Can India catch up with China?

Published : Jul 22, 2000 00:00 IST

India must concentrate on accelerated growth in agriculture, IT, services and exports during the next two decades, and make efforts fiscally to raise the rate of investment to start closing the gap with China.


IT was my 10th visit to China since 1978 when I landed in Beijing airport on June 25 from Kuala Lumpur. In 1978, I was the first Indian politician to set foot in China after the 1962 border conflict. I undertook that trip after I persuaded, in the teeth of Soviet-lobby objections, Prime Minister Morarji Desai to give up his traditional anti-Chinese knee-jerk approach and see the strategic value of befriending China. That strategic objective - how to prevent or minimise the prospects of China allying with Pakistan against India - is still as important today. In 1978, as External Affairs Minister, Atal Behari Vajpayee had not only opposed befriending China but had tried to prevent, tooth and nail, my visit to Beijing. By his ill-advised postures t oday as Prime Minister, from writing to United States President Bill Clinton about the "China threat" to allowing his Ministers to rake up the Tibet and Taiwan issues, Vajpayee is unwittingly "cementing" the Sino-Pakistan alliance. It was this two -faced "forked tongue" approach to China that had shattered the illusions of Prime Minister Jawaharlal Nehru in 1962; it may, if circumstances develop, do the same to the Vajpayee government.

In October 1998, on my ninth visit, I was in Beijing when all our government-level contacts with China had broken down. After my arrival, perhaps at the urging of Vajpayee's media spokesperson in Delhi, at a routine daily press briefing of the Chinese Fo reign Ministry a correspondent popped the question: why was I being invited to China when I was persona non grata with the BJP-led coalition? The Chinese spokesman snubbed the correspondent with the remark, "Dr. Swamy is an old trusted friend, and he is welcome to China any time."

Such small-mindedness has characterised Sino-Indian relations from our side. No wonder then we have come to grief from time to time - and then, to make amends, have had to humiliate ourselves. For example, after the "China is a threat" fiasco, External A ffairs Minister Jaswant Singh petitioned the Chinese to permit him to visit China to make amends. After rebuffing him four times, the Chinese finally relented on condition that Jaswant Singh would "retract" (not explain away) the "China threat" statement of the Prime Minister. This Jaswant Singh did on all fours in Beijing. It was abject surrender. No wonder, then, the Vajpayee Government is unhappy with the warm reception I receive in China.

My latest visit to China was originally scheduled to enable me to do research on China's national income. This is a project for which Harvard University has once again appointed me to its faculty of economics (for the year 2000-2001) but this time withou t requiring me to be resident on its campus. However, my China visit acquired political significance when my hosts organised a meeting with the Secretary-General of the International Department of the Central Committee of the Communist Party of China. Fo r me, it was the first time ever. The Secretary-General, Li Yeng, also did me the honour of hosting a dinner in their resort-like Hotel Wen Shou on the outskirts of Beijing, where we had wide-ranging discussions on topics of mutual interest.

It is my intention to write on Sino-Indian relations in detail in these columns later, but for the present I propose to examine briefly the results of my research on China's national income and its distance from India's GDP. I shall also try to answer wh at is today the most-often asked question: Can India catch up with China?

THERE are three interesting questions often asked in discussions involving China-India comparisons. First, did the two countries start post-liberation economic planning in the 1950s from the same set of initial conditions? Second, is there a significant gap in economic levels now between the two countries? Third, is this gap bridgeable in the first two decades of the 21st century?

On whether China and India started their respective modern post-War economic planning from the same or similar levels of development, it needs to be recognised that many general similarities existed between the economies of India and China at the time In dia achieved its Independence in 1947 and the Communists assumed power in China in 1949. Until then, each had made only modest beginnings toward industrialisation. In the main, the modern factories in both countries were devoted to the production of ligh t consumer articles, particularly textiles. In each country a large percentage of the industrial production was from cottage and handicraft industries, and very little from heavy industry. The Japanese had developed heavy industry in China during their o ccupation of Manchuria, but this sector had not become integrated with the Chinese economy until later and after much of the equipment had been removed by the Russians during their occupation after the Second World War. China and India began their develo pment programmes in 1952, therefore, from a point at which neither country had made any great progress in heavy industry.

