The western chief executive of one of the large foreign banks in Hong Kong, having previously run one of the Hong Kong trading houses in Bombay, says that for the last 10 years people have been trying to answer the question as to whether India or China is ahead economically. “In India in the mid-1990s, whenever China was perceived to be getting ahead there were endless lunches and sessions debating this. The net result was that nobody could agree which economy was doing better.The debates usually ended in a 15-15 draw.”
His very much non-attributable view is that China leads for two reasons: lack of democracy and successful control of population growth.
China has enjoyed many years of stronger economic growth, averaging almost 10% a year since market-oriented reforms began in 1978. India has grown at an average of 6% since 1992 when the country embarked on economic reform after a 1991 balance-of- payments crisis.
Chinese inflation is a fraction of that in India. It has an annual current-account balance of $16 billion, India a small defficit. China has $156 billion of reserves, India $35 billion. China’s population is growing at half the Indian rate; its per-capita GDP, at $3,275, is well ahead of India’s. Life expectancy is longer by almost 10 years in China than in India; it has one doctor for every thousand people against India’s one per 2000. And China has 11 people per telephone compared with 45 in India.
Yet in theory India should be much better off than China, partly because India was ruled and developed under the British legal system which gave the country high educational standards and widespread spoken English. Indeed, India may well become the IT back office of the world, allowing it to benefit from the dynamism and growth of the US economy. It’s not just Indian software companies that are thriving but also IT-enabled services such as data processing and call centres. From a modest base, exports in these sectors are growing by 50% per year. Entrepreneurial Indians are heading home from Silicon Valley to Find a dynamic capital market waiting for them, replete with venture capitalists and IPO investors.
The difficulty has always been that if democracy and the British legal system are applied to an emerging market such as India it is, as one foreign banker puts it, “a catastrophe” because nothing moves, nothing gets done. Bureaucracy, political squabbles and lingering resentment against imperialism have hampered the inflow of foreign direct and portfolio investment.
The reason, for example, that building roads in Bombay is a Herculean task is that the city is built on a peninsula and the interests of the Fishing community are paramount. In probably any other city in the world that Fishing community would have been relocated – but not in India. “In China, if people are told to move, they move because they expect nothing more” says a foreign banker. It takes a maximum half-an-hour on the highway from Beijing Airport to downtown compared with up to two hours from Bombay airport to the Gate of India. A recent IMF/Asian Development Bank report suggests that infrastructure bottlenecks will constrain Indian GDP growth to 7% or below unless huge investments are undertaken by the public and private sectors.
Bankers see the same bottlenecks in the Indian Financial system. One complains that for a bank to bring a lawsuit in India “takes a thousand years. India will always be dragged back to delivering at 80% of potential. Twenty years from now China will be an economic superpower for sure. India will carry on changing its governments and face periods of stalemate. China will grow at 7% to 10% for the next 20 years whereas India may grow sometimes at 8% to 10% but sometimes at 1% to 2% – compound that up and China’s overall speed of growth will be double or treble that of India.”
But note too that China’s control of its population growth rate is a double-edged sword. It is creating a demographic/pension liability nightmare. Economists are beginning to refer to it as the emerging “4-2-1” syndrome. The vision is that within 15 or 20 years there will be millions of individuals (1) burdened with providing social support for (2) parents and (4) grandparents.
