Why India's economy lags behind China's
By Ramtanu Maitra
By Ramtanu Maitra
The on-going six-day trip to China by the Indian Prime Minister Atal Bihari Vajpayee that ends on Friday contains many elements, but one of the major objectives will be to improve India-China economic relations.
In tow with Vajpayee are business leaders from 100 of the biggest Indian companies, including one of India's top five, software developer Infosys Technologies Ltd. The biggest tractor maker, Mahindra and Mahindra; the largest drug manufacturer, Ranbaxy Laboratories Ltd and the top cement manufacturer, Grasim Industries Ltd, are accompanying the premier. These industries represent the areas in which India enjoys an edge over its Chinese counterparts, and New Delhi expects to pull off business deals of benefit to India.
Comparing the Indian economy with the Chinese economy has become almost a pastime for many analysts. A majority of these economic analysts have come to the conclusion that as of the year 2003, China is well ahead of India. As The Economist of London titled its recent cover story on the subject: "India V China: A Tiger, Falling Behind a Dragon."
China's relative success over India in attracting foreign direct investment (FDI) was what tipped the balance for The Economist, although the article points out that China's figures are "inflated by 'round-tripping' of domestic investment through Hong Kong". At the same time, The Economist notes, some Indian economists claim that India's FDI figures are understated, because "they exclude foreigners' reinvested profits, the proceeds of foreign stock market listings, intra-company loans, trade credits, financial leases, and so on".
The second criterion cited by The Economist is the respective growth rates of the two countries. Decidedly, China's growth rates are much higher than India's. But the article points to some Indian businessmen and policy makers who angrily claim that China, being under a dictatorial government, cooks its books and presents a much rosier picture of its economy than reality warrants. India, with a democratic system, cannot resort to such official chicanery.
The Economist concludes that India's economic backwardness has little to do with democracy as such, but has a lot to do with corruption, fiscal mismanagement, a lack of international ambition and a history of over-protection at home. On the surface, the argument is cogent, but it is also true that corruption in China is similarly high and often, if not always, fiscal mismanagement is another face of corruption.
Significantly, however, The Economist report did not look at the respective country's investments in the physical sectors - such as manpower development, health, power, water management, railroads, roads and highways, communication etc - and hence remains highly superficial and gossipy. A comparison of investments by China and India in their respective physical economic sectors over the past two decades would have made it very clear why China is surging ahead, and India is not. It must, however, be said that India's growth rate in recent years, for which the Vajpayee government hardly deserves any credit, though highly inadequate, was better than most distressed economies of the world.
In the 1990s, following the opening up of the Indian economy with the intent of inviting foreign direct investment, foreign investors were given an open invitation. As a result, investment was concentrated in consumer durable sectors where it is quick-yielding and withdrawal is very easy. This exemplifies the fly-by-night nature of many foreign investors.
As was pointed out by Indian Planning Commission member Dr S P Gupta at a memorial lecture two years ago, India now must encourage foreign investment with a priority in infrastructure. There investment is of a long-term nature and the amount of investment needed is very high. The Indian private sector finds it very difficult to enter such heavy investment areas.
Similar views were expressed by a senior World Bank economist recently. "Since 1991, India has had a policy of attracting private investment into infrastructure," said India country director Edwin Lim, speaking at a conference in New Delhi. "While some progress has been made, India's demands for infrastructure services are still not being met. If the private sector is to play a big role in meeting India's infrastructure demands, then India needs sectoral policies and a regulatory framework that are conducive to private investment."
Since India opened up to foreign investment in the early 1990s, there has been some economic expansion. But there has been little parallel investment by successive governments in the power industry or other critical infrastructure such as railways, airlines, highways and telecommunications.
A World Bank report issued almost three years ago said, "The shortage of power is estimated at about 10 percent of total electrical energy and roughly 20 percent of peak capacity requirement." Fifty years after independence, many rural areas are still without electricity. Even measured against neighboring countries, India's per capita electricity consumption is very low - 270 kilowatt hours/year as compared to 300 for Pakistan and 480 for China.
Perhaps no single issue excites Indian industrialists more than the subject of erratic power supply. Indian small and medium-sized enterprises (SMEs), the backbone of India's manufacturing and industrial employment, are now reeling under pressure from imports. "We do not want protection," says Y P Suri, secretary of the Federation of Associations of Small Industries of India, an apex body representing SMEs. "All we want is support in terms of infrastructure."
From padlocks to electrical appliances, Chinese goods have made a mass entry into Indian markets. Chinese electrical goods flooding the Delhi market have forced over 250 units in the capital to close shop. "How can you compare us with China?" asks Suri. "Can the Indian government guarantee us the same kind of power supply that Chinese SMEs get?"
With more than 3.3 million small-scale units spread across the country and with over 18 million people employed in them, SMEs are India's second largest employer - after agriculture. But, according to the Ministry of Small Scale Industries, more than 300,000 SMEs have been sick since March 2000.
