The Indian tortoise and the Chinese hare3 min read . Updated: 16 Sep 2015, 08:12 AM IST
China is struggling to rebalance its economy away from investment
Is this the moment when the Indian tortoise overtakes the Chinese hare?
The question is not a new one. In a celebrated essay published in the Foreign Policy magazine way back in 2003, Yasheng Huang of the Massachusetts Institute of Technology and Tarun Khanna of Harvard Business School had deconstructed this very possibility. Their argument is worth another look right now.
The two economists essentially said that India had an advantage over China in the long run because of its pool of domestic enterprises, rule of law, democratic political system and well-managed financial system. China had substituted domestic entrepreneurship with foreign capital in its export-led growth strategy. India was not that open, but allowed domestic business to flourish. The difference in approach was also a consequence of the political systems in the two countries. While India, as a democracy, was building from the bottom up, the Chinese approach was top down. Huang and Khanna reasoned that by depending on “organic growth, India is making fuller use of its resources and has chosen a path that may well deliver more sustainable progress than China’s FDI (foreign direct investment)-driven approach".
So, why did growth in India lag behind China for decades? As the two authors pointed out, economic reform in India began a decade later than in China and the savings rate in India was half that in China. Importantly, they noted: “India is a sprawling, messy democracy riven by ethnic and religious tensions, and it has also had a longstanding, volatile dispute with Pakistan over Kashmir. China, on the other hand, has enjoyed two decades of relative tranquility; apart from Tiananmen Square, it has been able to focus almost exclusively on economic development."
This was 2003. Twelve years later, China has reached the limits of its top-down approach which has resulted in over-investment, overcapacity and massive accumulation of debt. According to a report by McKinsey Global Institute published in February 2015, by the middle of 2014, the total debt in China was 282% of gross domestic product, even higher than in developed countries such as the US, Canada and Australia. Furthermore, since 2007, China added new debt worth $20.8 trillion, more than one-third of total debt addition across the world, during this period. China is now struggling to rebalance its economy away from investment towards consumer demand. This shift will not be easy.
It is for India to grab the opportunity. So far, economic reforms in India have moved at a gradual pace and, despite their visible benefits, have not been able to acquire the required political acceptability. This will have to change if India has to move to a higher growth path in a sustainable manner. The Narendra Modi government would do well to focus on two sets of challenges. First, it will have to remove unnecessary legal and regulatory hurdles that come in the way of a 21st century market economy. Second, the government will have to use resources at its disposal far more judiciously. It will have to decisively shift expenditure in favour of building physical and human capabilities. India has lacked both physical infrastructure and skilled manpower, and that has long hampered growth.
But here is a sobering thought. The growth differential between China and India has narrowed every 10 years or so, but then China has managed to pull ahead with a burst of reforms. The first retreat from Maoism in 1979, the policy push after Deng Xiaoping’s famous tour of the southern districts in 1992, the entry into the World Trade Organization at the turn of the century—each was followed by a new round of rapid growth. China is perhaps facing a deeper challenge right now because its very growth model seems to be in trouble. But the lesson from recent history is that China will try to adapt.
In other words, India has to work hard to set its house in order rather than hubristically watching an economic decline in China.
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