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China Vs India : Economic Growth Patterns And Predicting Future Trends

Over the last 35 years, China has spent about 8.5% of GDP on infrastructural development. It has the reputation of being the world’s most aggressive investor in domestic infrastructure – be it roads, rail, waterways, power, ports, airports or telecom. In contrast, India has spent only 4.7% of GDP on infrastructure over these years.

With the launch of Make In India campaign last year, India achieves to emulate its neighbour’s similar program launched back in 1992, Make In China. It aims to increase the share of manufacturing sector in GDP from the current 16% to 25% by 2022. India’s physical infrastructure today is quite similar to that of China in the early 1990s. With capital availability not a hindrance, India has a long way to go to catch up with China.

Even though Indian towns and cities continue to be flooded with Chinese products, the day is not far off when this condition can be reversed. To start with, let us discuss how both the campaigns differ and how India can gain an edge over China as a global supplier.

How Make in India differs from Make in China

Make in China was a campaign launched in 1992 by its former leader Deng Xiao Ping, when China’s share of global manufacturing was only 2.6%. After 1992, this share grew rapidly from 7.1% in 2000 to 24.9% in 2013. Modi’s Make in India campaign seeks to raise it share of manufacturing to 22% by 2022 from the current 18%, a figure that’s been largely unchanged since 1947. (GDP)

Presently China’s GDP is almost 5 times that of India and its manufacturing sector is 10 times bigger. The 2 campaigns differ conceptually, in addition to the difference in the economic environments faced by the 2 countries.

  • Make in India faces much fiercer competition today than even a couple of decades ago when China launched its campaign. Many countries such as Asian nations like Bangladesh and Vietnam have started carving out a stake in the global supply chains. Only 18% of global manufacturing output was accounted for by developing and emerging economies in 1992, while this number was 35% in 2012. Also, China’s one-party rule, currency controls and state-owned enterprises were, and continue, to be impossible to emulate.
  • There is no watershed reform or revolutionary technology that can give India any special advantage. China witnessed a revolution in Information Technology along with economic liberalization to boost its manufacturing sector.
  • China’s policy makers focussed on selected industries and geographical locations to ramp up manufacturing, such as export-oriented consumer goods and real-estate and infrastructure industries. India rather aims at a resurgence of manufacturing across the entire economy.
  • China undertook a number of reforms, such as creation of SEZs, many tax incentives, lowering of policy barriers which facilitated rapid access to licenses and permits along with ease of availability of ancillary services. The importance of inbound FDI surpasses financial capital in the longer term economic impact of the former in addition to linked to global supply chains and markets. India’s inbound FDI flows were 1.5% of GDP in 2013, and need to be atleast 3% of GDP to have an impact. The Modi government has increased the permitted flow of FDI in the insurance and defence sectors to 49% and to 100% in the rail sector. In addition to this, the government aims to improve India’s ranking from a lowly 142 to above 50 in the next 2-3 years, in the World Bank’s ease of doing Business Index.
  • Between 1980 and 1992, Chinese currency was devalued by a huge magnitude against the US dollar, with boosted its exports resulting in a massive trade surplus. India getting a similar currency advantage is highly unlikely. The RBI needs to ensure that the rupee adjusts to differences in inflation with its partners of trade and not allow it to appreciate on the back of capital flows.
  • Driven by Germany’s dual-track training policy, China ensured that about 6-7 million graduates were given vocational training. Hence the growing pool of young skilled workers ensured that 90-100 % of the workforce joining Chinese factories were well-trained. The state of vocational training in India is much weaker, only 2-7% of India’s youth receive vocational training. Without redressing the gap in vocational skills, it is difficult to imagine India achieving its goals.

Promotion of the manufacturing sector in India starts from a very low base. China has supported a more exports based policy to boost its economy, with support from the government in the form of affordable cost of funds, cheap labour and world class infrastructure.

However the slowdown in China could make a big difference this time. With the rising cost of labour, it is no longer cheap to manufacture there and it will soon cease to be an export powerhouse if this continues. Minimum wages have increase by double-digits and companies have started looking for alternatives. For example, companies like Godrej, Micromax and Bosch have started expanding or shifting manufacturing operations to India.

Creating the right climate

If India is to stand up to the China challenge, it would need to better pick up some lessons from its successful neighbor fast which already has a 20 year headstart on manufacturing. The biggest success factor for China has been its government which has always shown its endeavours towards supporting the manufacturing, towards recognizing its importance and creating a conducive environment for it.

