Could India “overtake” China?

1. Could India “overtake” China?

2. Is India catching up to China? • Not in terms of international finance: its foreign exchange reserves are still less than $130 bn, versus China’s $700 bn, HK’s $122 bn, Korea’s $200 bn, Singapore’s $115 bn, Taiwan’s $250 bn, Russia’s $150 bn, and Japan’s $1000 bn ++.

3. Is India catching up to China? Look again … In 2005 India’s GDP growth rate was almost 8% and rising, versus 9.5% and falling in China. • In 2005 India’s stock market rose 15% in dollar terms, versus a fall of -12% in China. • India’s growth has been more in services, versus China’s in manufacturing.

4. India’s strengths • India’s population growth is faster than China’s, and its population is much younger. • Indians speak English. Their universities have become among the best in the world, esp. in engineering, IT and bio-technology. • Their banking sector is much healthier than China’s, and the return on capital is much higher.

5. India’s weaknesses? • Indian democracy is fractious and has thus far blocked infrastructure development. But now a massive “autobahn” is being built connecting Mumbai to Delhi and Calcutta. • BUT India’s democracy also fosters creativity, and provides an outlet for discontent that China lacks.

6. World Bank Report on India • Carl Dahlman and Anuja Utz, “India and the Knowledge Economy” World Bank Institute Development Studies, June 26, 2005, 178 pages.

7. Macro-stability Since the 1991 crisis, when energy imports exhausted reserves, India’s GDP growth is up (averaging 5 – 7%), volatility is down, inflation is down and all three trends have been resilient. The debt burden has been stable and FX reserves have increased to safe levels.

8. India’s youthful labor force India’s “demographic peak” (when its ratio of income-earners to dependents peaks) is, unlike China’s, yet to come.

9. Democracy and a free market India has the world’s largest population under democracy and the world’s fastest growing free market. Good or bad for growth? More later.

10. Outsourcing human capital India has mastered 21st century Information Technology, leap-frogging the need for transportation infrastructure. Its youthful population embraces this technology. Vocational training is at last taking off, after decades of strictly academic education. Outsourcing – to Hyderabad and Bangalore – is now legendary, documented anecdotally in Thomas Friedman’s “The Earth is Flat”. Young Indians can sell services to rich countries without leaving India, and H. and B. are now attracting engineers and investment bankers from all over the world.

11. Domestic vs Foreign DemandRetail Banking • India’s growth is driven by domestic demand; China’s by foreign demand • The 1991 reforms sparked consumer lending, as India’s (gov’t) banks were opened to pvt competition, and subjected to BIS regulations. India’s retail banking is now growing at 30% per year, although retail loans are still only 5% of GDP (versus 40% in Taiwan). Electronic banking is much more advanced than China. India’s NPLs are only 2.3% of assets.

12. 21st Century Farming • 65% of India’s population is rural, and the gov’t recognizes that rapid movement from farms could be disastrous (also, democracy and private property rights constrain such a plan). Instead, India espouses “21st Century Farming”: eg, rural village kiosks (“e-chaupals”) where world prices are quoted and small sellers can trade.

13. The Indian Touch • India’s concentration on manufacturing for domestic rather than export demand encourages the “Indian touch”: easy-to-repair cars and trucks, a “smart” health card, a cell phone for truckers (with a flashlight!), Maggi Sauce becomes Maggi Pickle.

14. Design versus Mass Production • India doesn’t mass produce as effectively as China, but it does win quality and design awards: eg TAPS got the “GM supplier of the year” award last year. • Some of India’s traditional non-tradeables are becoming globalized: eg, the 3 “Fs”: Food, Fashion, and Film.

15. Recycling • A scarcity economy and shortage of capital have made Indians inventive about improvising on inputs and reducing costs. • For example, 60% of India’s plastic waste is recycled, compared to 10% in China and 12% in Japan.(Pavan K. Varma, Being Indian p. 74.

16. Small Scale Industries • India provides financial and fiscal incentives to SSIs; also Indian banks extend small loans. • India’s SSI sector employs 80% of factory workers, 50% of value added in manufacturing, and about one-third of export value. • There are about 2.5 million small scale enterprises in India, and they pay about 1 billion dollars a year in bribes. • Only 3% of India’s work force is in the formal, organized sector: private, corporate and public

17. Democracy vs Autocracy • India is very diverse and decentralized, with 15 states the size of typical European countries, but more populous. It is remarkable that it has proved democratically governable since independence. Some eg, Pranab Bardhan) fear that India is paralyzed by fragmented political parties. Democracy has pros and cons for growth (eg India’s income dist is, surprisingly, more equal than China’s, and the potential for serious unrest and political crisis may be lower; but its ability to relocate people and install infrastructure is constrained: eg, Mumbai’s putative superhighway). Since India is less coordinated from the top, its potential for large-scale error may be lower. But to be fair, China’s CCP is increasingly sensitive to popular opinion.