| India is more efficient with capital use but that could soon change once our infrastructure spending goes up. |
| In the last article, as a rough and ready comparison, I had argued that, based on the differences in growth rates over the last quarter of the century, the Chinese economy has grown roughly seven and a half times and the Indian economy at just three and a half times. Given the larger GDP of China to begin with (roughly the same per capita income but a much bigger population) the absolute size of the Chinese economy is three to four times larger. Surprisingly, the rough and ready estimates turn out to be pretty good in other areas as well. China's trade in the current year will be around $ 1.7 trillion and ours about $ 450 billion. The Chinese GDP will be nearing $ 2.5 trillion as against roughly a third of that in India. (Incidentally, trade as a percentage of nominal GDP is much higher today in China, than in say Japan, and comparable to that in much smaller countries like South Korea). China of course registers much better numbers on social indicators like infant mortality, the proportion and number of people below the poverty line, and so on. |
| Ever since I started reading newspapers in the 1950s, western commentators have always been comparing and speculating about the progress in democratic India and authoritarian China; between India's mixed economy and China's earlier emphasis on collectivisation and state ownership. In the event, China has done better than us, particularly after abandoning socialist dogma in 1979. India and China also faced some problems in common: deteriorating environment, uneven economic development between the fast growing coastal provinces and the hinterland "" the BIMARU states in India and the western provinces of China "" huge and growing income disparities, and so on. One major contrast is the way in which China solved potential problems from religious minorities constituting majorities in border states. If India barred non-Kashmiris from owning property in that state, the Chinese encouraged the immigration of the dominant Han Chinese in a Muslim majority western state, and Buddhist majority Tibet. Today Han Chinese constitute the majority in these states. |
| But coming back to the macroeconomy, there are segments in which we clearly are better. Perhaps the most important is the efficiency in the use of capital. India has made remarkable progress in this area: from roughly 6:1 pre-reform, the incremental capital output ratio today is just about 4:1, with, in round numbers, investment of about 30 per cent of GDP producing 8 per cent growth. The Chinese ICOR seems to be nearer five. But there is a danger in reading too much into this: China is far ahead of us in infrastructure investments. And, the return from infrastructure investments takes time to get reflected in GDP numbers. Therefore, our ICOR could well increase as the investment in infrastructure goes up. There are analysts like Minxin Pei who argue that "the only thing rising faster than China is the hype about China". Pei is Director of the China programme at the Carnegie Endowment for International Peace, and the author of "China's Trapped Transition: the Limits of Developmental Autocracy". I recently came across a longish article by Pei titled "The Dark Side of Chinese Rise", published in the March-April 2006 issue of Foreign Policy. Conceding that while "China's growth over the past two decades has proved pessimists wrong and optimists not optimistic enough", Pei describes China as a neo-Leninist state "" one party rule, state control of the commanding heights, but otherwise a liberal market and a globalised economy in terms of trade and investment. He quotes research to suggest that the private sector accounts for no more than 30 per cent of the economy. He also criticises the "virulent form of crony capitalism" bred by the combination of authoritarian rule and the state's economic dominance. He quotes World Bank estimates that a third of the investment decisions in China were "misguided", and contends that the economy is inefficient and corrupt. After reading the article, two thoughts occur to me: if, with all these weaknesses, the GDP grows at 10 per cent, year-after-year-after-year, surely something is right with the model. Again, if investment decisions are wrong and the economy inefficient, how do corporate savings account for 30 per cent of GDP? But, more about the second point in a subsequent article. |
| But to come back to India and China, Chris Patten, the last British governor of Hongkong, while reviewing James Kynge's China Shakes the World, wrote in the Financial Times: "which Asian tiger should we bet on "" India, with its software engineers and democracy, or China, with its manufacturing prowess and its flaky totalitarianism? The political romantic in me hopes that the answer is both. I keep my fingers crossed that China will change without turmoil." He does not say what his view as a political realist would be! |
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