Tiger

INFOCUS | INDIA-CHINA | ECONOMY

IndIa must ready for the leap

Tiger, tiger burning bright

India’s economic journey over the last 20 years has seen it metamorphose from an ambling elephant into a hungry tiger: Today India’s GDP is the third largest in the world, with a total GDP of 2 trillion dollars.

Amir Ullah Khan

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hina continues its relentless pace of growth. It has been growing in double digit terms almost ever since Japan’s growth slowed down in the early nineties. China now is India’s biggest trading partner between the two, relegating the US to the second place after several years.

While the West is important for India, it is also time we started looking at our relationship with China closely.

The issues with China and Europe are quite different. While China has a huge labour force, Europe and Japan’s labour force is fast dwindling with an ageing population. The median age in Japan is now touching 50 and the problems of a large dependent population are seen everywhere. If the Japanese and the Europeans don’t stop their strict immigration policy, they will at least have to outsource most of their production.

And it is India that is ideally suited to take on the manufacturing sector and the electronics sector that the western world might look at outsourcing.

What is evident in China is the silent appreciation for India’s rapid strides in the services sector. The Chinese know that they need to move up the value chain and not remain large scale suppliers of manufactured goods.

They also realize that India is way ahead on this and can sustain service sector growth for quite a while as its demographic dividend pays and the knowl-

edge economy continues to grow.

There are a large number of Chinese delegations coming to India to learn what can be done to help China grow in the tertiary sector. In this it is important for India to continue to harness its strengths and ensure that enough investments are made in the education sector so that the human resource development goes on. It is important to make high school students who will graduate go to college and university so they can be part of the large knowledge economy that the world will have. The reforms in the higher education sector therefore are imperative now.

Comparing two giants There are many similarities between China and India. Both have emerged out of a long history of colonialism, with the largest populations in the world. Both have aimed at developing the economy and improving living standards of a vast majority of the population. In the development process, China and India have shared similar experiences, and till recently, their development levels were indeed very close to each other.

While China is clearly miles ahead by way of infrastructure growth, India’s capital market is clearly more robust and certain. Telecom infrastructure is comparable in both countries, the education sector is equally strong and technology is leveraged almost at the same levels in each country’s industry. Chinese products are imported for their

lower prices while Indian products are popular in Chinese markets.

Evolving from a rural agricultural society, China has become an urban, industrial one. Its vast size and unprecedented speed of industrialisation has led to this. China’s transition from a closed economy to a market economy has also been unique with a combination of experimentation and incremental reforms leading to rapid progress.

The result has been a quadrupling of GDP since the late 1970s. During the last two decades, China’s nominal GDP ranking is sixth in the world. With China’s accelerated global integration by intensifying international linkages in trade, investment and finance, the implications have been tremendous.

Rapid growth in trade has resulted in high economic growth. In fact, it is predicted that by 2020, China will account for 40 per cent of the increase July 2012  India-China Chronicle |25|

INFOCUS | INDIA-CHINA | ECONOMY

in imports from developing countries, hence enhancing world trade. And foreign investment has encouraged faster specialisation in labour-intensive manufacturing and increased employment and incomes, while reducing poverty.

To take forward the cooperation between India and China, it is important the two countries stick to some basic rules of the game in the international trade context. First is the need to firmly practice the simple principles under the WTO-MFN treatment.

Both countries need to extend national treatment to goods and services traded and to investments from the other country. Second is the issue of mutual benefit. In the original Panchsheel agreement, one of the important principles was indeed mutual benefit. The anti-dumping cases launched recently against each other do take away from this principle, and there is an urgent need for the commerce ministries in each country to sort this out mutually without escalating the conflicts.

Third is to focus on the comparative advantages enjoyed by each economy. The goods that are now being imported from China are chemical products, machinery, electronic goods, raw textiles, base metals and plants. China imports from India minerals, textiles, chemicals and jewellery. There is greater scope for complementarities in trade in goods and in services. The boom in the middle class Indian market provides a great opportunity for Chinese electronics and other fast moving consumer goods. China on the other hand is among the world’s biggest markets for processed food, natural fruits and vegetables, minerals and handicrafts.

Technical books and journals constitute another potential area for Indian exporters. Medicinal plants, herbs and tropical products find a large market in China.

Finally it is also important to take serious note of the large amounts of mutual investment that is increasing rapidly. The tourism sector has also started benefiting from visits to each other’s countries. India’s service sector is well positioned to avail the opportunities in software development and training work in China. China on the other hand has great expertise in engineering |26| India-China Chronicle  July 2012

and particularly in the construction sector, that in India is on a never before ascendance and mutual cooperation there would indeed be beneficial. The Indian capital market, banking sector and insurance sectors, with their credibility and experience will find it easy to exploit the Chinese markets while the nascent food processing sector in India can well learn from and attract investment from China with its long history in agricultural development.

With both countries sitting on healthy foreign exchange reserves and no balance of payment issues in sight, it is the right time for mutual investments to take off.

