ABSTRACT

It is now commonplace to regard China and India as the two economies in the

developing world that are the “success stories” of globalisation, emerging into

giant economies of the 21st century. The success is defined by the high and

sustained rates of growth of aggregate and per capita national income; the

absence of major financial crises that have characterised a number of other

emerging markets; and substantial reduction in income poverty. These results in

turn are viewed as the consequences of a combination of a “prudent” yet

extensive programme of global economic integration and domestic deregulation,

as well as sound macroeconomic management. Consequently, the presumed

success of these two countries has been used to argue the case for globalisation

and to indicate the potential benefits that other developing countries can reap, as

long as they also follow “sensible” macroeconomic policies. The importance of

these two countries spills over into discussions of international inequality as well.

Almost all of the studies which have found that global inequalities have reduced

in the period of globalisation [Dollar and Kraay (2002); Surjit Bhalla (2003); Sala-

i-Martin (2003) among others] rely very substantially on the increase in per capita

GDP in China and India – which together account for around one-third of the

world’s population – to arrive at their conclusion. Conversely, those who have

been more sceptical of the impact of global economic integration on inequality

have tended to look at patterns of inequality within these countries in particular

[Cornia (2003); Milanovic (2004); Reddy (2003) etc.] to find that there has been
an increase in economic differentiation (including increased rural-urban

inequalities) and probably more vulnerable conditions for the poor in these

countries (hidden by the per capita GDP figures), which change the conclusions

with respect to global inequalities. For all of these reasons, a comparison of the

nature of macroeconomic policies in India and China, and the extent to which

these have been “pro-poor” is of great analytical importance at the present

moment.
 INTRODUCTION

The Comedy of Errors is one of William Shakespeare's earliest plays, believed to

have been written between 1589 and 1594. It is his shortest and one of his most

farcical, with a major part of the humour coming from slapstick and mistaken

identity, in addition to puns and wordplay. The Comedy of Errors (along with The

Tempest) is one of only two of Shakespeare's plays to observe the classical

unities. It has been adapted for opera, stage, screen and musical theatre.

The Comedy of Errors tells the story of two sets of identical twins. Antipholus of

Syracuse and his servant, Dromio of Syracuse, arrive in Ephesus, which turns

out to be the home of their twin brothers, Antipholus of Ephesus and his servant,

Dromio of Ephesus. When the Syracusans encounter the friends and families of

their twins, a series of wild mishaps based on mistaken identities lead to wrongful

beatings, a near-incestuous seduction, the arrest of Antipholus of Ephesus, and

accusations of infidelity, theft, madness, and demonic possession.

For many corporations, India and China are two sides of the same coin. This is

understandable. After all, India’s economic potential and the challenges it faces

do look very much like those of China. China and India are both developing

quickly but with vastly different approaches. China's growth has been driven by

manufacturing, and the country's planned economy has tapped into domestic

savings and foreign investment to build an impressive infrastructure. India, by

contrast, owes much of its progress to private businesses. Without much

assistance from the government, they serve companies in the West's knowledge-

based industries, such as software, IT services, and pharmaceuticals. The

difference between the two models prompts debate about whether one country

has a better approach to economic development than the other and which will

eventually emerge as the stronger. With a soaring economy and an expanding

“soft power” initiative to expand its global influence, China appears on the road to

superpower status. Yet, in recent years, India has emerged as a contender with a

booming IT sector, GDP growth that rivals China’s, and a similarly massive labor

force. The rapid rise of the world’s two most populous nations has spurred

discussion on whether democratic India or authoritarian China will emerge as the

greater economic power. Clearly we are seeing a historical righting of the

balance of influence in the world, away from Europe and North America, and

toward Asia. China and India will be major poles in this new world. India, as a

multi-ethnic, tolerant democracy and developing economy, can offer important

leadership to this new world. But for India to fulfill this role, it will still need to build

the traditional measures of hard power. It will be better for China, India, and the

United States if Indian strengths do not remain invisible. The truth is that India

does not see itself in a race with China. India truly wants to chart its own course,

and is willing to pay the price of slower economic growth. China, too, is charting

its own more ambitious course. For now, from what is visible, the Chinese people

seem willing to pay the price of freedom for economic might. Even if they are

given political freedom, they may choose to have exactly the same government,

the same system—but then it will be their choice.

India and China are the two giant experiments of our time. No other country has

attempted to do what they are doing. These two ancient cultures dominated and

changed world history in the past. The rise of the western, industrialized powers

in the 19th and 20th centuries was a brief interruption. India and China will once

again change the course of world history—for now India will do it though its soft

power, and China through its hard power. Hopefully, they will learn from each

other. Then Asia will regain its central global status.

India ’s democratic institutions have survived the test of time. India’s great value

is that it is the oldest receptacle of democratic values in Asia—since its inception

sixty years ago. There may be caste and religious riots, only natural in a highly

heterogeneous society where multi-lingual, multi-religious, multi-ethnic, multi-

cultural elements wrestle for space. But these issues are resolved through the

institutions of freedom and democracy.

China does not have those institutions or a vent for the frustrations of its society,

which, like India’s, is going through a massive transition. It’s easier for China to

pursue economic equity first. For now, the Chinese seem satisfied with that.

India is not. Indians have made the calculation that they will not sacrifice social

equity for the erosion of their democratic strengths. China may have 350,000

NGOs (India officially has 1 million), but the bump in the road has yet to come. It

is not clear how China will handle another Tiananmen Square.

For sure, the Indian business elite admire China’s success and bemoan India’s

plodding democratic process; the endless debate about economic reforms; the

three-steps-back-one-step-forward, drunken-man’s-walk that is the Indian growth

pattern. Business prefers predictability.

Poor and illiterate they may be, but Indians have a strong sense of their own

identity, history, and destiny. And the hard-won power of their vote wins over the

power of running water and electricity at home. Of course, India’s poverty has not

been removed, but reduced; Indians have better food, clothing, and shelter than

before. Roads, water, and power are nowhere near being provided, but

education has become the service most in demand in India. Already, over 90

percent of children are enrolled in primary schools. The number one expenditure

item in every Indian household after food is education. In ten years, India will

produce its first truly literate generation.