The relative position of China and India measured by ratio of outputs of commodities, prior to the launching of their economic development programmes, is reflected in Table 1. If we are to generalise on the basis of these ratios, we can say that at the d awn of planned economic development in 1952, China was clearly ahead of India in agriculture. But this was, however, not so in 1870, when China and India were on a par. Relative to India, China made much greater progress in agriculture during the period 1870-1952. The reasons for this are recorded in my book Economic Growth in China and India: A comparison in Perspective: 1870-1986 (UBS, New Delhi, 1989).

India, however, was ahead in industry and transportation. As a consequence, India's per capita income measured in PPP (purchasing power parity) dollars in 1952 was about 54 per cent higher than China's.

While there is at present no acceptable theory about which set of initial conditions is better for industrialisation in low per capita income countries, it is nevertheless clear that China in the early 1950s was better placed than India, to extract resou rces from agriculture to finance the planned industrialisation programme. Hence the heavy industry-oriented strategy made relatively more sense for Chinese planning than for Indian. Relative to China India thus was required to pay more attention to agric ulture (which it did not do until the food crisis of 1966-67).

In a nutshell, therefore, China was relatively in a much better position than India to embark on industrialisation in 1952 because its agriculture was not in shambles as India's was. Although India had a better infrastructural system than China, t he difference was not much. Hence, it was a monumental error on the part of India to have pushed for industrialisation in a command socialist model, without first having laid the foundation for agricultural progress. India had to learn this lesson, thoug h not very well, the hard way in the mid-1960s. We have still to correct that conceptual error since economic reforms in India post-1991, unlike in China, were not preceded by reforms in agriculture. Agriculture, instead of being converted into sh eet anchor for growth, became an albatross for the Indian economy. It has weighed down on growth except for sporadic bursts. China, on the other hand, sequenced its economic reforms by first creating an agricultural boom during 1980-85, and followed it u p with industrial expansion during 1986-96.

During the period 1952-80, although China outstripped India in terms of the physical output of 19 key industrial commodities, the two giant countries grew at about the same GDP (gross domestic product) rate because the sluggish growth of the Chinese agri culture and service sectors levelled its fast growing industrial sector. The Chinese and Indian per capita incomes in 1980 were thus approximately at the same level. Under the leadership of Deng Xiaoping, in 1980 China initiated economic reforms ( a decade earlier than India) and as a consequence its economy grew at double the rate of growth of India during the 1980s and early 1990s. China thus considerably widened the gap with India during this period and that momentum has carried China forward i nto the 21st century.

Since 1993, there has, however, been a consistent slowdown in Chinese growth rates. Whereas in India since 1991 there was an acceleration, although during the three years before 2000 there has been a deceleration in growth rates in both countries. The av erage difference in growth per capita of China and India at the turn of the millennium is marginal and equal to the difference in population growth rates of the two countries. The headstart that China had in economic growth in the 1980s has, however, sto od it in good stead and thus China, in most aggregates and indices, is today considerably ahead of India. Table 2 shows that even as early as 1986, China had posted a considerable lead over India in outputs of most commodities.

How wide is the China-India gap today measured in four dimensions of economic progress: growth, globalisation, financial growth and human development?

Between 1986 and 1999 the GDP growth rate of China was maintained at a pace that made for a wide gap with India's. During 1996-98 China's average growth rate was 74 per cent higher than India's rate. (But in 1996-99, this gap narrowed considerably to jus t 8 per cent higher than India's). The per capita income, which was about the same in 1980 for both countries, had diverged in the two decades that followed. Evaluated in PPP terms, the gap was 86 per cent in favour of China, not only because of a higher growth rate of GDP but also because of a lower growth rate of population. In 1952, China's population was 57 per cent higher than India's. In the 1990s it was just 28 per cent higher. At present, China's population is growing at 1.0 per cent a year (tar get for 2000-2001: 0.92 per cent) while India's population is expanding at 1.9 per cent a year.

