Beijing: As recently as 1990, China’s average income per head was still lower than India’s. Today, it is more than twice as high.
There are many reasons why, from life expectancy to literacy rates and crop yields, India has fallen way behind its neighbour. Among them is the failure of India’s vibrant democracy, with its competing political interests, to replicate single-party China’s laser-like focus on growth and reform.
Now, after a decisive general election victory for the incumbent Congress-led coalition, markets have been electrified by the prospect that political and policy continuity will allow India to start closing the development gap with China.
Investors hope that Prime Minister Manmohan Singh, no longer beholden to the anti-reform left, will seize the chance to reap the economic dividends of positive population trends.
China’s population will soon start to age, eroding the demographic dividend that has helped fuel 10% annual growth for the last 30 years. Every second Indian, by contrast, is still under 25.
“To harness that demographic sweet spot, you need really good policy and infrastructure, and China managed to deliver those conditions,” said Ajay Kapur, head of global strategy and economics at Mirae Asset Securities in Hong Kong.
“After this election result, the probability of these things happening in India as well is far superior than in the past five years,” he said.
Arvind Panagariya, an economics professor at Columbia University in New York, said Asia’s tiger economies had been unable to sustain 10% growth for more than about 30 years, suggesting China will slow to a 5 to 6% rate in a few years.
At the same time, Panagariya said India was likely to climb back to its pre-crisis growth rate of 8 to 9% a year thanks to the substantial liberalisation already accomplished.
“And if the reforms get done, I have no doubt they can get to 11-12%,” said Panagariya. “The gap with China will be closed. It’s an issue of time.”
LEARNING FROM CHINA
So what are the fundamental changes needed?
High on Panagariya’s wish list is a more flexible labour market, a massive expansion of the power grid and state-level reforms to make it easier to acquire and develop land.
Kapur says India needs to learn from China and develop light manufacturing to provide employment for tens of millions of surplus farm labourers. Information technology may be the poster child of India’s economy but the sector creates relatively few jobs.
Better urban management will be an imperative as more Indians flock to cities in search of work. Seventy percent of them still live off the land.
Here, too, Kapur says China can show the way.
“India is terrible at managing large cities. China has powered ahead in connecting these cities and building out the transportation system. It’s pretty well planned and executed; in India it’s badly planned and badly executed,” he said.
The construction of New Delhi’s metro shows that China does not have a monopoly on smooth project execution if the local government is efficient. But planners in China face far fewer constraints than their opposite numbers in India.
Jahangir Aziz, chief economist at J.P. Morgan in Mumbai, agreed with Panagariya that land reform was key to generating the investment needed to ease road congestion and power cuts in big cities.
India has in fact ramped up capital spending, which leapt to 39% of gross domestic product in 2007 from 27% in 1995.
“India has been an investment-driven economy for the past five years, just like China,” Aziz said.
To sustain the trend, though, it would be critical to reduce the cost of capital through financial sector liberalisation, Aziz said.
QUESTION OF BALANCE
The election results were widely interpreted as a reward for good governance. But that is not to say they were a vote for the sort of deep-seated changes anticipated by investors who drove the Mumbai stock market up 14% last week.
“What’s happened is a huge positive, but expectations are running way too high right now,” said Shumita Sharma Deveshwar, director of India research in New Delhi at Trusted Sources, an independent research firm specialising in emerging markets.
“Even within Congress there is opposition to reforms. It’s not as though it’s a completely pro-reform party that’s going to change the entire face of India,” she said.
Some bills that have been blocked, such as those to permit more foreign investment in insurance and to open up the pensions system to private firms, are now likely to go ahead swiftly.
But Panagariya said it was not clear that Congress leader Sonia Gandhi and her son, Rahul, were committed to serious labour and land reforms.
“I want to wait and see. When the government is returned with this kind of strength, it’s probably going to feel that ‘well, the people liked what we did in the past five years, which was not a whole lot´,” he said.
Aziz agreed that there was not a clamour for reform in India.
Moreover, Congress would be pondering that it had been returned to power mainly for having stressed a fairer share-out of wealth; in 1996, by contrast, it was kicked out of office after pursuing a bold liberalisation agenda.
So the party’s power brokers will have to reach a consensus on where to strike the balance between growth and distribution before deciding how far to push the reform agenda, Aziz said.
For investors who want to choose between the billion-strong neighbours, Aziz said it would take a couple of years to see whether China succeeds in rebalancing its economy and whether India can raise its infrastructure game.
“There are always policy risks in India. It’s a democracy, and no matter how good the election results may have been, it’s still a fractured democracy and policy slips can push back the economy quite far.
“But I don’t see China and India being out of any portfolio on a 10-year horizon. They’re both going to be the fastest-growing countries on the globe for at least the next 10 years,” Aziz said.