India and China have been described as “non-identical twins.” The two countries

have much in common: a proud, ancient culture with a central global role in the

pre-colonial era, intellectual sophistication, and recently, poverty, and a large,

young, hard-working population, which is nationalistic and has high aspirations.

Both nations want to reassert their historical roles, but have chosen different

paths to achieve their goals. India’s path has been democratic, China’s

authoritarian.
India’s model is that of bottom-up, demand-driven, grassroots-led change,

without the help of foreign direct investment but with local entrepreneurial energy.

Unlike China, which has grown on a manufacturing base, India’s lopsided,

politically motivated policies have made its blue-collar labor uncompetitive.

Consequently, India’s growing on the back of a high-end, high-tech services

industry and entrepreneurial energy.

Most important, India has chosen social equity over economic equity; choosing

democracy and instituting universal franchise and affirmative action programs

immediately upon independence from British rule in 1947. Those moves

empowered the vast underprivileged in India, whose voices had been

suppressed for centuries; through the ballot box, and through their elected

representatives, they were heard on the national stage. Now many poor, lower

caste Indians are state and national leaders. This political mobility provided

social dignity—a choice they have made over economic parity. With the hard

work done, India is now turning its attention to the painful task of economic

equity.

China, on the other hand, is the model of elite-run, top down, foreign direct

investment-driven, manufacturing and exports-led, supply-side growth. It chose

economic equity over social and political equity.

But India has done the hard work first—overcoming centuries of social injustice

of the caste system, and becoming inclusive, whilst staying largely tolerant,

pluralistic, and democratic. Economic growth will take off as a young, confident
population releases its creative, entrepreneurial juices, less reliant on the state

for jobs or assistance.

China’s economic miracle is admirable, yet its social and political record is not.

China’s hard work will now start: teaching freedom of thought and action to a

people who have lived with obedience for decades; teaching them to negotiate

for their rights when the only way they know is authoritarian.

The answer is unclear. Perhaps it will be as hard for India to get its economy on

a par with China’s as it will be for China to get its politics and society as

integrated as India’s. Perhaps both nations, using divergent paths and models,

will reach the same destination of giving their people a decent, dignified and

prosperous life at the same time.

India vs China Economy: Comparing the Economies of India and China is to

embark on an old puzzle that has fascinated smart people for centuries. Although

it is urgent and important to discuss it because China and India are the world's

next major powers. It is also important because the two countries have embraced

very different models of development.

Looking at the Similarities between the Economies of India and China, both are

conscious of their role in the world economy. Both seek to play a bigger political

role on the world stage. China is already doing that as a permanent member of

the U.N. Security Council. Now observing the Differences between the
Economies of India and China we see that China is taking tangible but slow steps

towards embracing private entrepreneurship. India on the other hand is

continuing to struggle with making things easier for multinationals. Although the

differences are arguably narrowing, but the first-order effect of all this is still “a

big difference”.

In general, FDI has been positive to both the Economies of India and China. It

has provided goods and services that did not otherwise exist. It has also

introduced competition into moribund sectors.

Both countries have clocked up strong economic growth since 1980, China at a

spectacular 9 per cent plus and India at nearly 6 per cent. Both countries have

opened up to international trade and capital in the past quarter of a century,

decisively in China and more hesitantly in India.

China's per capita GDP growth has averaged 8 per cent in the 25 years since

1980, more than double the growth rate of Indian per capita GDP. Somewhere

between 1975 and 1985 China's average income is believed to have surpassed

India's. Since then it has kept moving ahead. By 2003 China's per capita GNP

was at least 70 per cent higher than that of India's and her economy was more

than twice as large as India's. Much of China's growth was powered by labor-

intensive manufactured exports, which took the share of manufacturing in GDP to

nearly 40 per cent, compared to a mere 16 per cent in India.

Other indicators like living standards were just as decisively in China's favor by

the turn of the millennium. China's poverty ratio was less than half India's 35 per

cent. Female adult literacy was nearly double India's pathetic 45 per cent. Life

expectancy in China was a solid 8 years higher than that in India.

Looking at the future, it is easier to forecast a widening of the existing Economic

disparities between China and India than a reduction.

Macroeconomic Similarities

Although a growing body of literature has developed to contrast developments in

economic reform in Eastern Europe and China (Buck, Filatotchev, Nolan, and

Wright, 2000; Cao, Qian, and Weingast, 1999; Friedman and Johnson, 1996;

Heilman, 2000; McKinnon, 1993; Sachs and Woo, 1994), existing data showing

similarities between India and China are equally significant. In macroeconomic

terms, China and India are better units of comparison because they are the two

largest, low-income developing economies.

Some of the development patterns fostered some landmark studies in

comparative economics. Alexander Eckstein (1954, 1955a, and 1955b) provided

one of the most ambitious early efforts to evaluate China's political economy.

Wilfred Malenbaum (1956) undertook another such effort. In Malenbaum's study,

the key defining variable in India and China's developmental objectives was the

underlying logic between the different approaches to rapid economic growth.

According to Malenbaum, China's Soviet-model rapid industrialization program

was "power-oriented", namely geared for the purpose of cementing the

Communist Party's centralized control over the country. In contrast, India's

developmental planning was portrayed by Malenbaum as being "welfare-

oriented", namely geared toward improving the average Indians' overall welfare.

Subsequent comparative studies of India and China (Bhalla, 1992; Swamy,

1974) have tended to focus on the differences in agricultural and industrial

output. China and India's national income and sectoral shares in the net domestic

product were nearly identical in 1952-1956. By 1970, China's sectoral share of

mining, manufacturing, construction and utilities in relation to the net domestic

product had increased from 16.1 percent in 1952-1956 to 33.3 percent in 1970.

In India, the sectoral share of trade and services in relation to the net domestic

product increased from 34.6 percent in 1952-1956 to 40 percent in 1970 (Bhalla,

1992; Swamy, 1974).

