The 20th century was the American century,” says Lakshman Krishnamurthi, the Kellogg School A. Montgomery Ward professor of marketing. The 19th, he adds, was perhaps European, but a journey further into the past reveals a different distribution of global wealth and glory.
A thousand years ago, India and China had been the world’s richest nations for the previous millennium. And, Krishnamurthi says, it would take more than a couple of centuries of Western prosperity to quell that kind of inertia: “Some historians may look at the data and say the last thousand years was a blip.”
Krishnamurthi, who travels annually to India, says the country has changed dramatically in the past 30 years. “I left India in 1975,” he recalls. “There was nothing—nothing— happening in India.” Today, a booming technology sector, an emerging middle class and an enormous, largely young, population have put India back on the map as a potential competitor with neighbouring China, whose gross domestic product has been rising steadily since the early 1980s.
Illustration by: Malay Karmakar / Mint)
In India and China in the Asian Century, a paper Krishnamurthi recently co-authored with research associate Sugandha Khandelwal, he sets out to “compare India and China and put them in context with the rest of the world”. He analyses data from large-scale studies conducted by the research arms of Morgan Stanley and Deloitte and concludes that both nations will face significant economic challenges in the coming decades.
“China has been growing, on average, about 9% per year for the last 17 years,” says Krishnamurthi. “That kind of growth is going to put tremendous pressure on factory inputs.”
In addition, the inevitable rising prices of global goods will strain China’s economy, of which 50% is tied up in exports.
Despite its economy’s heavy reliance on exported goods, China is a net importer with every nation but the US, Krishnamurthi says. Resource-poor China buys raw materials from most of the world and uses those materials to manufacture finished products, which it then sells primarily to the US.
Another of China’s many economic paradoxes is the philosophy that underlies the system. Though officially communist, China is structured more like a capitalist nation than is India, which, for much of its history since independence in 1947, has embraced socialism.
“China is very top-down-driven,” says the Kellogg professor, a marketing strategist who joined the school in 1980. “If they want to get something done, they get it done. India cannot.”
Development moves more slowly in India, he adds, because it’s a democracy. In addition, bureaucracy still remains prevalent—one vestige of its colonial days during the British Raj. “You can’t simply displace workers like they’re doing in China.” Krishnamurthi is certain that if the Indian government took such liberties, its citizens wouldn’t stand for it, and years of tedious litigation would soon follow.
He points to another quirk: “(The) Chinese are very entrepreneurial outside of China,” he says. “Inside the country, it’s another story. Little guys have a very hard time. In India, that’s not true.”
Need for reform
According to Krishnamurthi, India’s “little guys” have used their greater access to outside funding to build an enormous—but not scalable—retail sector. “It’s a country of mom-and-pop stores,” he says. “Every store is very small, and there are millions of them. It is completely inefficient, and is a sector that has to modernize. Major players such as Reliance Industries Ltd and Bharti Enterprises Ltd are getting into it, but India is far behind China in this sector.”
Without major reforms, retail will not be a viable option for India’s youth—who will, on average, be wealthier and better educated than their parents, and will face fiercer competition from their peers, who are many times more numerous.
Krishnamurthi says that as China’s population ages (a result of its one-child policy), India’s large, young workforce could put the country’s economy at a distinct advantage. But it will also pose new challenges: “The challenge in India is, how do you find work for all those people?” says Krishnamurthi. The answer is not simple, but he believes it must include vast improvements to public infrastructure.
“To employ hundreds of millions of people in the next 20 years, you need massive infrastructure investments which will spur manufacturing,” he says, adding that China is way ahead of India in this respect, thanks to Beijing’s prudent investment in roads, railways, ports and airports throughout the nation. “India is starting to recognize that their infrastructure investment has been pretty poor. The country knows it has to invest. The question is: How?”
Building new infrastructure will be crucial but difficult for both nations as the prices of essential goods continue to rise, Krishnamurthi says. “These countries need to keep growing to lift themselves out of poverty, so rising oil and food prices are a serious setback.”
And as each nation grows, neither is interested in hearing the word “pollution”—especially not from veteran polluters in the West. With a better standard of living nearly within reach for so many of their citizens, both nations have responded to concerns about global climate change largely by ignoring them.
In some ways, says Krishnamurthi, China and India are learning from each other. At the moment, India is faring better in some sectors—tech support, for example—because of its high percentage of English speakers.
Not to be outdone, the Chinese government has begun to mandate English instruction in primary and secondary schools. “In 20-25 years, it’s unclear to me that India’s (language) edge will be that much.”
While China and India vie for global economic supremacy, says Krishnamurthi, business and government leaders in the US will have to grow accustomed to the idea that both nations will be strong competitors for many years. If the US wants to stay competitive with China and India as their markets boom, it must recognize and confront weak spots in its own economy.
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