While India has a risk aversive environment for business and lives in a more real world vs reward world that China enjoys, it must focus its need to capitalize on its human and knowledge capital. China has certainly grown very rapidly but whether this growth is sustainable or not is another question. On the other hand, India’s growth could be more sustainable courtesy its booming domestic consumption market. India can perhaps even exceed China if it focusses on combating its own challenges first.

Infact, recent economic reports suggest that India could soon start overtaking China’s GDP growth. India’s increasing domestic demand, its focus on supporting the newly raved startup environment, its proficiency in English are certain key contributors towards rapidly developing India. However, the biggest factor is India’s youth that makes up the major chunk of its population. China has infact already reaped this benefit earlier on. Along with government pampering and an earlier economic liberalization, an army of young Chinese workers helped China get to where it is today. But now its working population is beginning to age and decline. And China’s one-child policy, which was meant to control its inflating population, has backfired, causing far fewer young additions to its now aging population. India certainly has an economic advantage here since its demographics imply a larger workforce and consequently heightened productivity and fewer dependents to provide for (because of youth majority). To leverage India’s advantage over China, it must take certain lessons from China and focus on fixing several things.

  • To leverage its demographic dividend advantage over China, India must focus on utilizing its knowledge and human capital. India has a famed knowledge economy comprising of doctors, engineers, scientists, teachers, mathematicians, physicists and various experts where the employments records show a mere 2.23 million out of 750 million+ working population. The main reason cited for this is that only 12% Indians actually enter higher education.
  • One of the imperatives while creating a positive climate change for India is helping it in moving up the “ease of doing business” list from number 130 to being in the top 100 within 6 months and being in the top 50 in 12 months.
  • It is clear that India’s fate lies in the hands of its incredibly incompetent and corrupt bureaucrats. Take the coal block allocation scam where all allocations were cancelled as a fallout of corruption. However, no one noticed what effect it would have on businesses that had invested based on these allocations, and the impact it would have on numerous people whose lives depended on those businesses. This nowhere promotes our country’s ease of doing business. The route taken here by government nowhere puts either industry or investors at ease. Another instance is where Cyrus Mistry, Chairman of Tata Group showed his immense support in Make in India initiative, however when it came to setting up the JLR(owned by Tata Motors) plant, it chose China over India. Therefore, it becomes essential on India’s government side to inject confidence in the climate and bring a change in business environment of India.
  • Land acquisition and Environmental clearances have infact been one of the biggest obstacles in industrialization. Changes in these areas will be very helpful in bringing about the necessary major changes.
  • In the last 20 years where China has been growing at a rapid pace, India at the same time has also been growing despite a lack of public infrastructure. Power, Water and Infrastructure are some major areas that government needs to focus on to let India decide a place for itself in the global marketplace.

Following are some current trends that can help India in gaining an edge over China in the present scenario:

1) Currency: The rupee has fallen against the dollar, while the yuan is rising, making Indian exports more competitive.

2) Labour Shortage: China does not have enough workers for many low value-added industries. The Chinese worker now aspires to work in high-tech factories.

3) Shipping Costs: Freight charges from India to some parts of the world are lower. For instance, costs to the UK from Shanghai for toys can be 5-7% higher than from Chennai.

4) Inventory Risks: Local manufacturing helps Indian companies manage inventory better at a time of high economic volatility.

5) Labour Costs: Chinese wages are rising over 10% a year. Indian labour costs less in many sectors.

6) Single Country risk: Firms are looking for options due to political risks and hence are not placing all their bets on China

Conclusion

The World Bank estimates that India’s economy is currently growing at a faster pace than China’s and forecasts it is likely to remain the world’s fastest growing large economy for the foreseeable future. For these projections to materialize, it is critical that Mr. Modi succeed in realizing his goals for the “Make in India” initiative. The dragon to the north has already demonstrated that this can be done. India would do well if it learns the lessons from its neighbour’s success and does its homework timely.

The good news is that most important matters like its own development are in India’s control. India needs to realize that its biggest competition is not China, but itself. China can majorly serve as a suggestion of what the possibilities are for India.

Authors:  Shobby Mishra, Priyanka Arora  

** While comparing China and India, we have tried to focus on how “Make in India” competes with “Make in China” and whether India can compete with China as a Global Supplier in the coming future