The macroeconomic comparisons between China and India were striking before

the enactment of their respective economic liberalization programs. They shared

similarly sluggish rates of economic growth, although China had a slightly higher

rate of industrial growth. In 1980, China and India had nearly identical levels of

GDP per capita. By 1990, China had gradual increases in GDP per capita,

whereas India had a decrease in GDP per capita in 1985 and a rebound in 1990.

[See Table 1]

As is well documented, China has followed a sequenced approach towards

economic liberalization and foreign trade reform. From 1979 to 1985, Premier
Deng Xiaoping enacted China's first Jaw on Sino-Foreign Joint Venture

Enterprises and established three special economic zones (SEZs) in Guangdong

and one in Fujian. These SEZs offered foreign investors a flat tax rate of 15

percent of net earnings, some limited foreign exchange retention privileges and

lower land usage fees.

India has followed a similar path of sequenced economic liberalization. As shown

in Saez (1999), a substantive set of economic liberalization policies were enacted

following a mounting economic crisis which reached its peak during April-July,

1991. By July of 1991, India's foreign currency assets touched a record low of

US$560 million, the fiscal deficit peaked at 8.4 percent of the gross domestic

product, and the inflation rate increased to 16.7 percent. In response to this

unprecedented economic crisis, the Congress Party government, which came to

power in June 1991, introduced a new economic strategy. Narasimha Rao's

Finance Minister, Manmohan Singh, masterminded the reforms. Manmohan

Singh's economic strategy was eventually labeled as the New Economic Policy

(NEP). NEP used a combination of measures aimed at short-term economic

stabilization as well as long-term structural reform.

Since the enactment of their respective economic liberalization efforts, China and

India have had two strikingly different developmental outcomes. The experience

of successive governmental efforts in India to increase overall foreign direct

investment inflows and to direct investment towards energy infrastructure

compares unfavorably with the experience in China. Despite lingering structural

impediments, China has consistently attracted massive amounts of overall

foreign direct investment flows for the last five years (1995-1999). During 1995-

1996, it received US$38 billion in FDI, then becoming the second largest

destination for FDI in the world. FDI to China peaked at US$44 billion in 1997-

1998, before declining slightly to US$38 billion in 1999-2000. In contrast,

although India has aggressively introduced measures to encourage foreign

investment, it has had modest success. In 1995-1996, FDI inflows to India only

approached 2 billion dollars. In 1997-1998, FDI flows to India increased to

US$3.5 billion, before dropping to US$2.1 billion in 1999-2000.

In an interesting comparison of the prospects of economic reforms in India and

China, Richard Eckaus (1995) argued that in the initial stages of economic

reform China was more successful than India due to its higher savings rate and

higher capital productivity. Although Eckaus noted that neither China nor India

had made significant steps to deregulate their state-owned industries. Eckaus

forecasted that China would be more successful than India in increasing the

efficiency of its state-owned enterprises (SOEs).

Divergent Deregulation Strategies

There are several methods of disinvestment of public sector enterprises. They

include public offering of shares, private sale of shares, new private investment in

a public sector enterprise, reorganization into component parts, and

management/employee buyout. Both China and India have attempted to

experiment with various forms of deregulation techniques without referring to it

directly as privatization. Nevertheless, both China and India have followed

sequenced patterns of deregulation.

Stephen S Roach, chairman of Morgan Stanley Asia, expressed his optimism on

the prospects for the Indian economy over that of China, saying that India has

made a lot of improvement in recent years on the macro developments,

especially with an increase in foreign direct investments, higher savings and

improvement in infrastructure in the share of India in GDP.

“These improvements reinforce the long-standing accomplishments of India on

the micro front—large collection of world-class competitive companies, well

educated IT competent workforce, extraordinary entrepreneurs and innovators,

well developed capital market, solid financial institutions, rule of law and

democracy,” said Roach in a press conference, adding that what has been

missing in this interplay between the micro and now the improved macro has

been the political impetus to reforms, something it has hobbled your government

in the last five years.

“India is a more balanced economy than the rest of export-led Asia,” Roach told

reporters in Mumbai on Wednesday. In fact, for the first time, Roach is now more

optimistic about prospects for India than China. “China faces major challenges

for the first time in 30 years,” Roach said. “It pushed its export-led model too far,

leaving it too dependent on the external climate.”

Roach noted that the recent election changes the prospects for reforms going

forward and hopes that the new Congress-led government will be more effective

in pushing the reforms forward on a number of fronts and will be much less

hobbled by the politics of coalition management.

Talking about the growth forecast for the Indian economy, Roach said the growth

would remain between 5.5-6.5% for now. Incidentally, Morgan Stanley on May 28

raised India’s growth forecast to 5.8% in the fiscal year to March 31, 2010, from

an earlier estimate of 4.4%. The economic growth in the $1.2 trillion economy

may turn out to be the real surprise in Asia, Roach said.

“The growth in the Indian economy cannot go beyond 8% in another 2-3 years

time,” he said. Roach also noted that disinvestment is important for India to

reduce its fiscal deficit.The fiscal deficit of India widened to a seven-year high of

6.2% in the fiscal to March 31 as government borrowed more to fund fiscal

stimulus packages.

Can China and India sustain their current growth rates?

A traditional answer to this question is conditional: yes, provided they continue to

implement policy reforms. But historical experience allows a less guarded

answer. There are few examples of countries that have grown as strongly and for

such long periods as India and China have – 6% and 10%, respectively, for

nearly three decades – and then suffered a sharp slowdown or collapse. If history
is a reliable guide, then barring major upheavals, economic growth looks likely to

continue in both countries until some threshold level of prosperity is attained.

But why does growth beget more growth? One mechanism is simply that growth

signals the fact of profitable economic opportunities, which encourages investors

to rush in, first in response to these opportunities but then in response to each

other – this is growth as a confidence trick – creating a virtuous circle. If countries

are relatively poor, if their markets are large, and if their policy framework is

basically sensible – all of which are true of China and India – the chances of the

growth-begetting-growth dynamic taking hold are high.

