THE India-China economic comparison is inevitable, even if it is best avoided. In any such comparison, India doesn’t perform too well. It is unnecessary to repeat more than a few illustrative figures, since this is familiar enough. Consider the World Development Indicators (WDI) database. As of April 2006 China’s Atlas method gross national income is 1.9 trillion US dollars, compared to India’s figure of $673.2 billion. Replacement of these official exchange rate or Atlas conversions with purchasing power parity (PPP) will not change the comparison remarkably. The India Shining GDP growth rates of 8.6% in 2003 and 6.9% in 2004 seem a trifle less shining when compared to China’s 10% in 2003 and 10.1% in 2004. China’s Atlas method per capita income is 1500 US dollars, India’s is 620.

Admittedly, there is a time lag in all WDI figures and these are for 2004, but even when later figures become available there will be no remarkable change in the comparison. India is much more open now compared to pre-1991. Exports plus imports (of both goods and services) are 41.6% of GDP. However, the Chinese figure is 65.4%. India’s 5.3 billion US dollar FDI inflow figure compares poorly with China’s 54.9 billion. In social sectors, China’s infant mortality rate (per 1000) of 26 outscores India’s 61.6. The number of telephone (fixed plus mobile) subscribers in China is 499.4 (per 1000 population), compared to India’s 84.5. Moving on to indicators that are sometimes less cited, it takes 48 days to start a new business in China, compared to India’s 89 days. One can add to this list, but these should suffice.

 

From an Indian perspective, there have been different responses to this relatively unfavourable India-China comparison and it is useful to list them out. First, there has been a questioning of China’s data and accounting practices, GDP and FDI being two obvious examples. While there can indeed be a case establishing over- estimation, it is not always obvious why this should affect rates of growth, unless the distortion increases over time. Second, there is the argument that China began economic liberalization in 1978/79 and if one dates India’s reforms to 1991, China has a head-start of 12/13 years. However, there were Indian reforms before 1991, even if those were not as systematic and comprehensive as compared to what has happened since then. Plus any visitor to China will agree that this gap between India and China is now much more than 12/13 years.

Third, a point is made that China has all along been more decentralized than India, even before the 1978/79 reforms. This decentralization and devolution of decision-making processes made the political economy of reforms easier to handle and notwithstanding the recognition of panchayati raj institutions and urban local bodies, the Seventh Schedule to the Constitution stands in the way of Indian policies and procedures changing fast enough. The labour market is a good example of flexibility that decentralization enables. Fourth, also on that political economy strand, it is sometimes argued that China was able to broad-base support for reforms and dispel the myth that liberalization is anti-poor and pro-rich, because rural sector reforms were introduced in 1978/79. This broad-based both income and consumption growth. Fifth, the socialist emphasis on social sector investments and even land reforms removed some of the asymmetric access that poorer sections have to market-based opportunities.

 

Sixth, had the labour market been reformed, SSI reservation eliminated and infrastructure improved, India would have benefited from the manufacturing export success story that happened in China. Seventh, it is also argued that there are significant inefficiencies in China and, when this point is made, one doesn’t have in mind only the financial sector. For instance, gross capital formation (as share of GDP) is 38.7% in China. A growth rate of 10.1% in 2004 implies an incremental capital/output ratio (ICOR) of 3.83. The gross capital formation rate of 24.1% and GDP growth of 6.9% implies an ICOR of 3.49 in India. The apparent efficiency of investment is of course a function of the sectors that investment goes into. Large Chinese investments in infrastructure naturally drive up the ICOR. Compared to industry, the service sector also tends to have a lower ICOR. China’s sectoral shares in GDP are 13.1% in agriculture, 46.2% in industry and 40.7% in services, while India’s share is 21.1% in agriculture, 27.1% in industry and 51.7% in services.

 

Eighth, this leads to an additional point to the effect that while China may have innate strengths in manufacturing, India’s growth will be driven by services. There is of course no country in the world that has sustained growth rates of 8% plus without a significant contribution coming from manufacturing and India is unlikely to be the first country to prove this wrong. The share of manufacturing (not industry) in India’s GDP has been of the order of 17%. While this cannot possibly be pushed up to 30%, as some people in the government often suggest, it ought to be in the neighbourhood of 25%. The problems that constrain India’s manufacturing have often been documented, including in recent papers by the National Manufacturing Competitiveness Council (NMCC). In this list are items like indirect taxes (the lack of a combined and integrated goods and services tax), infrastructure (particularly power), labour market rigidities and bureaucratic procedures and red tape.

Rather remarkably, FDI out of India has now begun to exceed FDI into India. Interpreted uncharitably, since multiplier effects are greater if investment takes place at home, this FDI outgo (including to China) is symptomatic of the high transaction costs of doing business in India. However, the paranoia about Indian manufacturing being swamped by imports from China, so characteristic of our reactions four or five years ago, has now disappeared, despite the fact that a large number of Indian anti-dumping cases are directed against China. The fact that China’s WTO accession doesn’t treat China as a market economy makes levying of anti-dumping duties easier, since the proof requirements are milder.

 

Perhaps the progress on Indo-Chinese economic relationships, without getting bogged down by border talks, also contributed to a lack of paranoia. Not only has bilateral trade taken off, with a greater China becoming India’s single largest trading partner, there has been reasonably closer cooperation at the World Trade Organization through G-20 and a FTA (free trade agreement) or comprehensive economic cooperation agreement (CECA) with China is on the cards. The implicit conflicts are strategic, including those related to energy demand, rather than purely economic.