With better understanding of each

loving, lazy and laidback. The Indian economy through the decades of the fifties, sixties and seventies was seen as one that was ambling along languidly, content in its slow pace of growth and oblivious to anything that was happening in the neighborhood. It is only recently that the elephant analogy has been dispensed with. India’s economic growth is these days increasingly seen through the imagery of a tiger; hungry, competitive, combative and fast paced.

In the last twenty years, this picture has changed dramatically. For instance, in 2009-10, India received 5.9 billion dollars of foreign aid. On the other hand

of which are the national rural employment guarantee programme, the Sarva Shiksha Abhiyan and the Bharat Nirman. In gross terms, India GDP now is the third largest in the world, with a total GDP of 2 trillion dollars and the country is getting to become a super power.

What is remarkable about the 20 years of economic reform we have seen in India is that when the reform journey was started by Dr Manmohan Singh, there was great scepticism around the process. Everyone declared that these changes would land India in trouble, poverty would grow, Indian

Given india’s GrowinG trade diversity and the emerGence of some larGe Global players in the private sector, we will also soon see indian investment movinG eastwards. therefore the importance of movinG towards an asian economic Union for which some attempts have been made other’s societies, cultures and policies, aided with some robust research, this new friendship can take both countries a long way in their quest towards development and growth. A mature political leadership is already in place in both Beijing and Delhi. With a little more relaxation in norms, a little more certainty in policy and improvement in travel facilities by way of more frequent flights and easier visa regimes, this partnership contains the potential of transforming the way international trade happens today.

India’s national animal is the tiger, but the animal that is most associated with us is the elephant. For long, India has been seen as a huge lumbering beast, patient, by and large peace

up 50 times and now is more than one lakh crore rupees a year.

Also, such growth did not come to India by simply leveraging low labour costs. China and the other East Asian economies had grown fast as they all sold their low labour costs and produced cheap manufactured goods on low wage costs to make money in the export market. India instead chose to export brain intensive goods and not the labour intensive ones. Unlike China that became known for toys and machines that were mass produced using cheap labour, India became known for software exports. What is more is that software exports are actually a negligible portion of our total exports, it is the other intellectual areas that India’s exports have grown in. Exports of legal,

in the development process, china and india have shared similar experiences, and till recently, their development levels were indeed very close to each other.

51 billion dollars came through foreign investment and 54 billion dollar through non-resident remittances.

India was a really poor economy then. Per capita income 20 years ago stood at 300 dollars per annum, meaning that the average income of an Indian was less than 400 rupees a month.

Today the per capita income is at 1500 dollars, that is about 60000 rupees a year, or Rs 5000 per month. Such huge increases in income have resulted in tremendous increase in revenue income for the government, so much that there is ample money at hand to spend on schemes for the poor that are the biggest the world has ever seen, examples

companies would close down, everything would be imported and foreign firms would rule the market. None of this proved right. Poverty has come down significantly, though not fast enough. Some firms that could not compete closed down but a vast majority of Indian firms have held their own and grown to become some of the biggest companies in the world. In fact they are the ones that are now buying firms abroad. Foreign investment by India is now as much as foreign investment in India. Instead of the government reducing moneys spent on the poor, expenditure on welfare increased manifold. The food subsidy itself went

engineering and medical services, automobiles and pharmaceutical products have risen really fast.

Contrary to all expectations, India became a hub of efficient and frugal engineering, of which the Nano car is a foremost example. The other notable examples are the telecom sector where our tariff is the lowest in the world, our eye care and heart care that is carried out at a fraction of the cost in similar facilities in the West and at comparable quality levels. Most Fortune 500 companies now have set up shop in India, and a large number of them have their R&D facilities in Hyderabad and Chennai. What is also remarkable and often ignored is the fact that our stock exchange was recreated after the Harshad Mehta scam and the electronic NSE that came up was computerized even before London and New York and

the capital market has become among the most efficient around the world.

However there is much that remains to be done. If we have seen such laudable achievements on one hand, on the other hand growth seems to have bypassed poor regions where we have seen militancy grow. Dalits are still not well off, despite some phenomenal improvements since 2004 in the poorest of states. The fastest growth rates now are seen in Orissa, Jharkhand and Chattisgarh in terms of industrial growth. Inflation has been persistently high and agriculture reforms have not been carried out. The biggest problem however, is in terms of poor quality of government services. The police and the judiciary need to be augmented and modernized because in India there is no justice, and that is scary. True equality of opportunity will come only when we improve our governance, law and order. The next 20 years of reform must see improvements in these areas.

Given India’s growing trade diversity and the emergence of some large global players in the private sector, we will also soon see Indian investment moving eastwards. Therefore the importance of moving towards an Asian Economic Union for which some attempts have been made. With India’s public sector also looking to move beyond India’s borders it will be critical for policy to make this transition possible. Also what business will have to watch for is the way in which the Chinese currency will move, the pace at which Japan will recover and the opening up of various sectors in ASEAN that will allow Indian forums to spread their wings. To be able to make a mark in these emerging areas, India’s business heads will have to counter challenges on various fronts and ensure they make use of the new opportunities that are being created. 

Amir Ullah Khan is Deputy Director of the Bill & Melinda Gates Foundation, New Delhi

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