But in addition to the signalling effect, growth may itself cause changes which

have in turn a growth-reinforcing effect – a kind of positive feedback loop. A good

example is education. For long, development economists bemoaned the poor

levels of educational attainment in India, directing their critique at the

government’s failure to supply better education. But economic growth changed

the education picture dramatically. It increased the returns to, and hence the

demand for, education. And if government supply remained weak, consumers

simply turned to the private sector to meet their demand for education.

Improvements in educational attainment over the last 15 years are attributable in

part to more rapid growth.

An important question then is whether India and China can take the positive

feedback loop for granted, especially in relation to two key determinants of long-

run growth: state capacity or effectiveness and the private sector’s

entrepreneurial capacity. In other words, is it inevitable that over time growth will

itself improve the quality of private entrepreneurship and public institutions?

Consider each in turn.

Policy reforms have created the conditions for the private sectors in both

countries to flourish. Yasheng Huang of MIT in his new book, Capitalism with

Chinese Characteristics, argues that the Indian private sector, especially the

indigenous part, is more efficient and entrepreneurial than its Chinese

counterpart.

One crude measure of relative sophistication or entrepreneurial capability is how

much direct investment (FDI) these countries are exporting, especially to the

richer countries and especially in sophisticated sectors. Based on new data on

mergers and acquisitions, Aaditya Mattoo of the World Bank and I calculated that

India’s FDI exports to the OECD countries overall and even in the manufacturing

sector were substantially greater than China’s (measured as a share of GDP).

China is rightly considered the world’s manufacturing powerhouse and export

juggernaut, and yet in the manufacturing sector, Indian entrepreneurial and

managerial capital (in the form of FDI) has been more successful than China’s in

taking control of and managing assets in the sophisticated markets of Europe

and the US. So, while both private sectors have improved, India can claim today

that it is ahead of China in fostering entrepreneurial capitalism.

Turn next to institutions. In the case of China, the focus of the world, and indeed

the disappointment, has been the absence of the positive political feedback loop:
growth and the attendant economic freedoms have not led to greater political

development and openness. Implicitly, there has been less concern about the

effect of growth on the state’s economic capacity. Over the last thirty years, the

Chinese state has successfully created physical infrastructure and delivered

essential services.

Contrast that with the Indian experience. While there are many exceptions, and

at the considerable risk of over-generalising, the Indian state despite rapid

economic growth has deteriorated over time. Whether it is providing basic law

and order, or ensuring sanctity of contract, or delivering public services, the

stench of decline is hard to ignore. For example, on a crude measure of

government effectiveness on which I compiled data across time, India’s

performance declined sharply: in the early 1960s, India was in the top fifth

percentile of countries in the sample, slipping to the middle of the pack in recent

years. The education example discussed earlier is an exception to the growth-

institutions dynamic, made possible only because of private alternatives to state

supply. For the core public sector functions, where such an alternative does not

exist, the growth-institutions dynamic has been weak or non-existent.

So, growth in India has come with a more entrepreneurial private sector but

accompanied by deteriorating state capacity. China has a vastly superior state

capacity but an indigenous private sector that is still finding its feet. Which

combination augurs better for the future?

There is a fundamental asymmetry between state and markets. It is easier to

create markets than it is to create state capacity or to prevent its deterioration.

Creating markets is a lot about letting go, establishing a reasonable policy

framework, and allowing the natural hustling instinct to take over. In other words,

hustling is the natural state. Building state capacity, on the other hand, is quite

different. It involves overcoming collective action problems, mediating conflict,

creating accountability mechanisms where outputs are multiple and fuzzy and

links between inputs and outputs murky, and contending with the deep imprints

of history. In Weber’s memorable words, building public institutions is like the

“slow boring of hard boards”.

In that light, China’s task of improving its private sector seems easier to

accomplish than India’s task of arresting institutional decline. So, while China and

India can probably both count on more years of high growth, the odds still favour

China pulling off that feat than India. That, and not just the meagre medal tally,

should be what India mulls over after the Beijing Olympics.

 RESEARCH & REVIEW

The importance of China and India to the global economy has by now been

widely documented. The two most populous countries in the world, with a

combined population approaching 40 percent of the globe's total, have risen in

importance together and meteorically. In a relativelyshort period of time, the two

sleeping giants have changed the entire economic landscape. As the Economist

recently noted, "In the first half of 2007 the increase in consumer spending (in

actual dollars) in China and India together contributed more to global GDP

growth than the increase in America did" (2007).

The two countries have built different models and followed different paths to their

current global prominence, yet they will remain forever and inexorably connected

in the pages of economic history books. Terms such as "Asia's non-identical

twins" (Turcq, 1995) or "Chindia" (Engardio, 2006) have been invented to

describe their peculiar interdependence, while numerous studies have compared

the two economies in terms of their respective progress to a market-based power

(Koveos and Zhang, 2006; Tseng and Cowen, 2005), tangled up in the race to

replace or at least stand next to the United States for economic supremacy.

The story of China and India's journey to economic stardom is really a story of

economic freedom. Economic freedom creates opportunities and incentives, and

provides the background for entrepreneurship to flourish. In the early 1990s,

India was facing severe political turbulence as well as both internal and external

economic difficulties. As the country was facing up to this environment, the

international environment was also changing, as the "central planning" model

was being abandoned in favor of the market-based framework. The Soviet Union

itself was both disintegrating and undergoing radical economic reforms. In India,

Narasimha Rao's government initiated radical reforms aiming at changing India's

own economic landscape and its relationship to the fast moving outside world.

The reforms undertaken covered foreign trade and investment, as well as

exchange rate and industrial policies. The objective was to facilitate the transition

to a market based economy while integrating India within the global economy

(Srinivasan and Tendulkar, 2003).