At this rate, India's population will overtake China's by 2025. China has an ambitious plan to reach zero population growth by 2020 to level at 1.5 billion people. If so, then India will overtake China by 2016, unless it implements some drastic plan to c urb population growth (at present there are no such plans whatsoever).

The higher growth rate of NDP in China was made possible by a much higher rate of gross domestic investment (as a ratio of GDP), of about 70 per cent more. The Chinese rate of growth of GDI during 1990-98 was 2.27 times the rate in India. One can therefo re conclude that the wide gap between India and China in per capita incomes (which gap was about zero in 1980), was partly due to a lower population growth, but primarily due to a much greater investment effort in China. India cannot close its per capita income gap by 2020, without a much faster GDP growth rate (for example, of 10 per cent a year), for which an even greater effort to raise the level of investment will have to be made. This is easier said than done. Since 1997, the GDI as a ratio of GDP in India has been falling, albeit erratically, owing to consumerism. Furthermore, the pressure to increase consumption will mount after the World Trade Organisation (WTO)-mandated quantitative restrictions are removed in April 2001, and tariffs are drast ically reduced. Hence a dynamic policy design for such an accelerated effort will have to be resolutely implemented in order to raise the level of savings (this has been discussed in my recent book India's Economic Performance and Reforms (Konark, New Delhi, July 2000).

However, judging by other indicators of productivity, China is not that far ahead. The proportion of irrigated land in agriculture is only 16 per cent higher in China. Gross cropped area under food crops was, however, 30 per cent lower, although y ield was 2.87 times higher. Agricultural value added per agricultural worker is just 17 per cent more in China. While commercial energy use per capita in kg of oil equivalent is almost double in China, the efficiency in its use measured by its ratio to G DP is surprisingly higher in India. This obtains despite China having 2.35 times more of scientists and engineers in R&D activities than India. It is clear that if productivity in agriculture is systematically raised in India, the food gap cannot only be closed, but India can surpass China. At the Chinese yield per hectare level, India can produce 579 million tonnes of foodgrain with today's technology.

In growth terms, then, the China-India gap can be closed if India designs its fiscal architecture in such a way that the rate of investment rises to above 30 per cent of GDP from the present 23 per cent, while it reduces the ICOR (incremental capital out put ratio) from 4.0 to 3.0, and at the same time maintains the structural balance levels for at least two decades (that is, fiscal stability manifested in five parameters: (a) an appropriate real interest rate; (b) a competitive and predictable real exch ange rate; (c) a low and stable inflation rate; (d) a sustainable fiscal policy; and (e) a viable current account level in balance of payments).

China has had an impressive growth in exports since 1980. At the present level of exports, at more than $200 billion, China's exports are 4.70 times that of India's. China is ahead in the export of services, which is expected to be a lead factor in the n ew millennium. At $24.52 billion Chinese export of services is 2.82 times the level of Indian exports of services. Import of services is almost equally large in China at 2.45 times that of India's.

China's current account balance is a huge plus at nearly $30 billion, while in India it has been a minus throughout the last four decades. Right now it is $ -6 billion. No wonder then, China's international reserves are nearly $153 billion, nearly five t imes that of India's. Foreign direct investment (FDI) in 1997, when it was at a peak in India, was 13.21 times more in China but because of its massive export drive, despite a huge FDI inflow over two decades, China's present value of external deb t as a ratio of GNP is only 15.0 per cent, that is, less than India's at 18.0 per cent, despite a 55 per cent higher nominal external debt in China. China-based foreign enterprises accounted for nearly half the exports of China while in India it is not e ven 5 per cent. Not only that, more than 75 per cent of China's FDI went into the setting up of new enterprises, "green field" investments, while in India only 35 per cent was in such capacity-augmenting projects. Nearly 65 per cent of India's FDI went t o mergers and acquisitions of existing enterprises. What is even more ominous is that in 1999 Mauritius emerged as the largest foreign investor in India. This is a dubious source, and is likely to be recycled hawala funds from India.

In the field of information technology (IT) China has outstripped India in hardware although it lags behind in software. High technology exports as a percentage of manufacturing exports are almost double that of India's at 21 per cent. The per 1,000 pers ons availability of computers is 2.86 times in China. Even in the number of Internet hosts, despite China being a controlled society, the per 10,000 people ratio is slightly higher than in India. China has 10 times more mobile phones per capita than Indi a, almost three times more telephone main lines, and four times more televisions sets per capita.