While the power shortage in India is for all to see, including those foreigners who travel only by air, India's railroads have been in a mess for decades now. At least 14 million people ride each day on the world's second largest railway system, which stretches 66,800 miles, zig-zagging up and down and across India.
"Freight traffic volume has gone up by 620 percent and passenger traffic by 514 percent since 1951, while input into increasing capacity has grown by only 200 percent," said M K Mishra, a former member of the Indian Railway board. The higher load has increased pressure on railway staff and affected safety on a state-run network inherited from the country's British colonial masters at independence in 1947. Railroad accidents have become a daily affair and, like terrorist killings in the state of Jammu and Kashmir, the deaths in railroad accidents do not raise any hue and cry from the people. No rail minister opts to resign any more. The death toll in train accidents has gone up significantly because, experts say, the outdated equipment combined with sub-standard parts on rail coaches make the railways more vulnerable to such accidents. At the same time, rail budgets have been decreasing. And the priority for every railway minister is adding a new train that connects his or her own constituency to Delhi or Mumbai or some other metro.
Ever since the Narasimha Rao government in 1991 embarked on its "liberalization" policy, the power sector has been systematically starved of funds. Not only has the private sector failed to contribute to production capacity in any significant way, but investment in transmission and maintenance of existing plants has seen catastrophic declines. As a result, even when new plants are commissioned, the problem of poor transmission networks remains.
One area where the neglect of infrastructure over the decades is most apparent is in the nation's roads network. Only 2 percent of Indian roads are four-lane, 34 percent are two-lane, and 64 percent are single-lane. Much of the problem is due to the fact that India has been spending less and less on road infrastructure. India's first five-year plan (1951-56) spent 1.4 percent of its total outlay on roads. The share gradually declined, to a mere 0.6 percent in the eighth five-year plan (1992-97). Even after 50 years of independence, nearly 50 percent of Indian villages are yet to be connected by all-weather roads.
The Rakesh Mohan Committee estimated in 2001 that the economic cost of bad roads ranges from Rs 200 billion (US$4.3 billion) to Rs 300 billion annually. External assistance is being obtained for the improvement of national highways through international agencies such as the World Bank, the Asian Development Bank and the Overseas Economic Cooperation of Japan. This is one area the Vajpayee administration has paid attention to, and is investing in quite liberally.
A similar weakness is all too visible in the Indian port system. Decrepit and bogged down by lack of modernization, Indian ports are a nightmares to importers. The old state-run Mumbai port is a classic example: it suffers from inefficiency, poor draught, low productivity, high costs and long vessel turnaround times. Mumbai's inadequacies have benefited Colombo in Sri Lanka, which is enjoying growing container volumes.
Efforts to develop India's ports have all too often been stymied by the creaking bureaucracy. For example, recent bureaucratic problems encountered in the private tendering processes at Mundra in northwestern India and in the conversion of two break bulk berths to a new container terminal at Nava Mumbai under the Jawaharlal Nehru Port Trust have slowed down the development of ports in India.
In contrast to India's neglect of the basic infrastructure, China is investing its surplus in railroad, power, road and water management in a concerted way. There is no question that China still lacks adequate infrastructure, but it has understood clearly the importance of modernizing its basic infrastructure to generate employment and adequate utilization of its vast population.
Indian policy makers, and some economists, on the other hand, give the impression that India's strategy to accelerate growth is to leapfrog past technologies through its information technology (IT) acumen. India's services sector has seen a steady increase in growth rates, share of GDP and contribution to GDP growth. More than half of India's GDP growth in the 1990s came from the growth of the services sector.
It is one thing to applaud the contribution of IT - with its minimal requirement for infrastructure - to the Indian economy at this time. It is quite another matter, and potentially disastrous, to pretend that boosting IT is a development strategy. IT cannot move a slow-moving economy, burdened with a massive shortfall of infrastructural development, a huge number of illiterates, crippling poverty and very high unemployment and under-employment. As the International Finance Corporation's 2001 report, "Leapfrogging India's Information Technology Industry and the Internet," put it, "while the technology offers considerable promise for India, it will have to be combined with more widespread reforms if the promise is to be realized."
The real bad news lies elsewhere. India's agricultural sector, which continues to employ about 60 percent of the country's workforce, has seen a real decline in terms of its contribution to GDP growth and its share of GDP. India's industrial sector has not been able to replicate the growth magic of the services sector either. While industry's share of GDP has increased over the years, its growth rate dropped in the 1990s and its contribution to GDP growth has more or less remained constant over the years. Data show that six major industry groups - food products, cotton textiles, textile products, wood, paper and basic metal and alloy industries - have experienced a sharp slowdown over the past four years.
Overall, as industrial development was divorced from efficiency and productivity, India's ability to compete globally has been seriously compromised. By contrast, during the same period, Chinese manufacturers became increasingly competitive. Infrastructure has made all the difference.