China began its departure from the planned economy model in 1978. The

accompanying reforms have had a purely Chinese flavor. Observers of these

reforms have noted that the country's experiences may be distinguished from

reform experiences in other countries through its use of a gradual as well as

pragmatic approach and its deployment of intermediate adjustment mechanisms.

Furthermore, the objective of changing the economy while maintaining the basic

elements of the political environment was characterized as "market socialism."

The impact of the reform has varied between the internal and external sectors,

among geographical areas, industry groups, and income levels. The challenges

faced have been immense and multifaceted; involving the country's economic,

political, and social frameworks.

China's size can be seen from the number of its businesses. According to the

2004 Economic Survey, China has more than three million enterprises in the
secondary and service sectors. More than two million of these enterprises have

fewer than 20 employees. Average employment was at about 51 employees.

China also has more than 22 million Township/Village Enterprises (TVEs),

employing on the average about 6 workers per unit. Finally, there were almost 40

million self-employed households (counting both rural and urban areas) in China

by the end of 2004, with the number of self-employed workers reaching almost

100 million.*

Prior to economic reform, of course, there was no need for entrepreneurship in

Chinese enterprises. Most of the enterprises were State-Owned Enterprises

(SOEs). The government simply distributed capital and human resources, while

the SOEs implemented the production and distribution directives of the State

Planning Committee. Accordingly, there was no competition, as Chinese

enterprises did not need to make any decisions independently, nor were they

profit seeking economic entities; they were just the means through which central

policies were executed. As for the leaders of these enterprises, their main

responsibility was to work hard to implement government orders.

Following economic reform, the operating environment of Chinese enterprises

changed dramatically. Departing from practices of other Centrally Planned

Economics, China reformed its State-Owned Enterprises without making basic

change in their ownership. Ownership and management of state-run enterprises

were separated. State-run enterprises thus became state-owned enterprises.

SOE reform began progressing toward the goal of "establishing the modern
corporate system." The basic objective was to divide responsibilities very clearly,

separating the role of the government from that of enterprise management, while

operating efficiently. Capital and human resources were obtained by SOEs from

the market. Their production and sales activities were now in competition with

domestic enterprises (including private enterprises, TVE and foreign enterprises)

and foreign companies abroad (through foreign trade). It is now common to find

individual entrepreneurs or even entrepreneurial teams in "blue-chip" enterprise

(top performing SOEs). These entrepreneurs have now become an integral part

of SOE success. Some star performers, such as Qingdao Haier Co., Zhenhua

Port Machinery Co. and Handan Iron and Steel Co., and many SOEs are now

listed on Shanghai and Shenzhen Stock Markets. New incentive mechanisms will

undoubtedly develop entrepreneurship even further.

According to one author, "China is becoming the world's center for enthusiastic

business creation. It manufactures start-ups. It is fertile ground for

entrepreneurship in virtually every market.. .The possibility of Chinese global

success is rooted in vigorous domestic competition among Chinese

entrepreneurs" (Hundt, 2006).

India's reforms got underway more than 10 years after China's. The country has

already seen a lot of success stories. Its information technology, software, and

business-processoutsourcing sector have been particularly productive, benefiting

from foreign direct investment and lax government oversight (Farrell, 2004). And,

despite the young age of its reform experience, India has made its mark in the
global entrepreneurial scene. Indian citizens (for example, Sunil Mittal and

Naresh Goyal) made their name known as world class entrepreneurs. New

opportunities arise within the country every day though! Together with the need

for jobs, they create an insatiable appetite for new entrepreneurial talent. As

Gupta states, "India needs entrepreneurs." To create this new class of

entrepreneurs, Gupta suggests that the country should focus on the following

areas (Gupta, 2001):

(i) Create the right environment for success

(ii) Ensure that entrepreneurs have access to the right skills

(iii) Ensure that entrepreneurs have access to capital

(iv) Enable networking and exchange.

The prescription is hardly unique to India. However, further enlargement if India's

entrepreneurial class will not only have a domestic impact, but also be heard

around the world!

KEY FINDINGS

China’s and India’s are among the largest economies in the world today. They

have also been among the fastest growing over the last two decades and a half.

They both entered the 1980s at comparable levels of per capita income following

three decades of growth-China at an average rate of 4.4 percent per annum, and

India at a rate of 3.75 percent (Srinivasan, 2003). 1 Since then China’s economy

has taken off to a state of unprecedented growth that averaged 10.1 percent per

annum in the 1980s, 10.3 per cent per annum in the 1990s, and has yet to show

any sign of slowing down. India’s GDP growth has also picked up to an

averaged 5.6 per cent a year in the 1980s, 6 percent per annum in the 1990s’,

and even higher since. Although India’s growth rate has been remarkably high by

any standard, the sustained growth gap between the two countries has intrigued

observers, especially given what seemed to be significant similarities in their

initial conditions. According to Srinivasan (2003), India’s GDP per capita stood

at 853 in 1990 international dollars in 1973 as compared to China’ 839. The

divergence in growth rates since then has created a widening income gap in

China’s favor, which stood at 3,117 dollars versus 1746 dollars by 1998

(Srinivansan, 2003). Figure 1 shows the evolution of the gap in Purchasing

Power Parity terms computed from data in the World Bank’s World Development

Indicators.

1
The growth rate figures reported in the following lines are also from Table 3 of the same paper by
Srinivasan.
 CONCLUSION

The future for both countries will undoubtedly depend on a myriad of factors,

from finding the proper role for their government to developing their financial

markets. It will also rely on the incredible human resources that both countries

have. Their human capital has already contributed to a shift in ÃÔ innovation

from Route 128 and Silicon Valley to large and small cities in China and India.

Cheap labor may still be there; but, more and more, so are some of the best

computer science and engineering graduates. These highly intelligent young men

and women are enabling the two countries to compete on the basis of much

more than price (Popkin, 2006). And, they will soon help transform family

businesses into entrepreneurial powerhouses.

China and India are, today, the engines of growth in the midst of rapid economic

transformation and make for a positive impact on the global economy. In fact,

according to a report by the World Bank, five countries – the US, China, Japan

Germany and India – account for nearly half of the world's gross domestic

product (GDP).