China had 6.2 times more patent applications filed by foreigners than India. Chinese residents filed 7.1 times more such applications than Indians in their own country. India cannot therefore remain smug in the belief that it is ahead of China in softwar e because Indian computer engineers are already beginning to get outpriced by the huge salaries being paid to them by Fortune 500 companies in outsourcing. Thus some time in the future Chinese, Russian and Irish engineers can be lower-cost alternatives t o Indians. Fortune 500 companies would not hesitate to dump Indians then. Therefore, India has to move from being servers in software, to design and domain specialists in IT. I would also advocate a China-India-Israel consortium for this purpose, since t he three countries complement one another in this area, and its citizens dominate the academia in the U.S.

At present there is without doubt an unambiguous and large gap in the lead of China over India in overall globalisation. And surprisingly, therefore, an open democratic market economy - India - has to make special efforts to catch up with a controlled Co mmunist "social market" economy - China - and that too ironically in the area of globalisation. But India can close the gap with a new mindset at the political level, which however the Rashtriya Swayamsevak Sangh-led BJP is incapable of.

China has not only managed a high rate of investment, but has kept the prime lending rate (PLR) at a relatively low 8 per cent; the interest rate spread between lending and deposit rates was confined to 2.6 per cent. In India, the PLR is 12 per cent, whi le the interest rate spread is at 3.4 per cent. Clearly, China's configurations are more conducive to high domestic investment. Even though the Indian stock markets were established much before China's, in terms of market capitalisation, China is ahead a t $231.3 billion, which is 2.20 times that of India's. Chinese banks extend credit, measured as a ratio of GDP, at a rate of two-and-a-half times India's. Marginal tax rates on corporate incomes is at a maximum of 30 per cent, while in India it is 40 per cent. Even in fiscal decentralisation, the Chinese Central government transfers 51.4 per cent of the tax revenue to the provinces, while in India the figure is 36.1 per cent.

However, despite China being ahead of India in various financial factors, these gaps are not unbridgeable. A sincere and determined effort at financial restructuring by India can close the China-India gap in financial factors within a decade.

In 1999, according to the Human Development Report of the United Nations, China had a higher human development index (HDI) ranking than India. The index for China was 1.29 times that of India whose HDI was 0.563 in 1999, placing it 128th in the list of 1 42 countries. China was in the 98th place.

Life expectancy in years at birth was 1.15 times India's. The literacy ratio was 1.56 times and the infant mortality rate was less than half of India's. Public expenditure on health in China as a ratio of GDP was three times more. But public expenditure as a percentage of GDP was lower in China. Surprisingly, the Gini Index of Income inequality was also higher in China than India. But as analysed in my 1964 Harvard doctoral dissertation, such an unexpected result can obtain because the ratio of u rban per capita income to rural per capita income which was larger in China than in India, swamps the result even if intra-urban and intra-rural Gini Indexes were lower in China. Economic reforms in China had caused a sharp increase in urban incom es in the eastern sea board areas, and this caused the ratio to rise, since the rural western provinces lagged behind.

Here too, while overall China is certainly better off in the matter of quality of life factors than India, the gap can be bridged by a sustained effort to improve health and education.

In 2000, there is a substantial gap between China and India, but if India were to concentrate on a significantly accelerated growth in agriculture, IT, services and exports during the next two decades, the gap can be quickly bridged. Clearly, India will have to make strenuous efforts fiscally to raise the rate of investment to reach or cross 30 per cent, as a minimum condition to start closing the China-India gap. The task of course is within reach and it is a target for which the people would be willin g to make a sacrifice. "Catching up with China" is a worthwhile slogan for India's new millennium, along with a national commitment to grow at 10 per cent a year. Both goals are feasible and attainable, and within India's grasp. The question is whether t he polity is up to it, or will it sink further into the communal and fundamentalist morass that it is already knee deep in. There is no hope in the present dispensation.

The author recently spent a week in China as a guest of the Chinese People Institute for Foreign Affairs.

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