China vs India

In an article published in 2003 called “Can India overtake China?” Tarun Khanna of Harvard Business School and Steve Hamm argued that India’s domestic corporate sector – strengthened by the country’s rule of law, its democratic processes and relatively healthy financial system – was a source of substantial competitive advantage over China. At that time, the notion that India might be more competitive than China was laughed at. Few years later, India appears to have permanently broken out of its leisurely “Hindu rate of growth”– an annual gross domestic product increase of around 2 to 3 per cent – and its performance is beginning to approach the east Asian level. From April to June 2005, India’s GDP grew at 8.1 per cent, compared with 7.6 per cent in the same period the year before. More impressively, India is achieving this result with just half of China’s level of domestic investment in new factories and equipment, and only 10 per cent of China’s foreign direct investment. While China’s GDP growth in the last two years remained high, in 2003 and 2004 it was investing close to 50 per cent of its GDP in domestic plant and equipment – roughly equivalent to India’s entire GDP. That is higher than any other country, exceeding even China’s own exalted levels in the era of central planning. The evidence is very clear: China’s growth stems from massive accumulation of resources, while India’s growth comes from increasing efficiency.

Today as the world has gone into an economic crisis, India's Inflation which was a 8.5% a month ago, has slipped to 6.5% and the verdict is it might soon reach the controlled zone of 4 and less. When that happens, the world will know that India's potential in comparison to China is manifold. But what is stopping India from acheiving its potential. Strangely, Democracy! Is this good for the country? Strangely again, Yes! Why? Read on! India is a highly attractive destination for FDI but has it aggressively taken the direction as China has- No! The reason is, India is weary of the large number of its businesses which are independent entrepreneurial ventures. A deal between WalMart and Bharti to open retail shops was stalled by the Congress, as it feared it would flood the market and impede the growth of the Indian plaeyrs in the retail market. The advantage, the money is generated by Indians for India. What's different about this model? If one takes a closer look at China, we know why India is truly the country to look out for, it is steadily building a strong foundation. China has become the home for Manufacturers around the world! Why? It offers cheap labor, good infrastructure (aided by Chinese Government) and cheap resources. And "Made in China" labels is omnipresent. But "Made in China" is not necessarily "Made by China". If India needs to compete and win China, it has to improve its Infrastructure. An economic litmus test is not whether a country can attract a lot of FDI but whether it has a business environment that nurtures entrepreneurship, supports healthy competition and is relatively free of heavy handed political intervention. In this regard, India has done a better job than China. From India emerged a group of world-class companies ranging from Infosys in software, Ranbaxy in pharmaceuticals, Bajaj Auto in automobile components and Mahindra in car assembly. This did not happen by accident.The day is not long, when MNCs find an alternative to China. When that happens, China will be drained by much of its capital and its market, left to chinese players, will get very incompetent. This situation is never bound to happen in India. Every Industry, has one or more Indian player in the market. Thus India is building its economy towards becoming a self-sustaining growing economy whereas China is still busy, improving its foreign reserves and comfortable with the headstart it has over other economies.  

Unless China embarks on bold institutional reforms, India may very well outperform it in the next 20 years. But, hopefully, the biggest beneficiary of the rise of India will be China itself. It will be forced to examine the imperfections of its own economic model and to abandon its sense of complacency acquired in the 1990s. China was light years ahead of India in economic liberalisation in the 1980s. Today it lags behind in critical aspects, such as reform that would permit more foreign investment and domestic private entry in the financial sector. The time to act is now.

Mike - the MBA blogger