Both India and China have also been major contributors to the global centre of

economic gravity moving towards Asia, and are expected to play a significant

role in making the 21st century largely about Asia. Naturally, when countries the
size of China and India – together accounting for 2.5 billion people – begin to

unshackle their creative energies, the impact is bound to be realised worldwide.

Trade

Trade has been the integral part of the burgeoning bilateral economic

relationship between the two countries. Bilateral trade has grown by over 10

times since 2000-01 – from just US$ 2.33 billion in 2000-01, to US$ 25.68 billion

in 2006-07.

India's exports to China, likewise, have grown nearly ten-fold – from US$ 831.3

million (accounting for 1.87 per cent of total exports) in 2000-01, to US$ 8290.7

million (6.56 per cent of total exports) in 2006-07. The growth continued in 2007-

08, with exports to China touching US$ 7868.6 million during April-January

2007–08 – as against US$ 6572.8 million in the same period last fiscal.

Significant exports from India to China include cotton, organic chemicals, iron,

steel and inorganic chemicals among others.

Simultaneously, India's imports from China have increased from US$ 1502.2

million (accounting for 2.97 per cent of total imports) in 2000-01, to a whopping

US$ 17399 million (9.53 per cent of total imports) in 2006-07. Furthermore,

during April-January 2007–08, imports have increased by 60.1 per cent to US$

22592.3 million against US$ 14108 million in the corresponding period last fiscal.

On the other hand, imports from China are highest in the category of electrical

machinery and equipment, organic chemicals, mineral fuels, oil and oil products.
In fact, this surge in bilateral trade between the two countries has resulted in

China displacing US to become the number one trade partner of India. During

April-January 2007–08, Indo-China trade was US$ 30.46 billion against the Indo-

US bilateral trade level of US$ 28.27 billion. This is no mean achievement,

considering the fact that, bilateral trade between India and China was only about

one-fourth of Indo-US trade in 2001-02.

With such rapid growth, the bilateral trade target of US$ 20 billion by 2008 was

achieved well ahead of time. Also, the next Indo-China bilateral trade target of

US$ 60 billion by 2010 is likely to easily achievable. Further, to cement the

rapidly strengthening bilateral trade ties, both countries are planning to sign a

Free Trade Area agreement at the earliest.

Both China and India are throwing up competition for countries like Hong Kong

(China), the Republic of Korea, Singapore and Taiwan as the main sources of

FDI in developing Asia. The share of India and China in the total global FDI

outflows has been increasing continuously. While both accounted for 10 per cent

of total FDI outflows in 2005 in the Asian region, it increased to 25 per cent in

2007.

India has emerged as the second most-attractive location after China, ahead of

the US and Russia, for global foreign direct investment (FDI) in 2007. According

to UNCTAD's world investment report, China is the most preferred investment

location, followed by India, the US, the Russian Federation and Brazil, the report

said.
In the 2007 Foreign Direct Investment Confidence Index by AT Kearney too,

China and India have been ranked first and second most preferred investment

destinations. China leads the Index rankings for the fifth consecutive year and

ranks first among Asian investors, 34 per cent of who plan to invest there over

the next three years. Significantly, India continues to occupy the second place in

the Index, a position it has held since displacing the US in 2005, as it attracts

investors from more diverse destinations (about 75 per cent of investors who

plan to invest India are from outside Asia).

Not to mention, from being a complete non entity in the Indian power equipment

market only a couple of years ago, Chinese companies will be supplying as much

as 30 per cent of the equipment required to meet the Eleventh Plan capacity

addition target of 78,000 mw. Chinese companies are also bagging large orders

from private power companies in India.

Mergers & Acquisitions

Both India and China have been moving aggressively to redraw the global

landscape through their mergers and acquisitions (M&A) deals. In fact, the year

2007 has been a record year for both countries with respect to M&A activity.

According to Thompson Financial, the value of China outbound M&A touched

US$ 24.2 billion by December 19, 2007-up 60 per cent from 2006 and seven

times that of 2004. Similarly, the Indian outbound M&A deals increased by almost

five times over 2006 to over US$ 35 billion.

Simultaneously, 2007 has also been a record year for inbound deals for both

countries. While, the value of China inbound deals reached US$ 22 billion, India's

inbound M&A deals value increased much faster to US$ 31.5 billion.

Consequently, this steady rise of the Indian and Chinese economy along with

their businesses is likely to transform the global business landscape. For

example, according to a study by UK-based Chartered Management Institute,

India & China (along with Brazil and Russia) would exert a greater influence on

business markets and transform the business landscape by 2018.

Both India and China provide huge investment opportunities across a myriad of

sectors. For example, they are world's top two growing major economies, are set

to be the among the top two global wireless network markets (by April 2008), are

among the top three realty markets, and have the world's largest number of

financially excluded households (opening huge opportunities in the financial

sector).

Consequently, these countries have been at the forefront in attracting global

majors in a diverse set of industries. In fact, according to a report by

PriceWaterhouseCoopers, India is likely to become the third largest and China

the largest economy by 2050. While the combined size of the two countries is

likely to have major influence on global economy, both the countries have also

their own respective natural advantages in a host of sectors. Certain factors that

favour India include:

• The flow of European cash into Indian firms surged more than four-fold in

2007, surpassing EU investments into Chinese companies, as per

estimates from the data agency Eurostat.

• India has been ranked 25th in terms of economic transformation

(Transformation Index 2008), way ahead of China's 85th position, by

German Bertelsmann Foundation.

• Indian business leaders – in a survey by Korn/Ferry International – are

found to be more entrepreneurial than their Chinese counterparts, owing

largely to their strong language skills and association with a society that

encourages entrepreneurship.

• In a survey by the US-based business magazine Fortune, Indian products

were found to be more preferred than Chinese products.

• India has fared better in providing social security like healthcare,

education and child welfare to its people, compared to China and

Malaysia, as per a new index brought out by the Asian Development

Bank.