Nevertheless, the fact remains that in most manufacturing, China’s costs are at least one-third, if not more, below India’s. This is due to a combination of better infrastructure, lower interest rates, labour market flexibility, economies of scale, better technology, non-transparent subsidies and even marginal cost pricing in export markets, all of which give it an edge. If appropriate reforms are introduced, India too will perform better in manufacturing. China may have all these advantages, but a better financial sector and legal system will attract investors to India.

And finally, India’s salvation lies in services. Apart from what was said earlier about services not being the panacea they are sometimes made out to be, China’s service sector share in GDP is not as low as is commonly thought. Many of India’s comparative advantages (knowledge of English) in the extremely visible segments of service sector successes, like H1-B visas and outsourcing, are also being eroded, as China catches up.

Ninth, the democracy tax is invariably mentioned. Stated simply, a democratic structure implies following of certain norms. The judiciary, the legislature and civil society (of which media is a part) hold back reforms. Consequently, India cannot carve out green-field airports or cities like Pudong without paying attention to land acquisition or compensation, cannot dismiss workers in public sector enterprises, cannot cut back on social sector spending or social security, cannot enforce a one-child norm and so on.

 

Across countries, the correlation between lack of democracy and economic growth is less robust than one thinks. For every China, there will be a counter example in sub-Saharan Africa. Sometimes a 2% lost GDP growth figure is cited as quantification of what India loses because of this democracy tax. This is nothing more than a wild guess. But assuming this figure to be correct and assuming a trade-off between democracy and growth, most people in India would prefer democracy with a lower growth than a higher growth without democratic institutions. Having said this, the argument is sometimes extrapolated to suggest that with economic development, the emergence of democratic institutions cannot be postponed indefinitely and Chinese growth will therefore eventually slow down.

In the same breath, perhaps one should mention increased regional disparities within both India and China, leading to heightened socio-economic tensions that can find a vent if there are democratic institutions that do not allow suppression. More than inequality in personal income distribution, this form of inequality is probably more serious in both countries. In China, the contrast between the northwest of China and the rest is obvious. In the Indian case, there are around 150 districts out of 600 that have been largely bypassed and marginalized in reaping the trickle-down benefits of growth since 1991. The National Rural Employment Guarantee Act has a list of 200 backward districts. These backward districts are almost geographically contiguous, beginning in central India and extending eastwards. In India’s case, geographical marginalization is also correlated with violent unrest and terrorism-type activities.

Tenth, the India-China comparison may be inevitable. But it is also clichéd and in terms of the transformations the world economy is going through, this is not an either/or proposition. The oft-quoted Goldman Sachs BRIC (Brazil, Russia, India, China) is not the only example of reports that flag India and China’s growing economic clout. Angus Maddison’s work shows that between them, India and China accounted for more than half the world’s output in 1600 CE. Such Indian and Chinese shares in world GDP may be a long way off, particularly because there was no United States then.

 

However, if one uses purchasing power parity (PPP), China already accounts for 13.6% of world GDP and India for 6.0%. And these shares will increase till 2020, and even more if one extrapolates till 2050, as the BRIC report does. This will imply changes in international decision-making bodies, already manifest in the WTO, less obvious in the World Bank, the IMF or the United Nations system. Arguably, China’s economic clout is already manifest even as many traditional developed countries are finding it difficult to adjust to transformations in global power. In contrast, the Indian clout is still latent and in the realm of the potential.

Even five years ago, the broad Indian response was that India and China were not in the same league. In some ways, hosting of the Olympic Games has been tacit recognition of a country progressing towards developed country status. This happened with Japan in 1964, Mexico in 1968 and South Korea in 1988. China is in the Olympic Games category, but India is still stuck in the Commonwealth Games league. But in the last five years, one witnesses a slight change in this Indian response, partly a reflection of better economic performance. This is also reflected in global rankings, which are often subjective and based on response to questionnaires. For example, in the recent (2006) World Competitiveness Scorecard, brought out as the World Competitiveness Yearbook (WCY), India’s rank among 61 countries has jumped from 39 to 29 in a single year. China’s rank jumped from 31 last year to 19 in 2006.

 

While both countries have improved their rankings vis-à-vis the rest of the world, a deeper relative point is also sometimes made. This concerns the three core ingredients that go into output growth – labour, capital and productivity increases. On labour, China will begin to confront the problem of an aging population, while India will continue to reap the benign effects of a young population with a decrease in the dependency ratio. One should, however, mention that most new entrants into the labour force will be in the northern parts of India, facing problems with skills, education, morbidity and governance in general, one reason why in the heart of the Hindi belt there is little investment right now of both the domestic and the foreign variety.

On capital, the argument is a tapering of high domestic savings rates in China, consequent to aging populations and absence of publicly funded social security, spliced with a breakdown in traditional social security systems, also compounded by the one-child norm. And one can even advance an argument about productivity increases tapering off. In passing, cross-country comparisons of GDP or per capita GDP require conversions to a common numeraire, usually the US dollar, and this is thus contingent on assumptions made about the exchange rate. In both countries there should be pressures of appreciation in domestic currencies, reinforcing growth expressed in US dollars.

 

But to reiterate what was said at the beginning, the India-China comparison shouldn’t be pushed beyond a point, including recent suggestions that there are two contrasting models at work, India’s one being consumption driven, while China’s is investment driven. The world economy has room for both and indeed, depending on the time frame used for extrapolation, the ingredients of a tri-polar world are in place, with the United States, China and India.

What is also inevitable is a relative, though not absolute, decline of Europe. And notwithstanding what has been stated above, suggestions about China’s relative decline vis-à-vis India are premature. There are several different ways of compensating for aging populations. And in the conceivable future, there are no immediate signs of India overtaking China, be it in official exchange rates or purchasing power parity (PPP) comparisons. There is too much of catching up to do. One should perhaps ask this question around 2035, at which time, by all accounts, India’s population will overtake China’s.