India and China- The tiger and the dragon

Sumant Sinha- President, Finance, Aditya Birla Group recently participated in a panel discussion on ‘India vs China: is the tiger on the dragon’s tail?’ The topic intrigued him. He gives the reasons and writes to give his opinion:

The topic intrigued me for the following reasons. Is India really on the move? Does the same question occupy policymakers, or the public at large, in China as much as it is beginning to in India? And which is a better model in the long-term? While making forecasts to answer particularly the last question is hazardous business, I shall nevertheless risk my reputation and give it a shot.

We Indians should really stick to the tiger analogy as the perceptual connotations are more favourable. Moving on to the second question of whether India is on the move, I think the answer to that question has to be an unequivocal ‘Yes.’ India has averaged growth of over 6% for the last two decades and the future looks bright. Anything less than 6% is simply unacceptable and any government that does not target and deliver at least 8% should voluntarily step down. Reforms have taken root across the political spectrum and the consensus behind the whole process is quite strong. The momentum is on India’s side now.

Other evidence is available in the way the world is waking up to India’s potential. Ten years ago, India figured in the western press only in terms of what I would call “disaster” reporting-earthquakes, riots, gas leaks, etc. However, a remarkable change has occurred over the last three to four years. Given its market potential and increasing role in services exports, India has increasingly begun to be mentioned along with China as two potential economic powerhouses. Now it is everywhere “China and India” where earlier it was only China.

Is this newly-acquired confidence and the new-found global interest in India beginning to perturb the mandarins in China? From all accounts, as yet the answer is ‘No.’ The reality is that China is miles ahead of India and we are only now showing up as a speck on the competition horizon. Unless we sustain this momentum and even increase it substantially, we will not worry the Chinese unduly. The Chinese are also a somewhat arrogant people – they will never formally acknowledge any worry about India as an economic competitor.

Now, is the Chinese model of top-down growth a more viable one than the more bottom-up Indian model? If you examine the situation, Indian growth is taking place in sectors that the government is either vacating or is somehow able to create a conducive regulatory environment in. In India, therefore, growth is taking place almost despite the government, than because of it. In fact, over the last 50 years the government has proven to be an extremely inefficient allocator and user of capital.

In China, on the other hand, it is the government which has been making the major capital allocation decisions. Whether in the long-term Chinese policymakers prove to be more efficient capital allocators and capital users is difficult to say, but the fact is that almost no other country in history has been able to pull this off over the very long-term. It will be surprising if the Chinese can emerge as the sole exception. Already, the first signs of weaknesses are being seen with vast infrastructure development having taken place but the financial sector being stuck with large amounts of non-performing assets. Whether China is able to manage the difficult task of keeping its financial sector in good shape, while at the same time developing a functioning private sector, removing government subsidies, and managing the aspirations of its people is really the question of the decade.

However, the reality is that China has taken such a large lead over India in terms of economic advancement that we are unlikely to overtake it. Having said that, our growth path, though slower, is less risky with less potential for large-scale disruption. In the context of another analogy, maybe in times to come India might end up being the tortoise to China’s hare! (This was used in one of my earlier entry too).

However, I firmly believe that India must learn from China as its many entrepreneurs in auto components industry have learnt some good lessons from Japanese are today reaping the benefits. I only wish that India must come up well in infrastructure sector with all its villages connected through roads, electricity and telecom. It must learn lessons from Chinese at least in building of huge nuclear, hydel and thermal power plants and roads if in no other things. It should also learn lessons if any from the rural sector that can provide employment there. It must learn how to control the population from the Chinese. There is no justification of allowing unabated population growth in below poverty class and providing incentive for that.

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