• India has overtaken the US and China to emerge as the largest developer

location for Sun Microsystems.

• IT spending in India is estimated to record the fastest growth rate in the

world in 2008, according to global research firm IDC.

• According to a survey by global consulting, technology and outsourcing

services major Capgemini, India is all set to threaten China's position as

the world's backyard for manufacturing in the next 3-5 years.

 • In less than a decade, as per a study by the Barclays Wealth and

Economists Intelligence Unit, Indian millionaires will hold more than

double the wealth of their Chinese counterparts. 411,000 Indian

households will be worth US$ 1.7 trillion in 2017. In contrast, 409,000

Chinese millionaires will be worth US$ 795.4 billion.

• A report by Barclays Wealth, ‘Evolving Fortunes’, signals the rise of

emerging markets such as India, displacing more developed economies,

with China, Brazil and Russia also making it to the ranking of the world’s

top 12 wealthiest countries.

• And, according to a recent Boston Consulting Group report, India has the

second-largest number of homegrown corporate champions holding their

fort against the might of multinational giants. The country was ranked

second behind China among the ten rapidly growing economies.

The India and China juggernaut

As Bill Gates, co-founder of Microsoft, the world's largest software company,

summed up for the students at the University of California, Berkeley, ‘China and

India are the big change agents for the years ahead.’

India's growing consumer market, skilled human resources, and software

excellence together with China's own large market, its manufacturing prowess

and cost competitiveness provide a strong platform for exponential growth of

their bilateral economic ties.

Simultaneously, the unprecedented growth stimulus in two of the world's largest

countries is expected to boost demand in the global economy and open up

massive market opportunities for trading partners, especially neighbouring Asian

economies. Moreover, the rest of Asia is also being energised by the boom in

China and India.

The two countries will also make a mark in the global tourism industry as they

become the new global players competing for a huge chunk of tourists, and

transforming the geopolitical landscape by 2010. The US, though a key factor,

will have less influence, according to researchers from the University of New

South Wales, and Australian School of Business among other universities.

To cite an excerpt from Globe and Mail, Canada’s most respected newspaper:

The genius of its business leaders will be India's ‘knockout punch in the title bout

21st century business.’ Though China was way ahead of India in exports,

infrastructure development, foreign investment and energy consumption, India

might surpass it in the long run because of its ‘smart, ambitious, and forward-

looking’ business leaders. Interestingly, the newspaper also said that Indians

were now accumulating money faster than the Japanese did in the 1980s and the

Chinese in the 1990s.

The implications of all this evidence need to be drawn out. To start with, it should

be clear that the egalitarianism that the Chinese revolution ensured and the

control state could exercise because of the persistence of substantial state

ownership of and investment in capital assets as well as the continuance of the

earlier financial structure and system, meant that the process of global economic

integration was carried out under fundamentally different premises from that

which occurred in India. To a significant extent, some of the basic development

issues, including ensuring adequate food supplies and universal primary

education, were already dealt with. The domestic market for consumption goods

was also significantly larger than proved to be the case in India. More

significantly for our current purposes, the control retained by the Chinese state

over financial institutions and the activities of the State Owned Enterprises

allowed it to sustain high levels of investment and deal with volatility, to prevent

undesired levels of inflation from persisting beyond relatively short periods. In the

event, the state could ensure that cyclical fluctuations occurred around a high

overall trend rate of income growth. The early phase of opening up, which

essentially involved increasing remuneration to farmers, operated substantially to

reduce poverty and deprivation. Subsequently, the heavy emphasis on

infrastructure development, combined with some amount of “controlled” trade

and investment liberalisation, created much greater possibilities for export-

oriented employment generation, which became the next engine of growth.

Because this occurred in a context of still heavily regulated and monitored

imports, it ensured that export employment was a net addition to aggregate

manufacturing, rather than having to balance for losses in employment in other

domestic sectors, since these were not really having to face import competition

on par with other countries that underwent trade liberalisation in that period.
When import liberalisation accelerated, a drastic devaluation of the yuan was

resorted to in 1994, which meant that import competition was still limited.

The transition to a market driven system in China while indeed delivering growth,

proved to be inequalising beyond a point. But measures by the state aimed at

preventing such tendencies and the migration-mediated process of trickle down

have helped to partially reverse these inequalising outcomes. However, in as

much as the current pattern of economic expansion is predicated on high rates of

saving and investment as well as loosening of the earlier credit and cash

planning system, the dangers of volatile growth and inadequate reductions in

unemployment and poverty persist, necessitating appropriate macroeconomic

corrections as well as supportive policies.

In comparison, India, with its market driven and demand constrained system,

which has greater space for conventional macroeconomic levers has not only

failed to deliver the same growth success but has also been far less successful

on the poverty reduction front. The implication is that macroeconomic flexibility in

a market driven environment is not the best recipe either for growth and stability

or for poverty reduction. India’s growth experience, while more stable than for

many other developing countries, was still nowhere near the rapid growth

experienced by China and other East and Southeast Asian economies. This was

strongly related to the reduced public expenditure by the Indian state in the

period of reform, most significantly the substantial reduction in central capital

expenditure (mainly on infrastructure) as a share of GDP, but also public

spending directed towards the rural areas generally. In addition, central

government policies in various ways created resource problems for the state

governments, forcing them to cut back on crucial developmental expenditure.

This meant that first, rates of aggregate income growth were well below those

which could have been achieved; and second, that employment growth was well

below the rate of GDP growth. These problems were compounded by the effects

that trade liberalisation had on small scale production in some manufacturing

sectors. Agrarian distress and inadequate employment generation have therefore

emerged as the most significant macroeconomic problems at the current time.

Of course it is true that the Indian experience has allowed for greater financial

and macroeconomic stability than experienced by many other “emerging

markets” over this period, primarily because until relatively recently liberalisation

of the capital account was limited and India was not “chosen” as an attractive

destination for finance capital. With changes occurring on both these fronts, the

country is currently experiencing a surge in capital inflows that exert an upward

pressure on the exchange rate as well as reduce macroeconomic flexibility.

