on why the two countries are important to each other. Excerpts: Is an India-China comparison appropriate? Or is it like comparing apples and oranges?
It is very valid. These are two large, developing countries that are growing very fast and they face some common challenges and problems. For instance, the biggest common challenge India and China face is poverty. Despite the fact that both countries are growing very fast, reducing poverty still remains a challenge. Hence, I think it's very valid to compare them, so as to learn the right lessons in terms of policies.
But aren't the two countries also different in several aspects?
The economies of both countries have done very well: China has done well for a longer period of time. Another similarity is that both countries now have some very difficult policy choices to make.
Then there are common issues like electricity. The Indian consumer is very concerned about energy consumption. Chinese consumers are exactly the same way so the business strategies that you have in China can be extended to India.
The differences are, India is moving on a path of very fast privatisation. Private companies are becoming the fundamental pillars of economic growth. It is generally accepted here that the private sector is more efficient and that it must promote the private sector growth. In China, this is still a very sensitive topic. The government has never explicitly said that the private sector is more efficient than public sector. China needs to overcome that hurdle, accepting the private sector as the main driver of economic growth.
Is increased competition between the two countries important for their respective growth?
Learning from each other is more important than trade. Trade is also very important because it forces the two economies to compete with each other directly. If they directly trade with each other there will be a higher level of competition between Indian and Chinese firms. Both countries will benefit from this. Take Latin America, for instance. Argentina, Brazil and Chile have all competed with each other because they are close to each other. They have fiercely competed on issues such as economic liberalisation, foreign direct investments, access to the US market and so on. But the countries have found it beneficial to have deeper engagements with each other there and to promote steeper competition.
Do India and China have the strategic intent to tap into each others markets?
India and China don't pay as much attention to each other as they should. There is a clear lack of strategy. A simple example is that it is only now that the two countries have a direct flight. But the flight is still just twice a week. It's not convenient and is a clear barrier to trade. Despite the geographical proximity, travelling from India to London, Frankfurt or Singapore is much easier than going to Beijing or Shanghai. You are clearly missing many business and economic opportunities by not having well-established links. Both governments are failing to actively coordinate relations and are leaving it to the trade.
What can India learn from China?
I think this is one of the most misunderstood areas. People in India look at China because China has highways and FDI. But I think there are other important areas where India clearly needs to learn from China. For instance, China's basic education is much better than India's basic education, China's savings rate is much higher that India's savings rate. India can learn from China, how to provide basic education. In terms of trade I don't see huge differences, perhaps only in terms of SEZ and labour market flexibility.
Are there areas where China can learn from India?
Yes, tremendously. In terms of emphasis on private sector growth, the growth achieved by India is very impressive. The financial system is an area where India has done very well. This is one area where China needs to do much better in order to have a sustainable economic growth. India has many other difficult conditions that China doesn't have.
But now India is growing at level that is very fast "" 8 per cent a year. If India can grow at that rate for another five years then that level will become self-perpetuating. And the reason why India is able to grow at the rate is because despite all its difficulties, it relies on private sector growth. On the other hand, China has many advantages and a high growth rate but because of its ambiguous attitude towards private sector, there are many problems in its growth. China also needs to learn to maintain an effective legal system.
What are the strategies that Indian companies must follow while entering China?
So far the companies that have really done well in China are mainly export-oriented companies. Essentially the approach of these firms is to use China as a production platform rather than a consumption platform. So that's a model Indian companies must look at. Indian companies ought to think very clearly about this question: do you view China as a production platform or as a consumption platform? So far, the business models that are oriented towards using China as a production platform are more successful than business models that are oriented towards a consumption platform. The reason for this is that the domestic consumption is growing but as a share of GDP it is actually falling.
What opportunities do Chinese companies see in India?
The opportunities are great. In China, manufacturing firms have developed their capabilities and are capable of serving consumers well. Especially Indian consumers can be better served, as Chinese companies can understand Indian companies well. The Indian consumer is doing very well economically. In China, the Chinese companies had the same set of consumers since the 1990s.
What must India do?
US firms lobby a lot. They were instrumental behind the WTO agreement and the voting of China as the most favoured nation. They lobby actively and establish ties. I don't know if the Indian business sector has the power or the intentions to do the same. But that could be one area to look at. Another thing, I think India really needs to do is reduce its comparison and association with China in the eyes of the world. From a branding perspective it is very important that India isolates its image from China. At present, China is growing and India may benefit from the association, but tomorrow if the Chinese economy takes a hit then investors will draw back from India too as investors work with a certain herd mentality.
Yasheng Huang, Associate professor, MIT Sloan School of Management
