cent a year compared to India's 5.7 per cent. In 2003, China's GDP was 2.5 times India's while its per capita income was twice ours. In terms of PPP-based GDP, China's share in the combined global GDP was 12.6 per cent compared to India's 5.7 per cent.

China's share in global trade in goods and services vaulted to 5.2 per cent against 0.9 per cent for India. We are yet to become the world's favourite FDI (foreign direct investment) destination while China appears to have arrived. This appears to be the proverbial story of the tortoise (India) and the hare (China) slugging it out in an endless race, and India cannot but hold a distant second position in this game.

On the face of it, these comparisons seem odious and depressing. But a look at the details suggests they could well turn specious depending on how we calibrate our foreign and domestic economic/fiscal policies in the years ahead.

Though economic liberalisation at home and globalisation provided the trigger for growth in both countries, the reform experiments in India and China have been remarkably different. Both countries embraced major structural reforms to accelerate growth, but the stimuli, timing and contours were markedly different.

China embraced the FDI-driven, export-led fast-track economic growth model in the 1970s with the initial stimuli for capital flows coming from its strong and wealthy diaspora willing to invest in the homeland, and further boosted by the availability of cheap labour to build infrastructure.

While this laid the foundation for China's eventual pre-eminence in the manufacturing sector, sustained focus on universal education, upgrading basic skills and labour reforms helped the country append a significant proportion of its workforce to the global manufacturing economy.

Declining dependency ratio (proportion of non-working to working population), concurrent economic expansion and diversification led to the creation of a virtuous cycle of enhanced domestic savings/capital accumulation and greater investment in infrastructure for improving competitiveness, thus fuelling further growth.

India's economic reforms began in 1991, over a decade after China started liberalising. In addition to a late start, India had to make do with a higher dependency ratio, a savings rate half that of China, negligible FDI and a diaspora that was "cash-poor" but rich in intellectual capital.

The balance-of-payments crisis of the early 1990s provided the trigger for reforms, which were launched in several areas — fiscal policy, trade, exchange rate regime, and industrial and financial sectors.

India's reform process is unique in the sense that it adopts a gradualist growth model focussing on the development of an institutional framework that is anchored in democracy, rule of law, democratic decentralisation, thriving local entrepreneurship and credible market regulators.

The results of India's reform process have been mixed. The structural adjustment programme that followed the BoP crisis was relatively painless without incidences of spiralling inflation or unemployment. The economy has successfully weathered several harsh tests — the East Asian finance meltdown and post-Pokhran sanctions in the late 1990s.

While India has successfully evolved beyond the "Hindu rate of growth" of 2-3 per cent, it is nowhere near the Chinese fast-track growth results. It faces strong political challenges in balancing reform priorities with development imperatives, which include reduction in the dependency ratio and ensuring gainful employment for all in a deregulated economy.

Two major areas where India's growth suffers compared to China's is lower capital accumulation and tardy productivity-linked growth. According to IMF estimates, while capital accumulation accounted for over 4 per cent of China's average GDP growth during the 1990s, it contributed only 1.5 per cent to India's GDP growth. With capital as a factor of production, and investment being scarce, availability of resources for upgrading infrastructure and fuelling economic expansion has been constrained, depriving India of the "big take-off".

Clearly, we are trailing China, both in terms of present economic trends and growth prospects. Can India catch up and overtake China in the years ahead? Experts predict that India's composite growth rates should draw closer to China's in about 10-13 years if the real GDP averages annually around 6 per cent.

There are several factors working towards this. India and China already have 17 per cent and 23 per cent share of the global working-age population, respectively. While India's working-age population will continue to increase in the next two decades, China's will taper progressively because of its one-child population policy.

India can outpace China in terms of contribution to the global labour pool provided there is a sustained and unequivocal focus in upgrading the quality of human capital. The first challenge before us is to convert the growing working population into a comparative advantage by reducing the dependency ratio. The next test of our economic and fiscal policy is to ensure the creation and availability of sufficient productive jobs for our growing working population.

Economic growth in India in the recent past has been based not so much on the agricultural or manufacturing sectors, which provide employment to bulk of the population but on the services sector. This explains the existence of hidden/under- employment, skewed income distribution, lack of adequate purchasing power and restricted demand for goods and services in the economy.

Global trade opportunities are significantly higher in manufacturing than in any other sector. Unqualified attention in consolidating our comparative advantage in manufacturing with focus on revitalising the agricultural sector is, therefore, critical for ensuring sustained growth and productive employment.

There is no gainsaying the fact that creation of productive jobs for a rising work-force will translate into higher domestic savings, greater demand for goods and services and increased domestic investment, which will fuel further growth.

India's ability to sustain its current growth trends is probably more real than China's. There are several `fault-lines in China's economic terrain', which have strong growth-retarding potential — fragility of the financial system, tottering state-owned enterprises, internal discord against an authoritarian rule, political instability and the consequent flight of capital, as the Chinese economic miracle is FDI-dependent.

In contrast, India leads the way in having much stronger public institutional and regulatory infrastructure, such as an independent legal system, efficient banking set-up, parliamentary bureaucracy and an independent press, all of which have stood the test of time.

The global economy, by the beginning of the second quarter of the 21st century, will have less of a Western and more of an Asian face, with China and India leading the band. It is expected to be about 80 per cent larger than the world economy of 2000, and the average per capita income could be 50 per cent higher. The best-case scenario is no way guaranteed. The pace of global economic expansion and integration could falter in the event of contradictions and uncertainties arising in the international system. India has to build on its strengths, attend to reform gaps and steer clear of doctrines that threaten stability. A properly planned and carefully calibrated external economic and domestic fiscal policy will determine the way and the pace at which India will reach the top.

(The author is Deputy Secretary, Finance, Government of Tamil Nadu. These views are personal and do not reflect the policies of the Government.)

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