There is on overarching conclusion, of wider relevance, that can be drawn from

this comparative analysis of the experiences of macroeconomic management in

China and India in the past twenty years. Discussions on macroeconomic policy

counterpose the policies adopted in the dirgiste period, ostensibly characterised

by financial repression, with the framework increasingly in vogue in emerging

market economies characterised by a reduced role for fiscal policy and state

expenditures and a greater role for a liberalised financial sector in mobilising and

channelling investment. The Chinese experience makes it clear that such either-
or dichotomies are not inevitable and that a pro-poor macroeconomic framework

must provide a role for state policies pursued within an area of control ensured

with state regulation. On the other hand, India’s experience suggests that

relentlessly pursuing the transition to a marketist macroeconomic framework

makes it difficult to sustain investment and growth and to translate the benefits of

that growth into better outcomes with regard to employment and poverty

reduction. In fact, India seems to have avoided the volatility that has

characterised countries that were even more successful on the growth front by

limiting liberalisation with respect to capital flows. Country-specific choices of a

consistent set of policies derived from the rich experience with macroeconomic

world-wide, rather than easy choices from either-or options seems to be the route

that any appropriate and pro-poor macroeconomic policy should take.

India is more efficient with capital use but that could soon change once our

infrastructure spending goes up. In the last article, as a rough and ready

comparison, I had argued that, based on the differences in growth rates over the

last quarter of the century, the Chinese economy has grown roughly seven and a

half times and the Indian economy at just three and a half times. Given the larger

GDP of China to begin with (roughly the same per capita income but a much

bigger population) the absolute size of the Chinese economy is three to four

times larger. Surprisingly, the rough and ready estimates turn out to be pretty

good in other areas as well. China’s trade in the current year will be around $ 1.7

trillion and ours about $ 450 billion. The Chinese GDP will be nearing $ 2.5 trillion

as against roughly a third of that in India. (Incidentally, trade as a percentage of

nominal GDP is much higher today in China, than in say Japan, and comparable

to that in much smaller countries like South Korea). China of course registers

much better numbers on social indicators like infant mortality, the proportion and

number of people below the poverty line, and so on. Ever since I started reading

newspapers in the 1950s, western commentators have always been comparing

and speculating about the progress in democratic India and authoritarian China;

between India’s mixed economy and China’s earlier emphasis on collectivisation

and state ownership. In the event, China has done better than us, particularly

after abandoning socialist dogma in 1979. India and China also faced some

problems in common: deteriorating environment, uneven economic development

between the fast growing coastal provinces and the hinterland — the BIMARU

states in India and the western provinces of China — huge and growing income

disparities, and so on. One major contrast is the way in which China solved

potential problems from religious minorities constituting majorities in border

states. If India barred non-Kashmiris from owning property in that state, the

Chinese encouraged the immigration of the dominant Han Chinese in a Muslim

majority western state, and Buddhist majority Tibet. Today Han Chinese

constitute the majority in these states. But coming back to the macroeconomy,

there are segments in which we clearly are better. Perhaps the most important is

the efficiency in the use of capital. India has made remarkable progress in this

area: from roughly 6:1 pre-reform, the incremental capital output ratio today is

just about 4:1, with, in round numbers, investment of about 30 per cent of GDP

producing 8 per cent growth. The Chinese ICOR seems to be nearer five. But
there is a danger in reading too much into this: China is far ahead of us in

infrastructure investments. And, the return from infrastructure investments takes

time to get reflected in GDP numbers. Therefore, our ICOR could well increase

as the investment in infrastructure goes up. There are analysts like Minxin Pei

who argue that “the only thing rising faster than China is the hype about China”.

Pei is Director of the China programme at the Carnegie Endowment for

International Peace, and the author of “China’s Trapped Transition: the Limits of

Developmental Autocracy”. I recently came across a longish article by Pei titled

“The Dark Side of Chinese Rise”, published in the March-April 2006 issue of

Foreign Policy. Conceding that while “China’s growth over the past two decades

has proved pessimists wrong and optimists not optimistic enough”, Pei describes

China as a neo-Leninist state — one party rule, state control of the commanding

heights, but otherwise a liberal market and a globalised economy in terms of

trade and investment. He quotes research to suggest that the private sector

accounts for no more than 30 per cent of the economy. He also criticises the

“virulent form of crony capitalism” bred by the combination of authoritarian rule

and the state’s economic dominance. He quotes World Bank estimates that a

third of the investment decisions in China were “misguided”, and contends that

the economy is inefficient and corrupt. After reading the article, two thoughts

occur to me: if, with all these weaknesses, the GDP grows at 10 per cent, year-

after-year-after-year, surely something is right with the model. Again, if

investment decisions are wrong and the economy inefficient, how do corporate

savings account for 30 per cent of GDP? But, more about the second point in a
subsequent article. But to come back to India and China, Chris Patten, the last

British governor of Hongkong, while reviewing James Kynge’s China Shakes the

World, wrote in the Financial Times: “which Asian tiger should we bet on — India,

with its software engineers and democracy, or China, with its manufacturing

prowess and its flaky totalitarianism?

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 Table 1: Industry distribution of firms to which the data

refer

China India

Number % Number %

Garments and leather

products 352.0 22.5 357.0 20.6

Household electronics 63.0 4.0 137.0 7.9

Electrical equipment and

parts 461.0 29.5 163.0 9.4

Auto and parts 358.0 22.9 265.0 15.3

Food processing 71.0 4.5 216.0 12.5

Chemicals and

pharmaceuticals 102.0 6.5 421.0 24.3

Metallurgical products and

tools 158.0 10.1 176.0 10.1

Total 1565.0 100.0 1735.0 100.0

 China and India: GDP per capita (PPP), 1980-2001

1000
900
800
700
1980=100

600
500
400
300
200
100
0
80

82

84

86

88

90

92

94

96

98

00
19

19

19

19

19

19

19

19

19

19

20
CHN IND