Too Close for Com­fort

Is In­dia ready to out­shine China and lead the South Asian re­gion?

Southasia - - Contents - By Ha­dia Ma­jid Ha­dia Ma­jid is As­sis­tant Pro­fes­sor of Eco­nom­ics at the La­hore Univer­sity of Man­age­ment Sciences.

China’s GDP growth rate has been at over 9 per­cent since 2008, af­ter ex­pand­ing 2 per­cent in the fourth quar­ter of 2012 over the pre­vi­ous quar­ter. In con­trast, In­dia has seen more spo­radic spurts of high growth rates – GDP growth stood at 3.9 per­cent in 2008, went up to 9.6 per­cent in 2010, while fore­casts sug­gest that In­dia will likely see GDP grow by 6.5 per­cent in 2013. In ad­di­tion to their high rates of growth, both In­dia and China have bur­geon­ing domestic mar­kets along with an econ­omy that is largely ex­port ori­ented. Ac­cord­ing to the World Bank, China’s ex­ports of goods and ser­vices as a per­cent­age of GDP have been in ex­cess of 30 per­cent since 2010 while In­dia’s have been in ex­cess of 20 per­cent since 2010. Thus, both economies are ma­jor play­ers in the in­ter­na­tional mar­ket with China’s econ­omy cur­rently be­ing the sec­ond largest in the world af­ter the United States, with ex­pec­ta­tions that it will over­take the US econ­omy within the next decade.

Hav­ing two ma­jor play­ers in such close geo-phys­i­cal prox­im­ity has re­sulted in some in­ter­est­ing dy­nam­ics vis-à-vis the for­eign re­la­tions of the two na­tions. Over the last 60 years, the two coun­tries have

been in­volved in sev­eral skir­mishes on their com­mon bor­der. In re­cent years, how­ever, both coun­tries have also en­deav­ored to im­prove their diplo­matic and trad­ing re­la­tions. More­over, although China oc­cu­pies the stronger eco­nomic po­si­tion for the time be­ing, it is un­clear if it will be able to main­tain that po­si­tion in the long run, though as stated, it is likely to sur­pass the US. Hence, the ques­tion of whether In­dia or China will be the dom­i­nant su­per­power in the re­gion, and po­ten­tially the largest econ­omy in the world, in the next cou­ple of decades is a mat­ter of de­bate.

Both China and In­dia have wit­nessed a fairly sim­i­lar pro­gres­sion of their economies to­wards the high rates of growth that they ex­pe­ri­ence to­day. Both coun­tries have evolved from a largely au­tar­kic econ­omy to one that is pri­mar­ily ex­port- ori­ented. Yet, there are also some sig­nif­i­cant dif­fer­ences in the path that the two have cho­sen to fol­low. While the Chi­nese econ­omy was lib­er­al­ized ear­lier than the In­dian one, China has been fo­cused on at­tract­ing for­eign in­vest­ment to en­hance its eco­nomic per­for­mance whereas the In­dian government has em­pha­sized on pro­vid­ing sup­port to lo­cal en­trepreneurs and busi­nesses. China’s success in at­tract­ing FDI may be at­trib­uted to the open­ness with which the government has tra­di­tion­ally treated its (wealthy) di­as­pora. His­tor­i­cally, In­dia’s at­ti­tude to­ward its for­eign res­i­dents has been more hos­tile. To­day this out­look has re­versed sub­stan­tially and In­dia has wel­comed in­creased involvement of its di­as­pora in the lo­cal econ­omy. The Chi­nese model has stressed ac­cel­era- tion in in­dus­try while In­dia has tended to un­der­score its ser­vices sec­tor.

The fact that In­dia and China have cho­sen to fo­cus on dif­fer­ent sec­tors must be eval­u­ated in the con­text of their na­tional char­ac­ter­is­tics. Both coun­tries are home to large pop­u­la­tions (China’s pop­u­la­tion stands at 1.3 bil­lion while In­dia’s is 1.2 bil­lion) but in­come per capita is higher for China than it is for In­dia. Fur­ther­more, China had a health per capita ex­pen­di­ture of US$471 be­tween 2008 and 2011 whereas In­dia’s per capita health ex­pen­di­ture for the same pe­riod was at US$41 (World Bank). Fi­nally, ac­cord­ing to the CIA Fact Book, adult lit­er­acy rates stand at 92.2 per­cent and 61 per­cent in China and In­dia, re­spec­tively, with the gap be­tween male and fe­male lit­er­acy rates be­ing sig­nif­i­cantly larger in In­dia as com­pared to China (where adult lit­er­acy is de­fined as per­cent of in­di­vid­u­als who are at least 15 years of age and can read and write).

Given the de­fi­cien­cies in the cur­rent state of hu­man cap­i­tal in In­dia, the growth prospects for the coun­try will in part be de­ter­mined by how read­ily it will be able to move be­yond its cur­rent em­pha­sis on ser­vices to an ex­pan­sion of trade in man­u­fac­tured goods. While In­dia’s highly ed­u­cated and tech­ni­cally skilled di­as­pora has been in­stru­men­tal in the ad­vance­ment of its ser­vices sec­tor, it is only in the trade of goods that In­dia can truly take ad­van­tage of its large pool of un­der­e­d­u­cated work­ers.

The ground-up ap­proach pur­sued by In­dia with re­gard to its domestic econ­omy has meant a heav­ier em­pha­sis on in­dige­nous en­trepreneurs. More­over, In­dia’s deep-rooted demo­cratic in­sti­tu­tions have given it sys­temic re­silience. Com­bine th­ese fac­tors with the de­mo­graphic div­i­dend that In­dia may en­joy in the next decade or so (while China’s pop­u­la­tion ages and shrinks as a con­se­quence of its one-child pol­icy) and In­dia might start to out­strip China in the near fu­ture. The ro­bust­ness of In­dia’s more bot­tom-heavy brand of cap­i­tal­ism is best ex­em­pli­fied by con­sid­er­ing the dif­fer­ence in per­for­mance be­tween two Chi­nese prov­inces. In a 2003 ar­ti­cle, Huang and Khanna report that while Zhe­jiang has fo­cused on lo­cal busi­nesses it has also grown at an an­nual rate that is 1 per­cent faster than Jiangsu that has re­lied heav­ily on FDI to drive its growth.

One ma­jor caveat to keep in mind when dis­cussing In­dia’s growth po­ten­tial is that its strong demo­cratic in­sti­tu­tions as op­posed to China’s highly cen­tral­ized and opaque sys­tem of government, in­spire (both domestic and for­eign) in­vestor con­fi­dence. The higher level of cor­rup­tion in the same in­sti­tu­tions also make In­dia the less at­trac­tive choice for in­vestors. Fur­ther­more, while the de­mo­graphic div­i­dend will be im­por­tant in the near fu­ture, In­dia will be un­able to take com­plete ad­van­tage of that un­less the pop­u­la­tion’s hu­man cap­i­tal ac­qui­si­tion is also en­hanced. How­ever, In­dia faces great chal­lenges with re­gard to rais­ing ed­u­ca­tional at­tain­ment at both the de­mand and sup­ply lev­els. Hence, while In­dia’s at­ten­tion to­wards nascent home-grown busi­nesses, its demo­cratic in­sti­tu­tional strength and the in­creased involvement of its di­as­pora im­plies that it has the po­ten­tial to sur­pass China in terms of eco­nomic growth, this po­ten­tial will only be re­al­ized if cor­rup­tion in government in­sti­tu­tions can be prop­erly curbed and the cur­rently un­der­e­d­u­cated pop­u­la­tion is fully uti­lized.

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