India's China challenge
December 18, 2003
China: you only have to mention the name to attract two extremes of reactions in India: wistful admiration or cynical disbelief. Either way, it's fair to say that China has emerged both as a monster-sized bogey and a model factory to the world, more so after it chose to opt in to the world trading system.
Most Indian businessmen are well informed about China's miracle and what has contributed to it; it's clear that while entrepreneurs are willing to emulate the best practices of the Middle Kingdom, the keys still lie in the realm of public policy -- infrastructure, flexible labour laws, tariffs and so on.
But with its own difficult and halting reforms programme, the recurrent question for India is where it will stand in world reckoning and what it needs to do to emerge as a competitor for global capital.
Some clues lie in the reservations that are currently being asked about whether China will be able to sustain its rapid growth rates over the next quarter-century. In the course of an excellent presentation to the students of the Indian School of Business in Hyderabad last week, Kenneth J DeWoskin, Partner, PriceWaterhouseCoopers, a veteran of over 35 years in China, pointed to two issues.
One was the fact that corporate ownership still lay overwhelmingly with the state, a fact that it recently emphasised when the government reasserted ownership over the country's top 200 corporations. "This may have been an advantage in the early low-tech stage of development," DeWoskin said, but it could prove a drawback for the future.
It manifests itself in such practices as preferential lending to state enterprises and, as crucially, in policy decisions. Since state security interests are not always separate from commercial interests, you get a situation where, for instance, the Chinese leadership is reluctant to license 3G telecom technology because it competes with state-owned telecom corporations that operate CDMA technology.
In that respect, India could gain major advantages if it ramped up its divestment programme -- which has consistently fallen short of target since 1992 and has kept the government a major player in oil, telecom, heavy engineering and civil aviation.
So far, the debate in divestment centres on the government's need to tackle the fiscal deficit. But other enduring gains can be starkly seen, for instance, in car maker Maruti, which has emerged as an R&D hub for Japanese parent Suzuki's 'Asian car project' a little over six months after it acquired majority control.
Another possible issue for China could lie in its biggest strength today: manufactured exports. DeWoskin points out that of the huge exports out of China, the value-addition by Chinese firms is relatively low -- fully-owned subsidiaries of foreign firms account for as much as 61 per cent of the value addition on exports out of China.
An opportunity for India? With the world's third-largest scientific manpower base available at roughly a third of the cost, everybody admits there is potential but the question is whether domestic industry has the wherewithal to absorb this in a meaningful way.
The recent hyper-growth in earnings on IT services and BPO (which show on the 'invisibles' account), suggest that it is more than possible if Indian corporations are ready to sink more money into indigenous R&D.
Later in conversation, DeWoskin suggested two 'non-commercial advantages' that China has reaped in its hyper growth. One is from its extremely flexible labour practices, which allows Chinese corporations to downsize at will or provide cheap labour for global corporations.
As DeWoskin points out, "China does have labour protection laws, they're just not enforced because the state often owns companies that practices these laws." Overall, poverty (though that is a relative term in the Indian context) and lack of recourse have made labour an extremely cheap input in China.
India, of course, suffers the opposite problem where rigid labour laws make it difficult for corporations with established organised workforces to downsize rapidly -- and crucial amendments to allow for this have inevitably fallen victim to realpolitik.
Finally, there is China's matchless 'advantage' of near-free capital. This is showing up in the enormous non-performing assets -- officially roughly 23 per cent, unofficially as much as 50 per cent of advances.
Either way, the figures are humungous compared to India's modest 5 to 7 per cent and suggest that the country can stand to gain substantially from its patient but deep-rooted financial sector reforms. HSBC's recent acquisition of a stake in UTI Bank points to the opportunities here.
Some businessmen suggest that less democracy would do India good. This is a tempting argument but doubtful at best. In post-medieval Europe, democracy emerged not because of the altruism of its rulers but because it was the most efficient form of government for the emerging capitalism of the time.
For those who point to China's example, it is worth considering that China has had authoritarian governments from the latter half of the last century -- and it faced desperate poverty under one (Mao) and moderate prosperity under the other (Deng and onwards). What distinguished the two was not form but quality of governance.
The irony about the current debate is that as much as Indians feverishly compare their country with China, it's doubtful whether the Chinese leadership or its people actually care to compare themselves with India -- indeed, the Chinese have progressed so much since 1977, that they don't feel the need to compare themselves with anyone at all.
rediff.com
10 reasons why China is ahead of India
Priya Ganapati | December 17, 2003
What sets China apart from India and is there more to it than meets the eye when it comes to China's growth figures?
Some leading corporate leaders from Asia debated on this at a conference recently held at the Indian School of Business in Hyderabad.
The emerging markets of Asia hold the promise for the world's corporation. India and China are the two key markets in Asia.
But China today leads India significantly. It gets ten times as much foreign direct investment as India does and its economic growth rate is much faster than that of India.
India has been showing a gross domestic product growth of an average of 5 per cent for the last five years. In contrast, China has averaged at least 9 per cent growth.
With China threatening now to become a force to reckon with even in information technology services, Indian corporate leaders are examining why China ranks better than India and what are its (India's) weaknesses.
In the first part of this series, we look at the ten reasons why China is ahead of India.
In the second and concluding part we will look at whether there is more to China's economic growth numbers than what meets the eye.
Here are ten reasons, according to the experts, why China is ahead of India.
#1. An authoritarian government
"Once committed to a focus on economic growth, some good policy decisions were implemented quickly and efficiently. From the time Deng (Xiaoping) set the direction 25 years ago, it has not been altered by party politics, ideology or leadership changes," says Kenneth J Dewoskin, Senior Consultant, PricewaterhouseCoopers (China).
While India's corporate leaders agree that this could be true, they are emphatic that India's vibrant democracy is the only way for the country to ensure that growth and development reaches all.
"There is chaos in it and sometimes policy decisions tend to be reversed. But ultimately India's democracy is essential for the country's welfare," says Lalita Gupte, Managing Director, ICICI Bank.
#2. High savings rate
According to Dewoskin who has been involved with China for the last 40 years, China has a high savings rate, which is recycled and concentrates wages paid to workers into four large state banks.
This capital is in turn directed by the leadership, which concentrates this available capital into key projects.
This capital has consistently financed more than 85 per cent of China's infrastructure investment.
#3. Investment in models and showcases
China's leadership has always focused on investment in models and showcases. All this has helped canalize foreign direct investment into the country and helped create local economic development.
For instance, Shenzhen and Zhangjiagang were developed into fantastic models that could help sell not only the region, but also China as a whole to investors.
China created awe-inspiring gateways for visiting foreign investors: the Beijing and Shanghai airports, Pudong Development Zone, and Beijing's Financial Street are just a few examples.
How India and China compare
China
India
Population (2002)
1.28 billion
1.05 billion
Population growth rate (%) 2002
0.87
1.51
Average real GDP growth rate % (1990-2000):
9.6
5.5
Foreign direct investment (2001)
$44.2 billion
$3.4 billion
Population in poverty (2002)
10%
25%
Size of Diaspora:
55 million
20 million
Computer penetration per 1000
14
7
Infant mortality per 1,000 live births (2002)
27
61
That model has helped many companies who were tentative about China make up their minds about setting up a centre there.
Ganesh Natrajan, CEO of Zensar Technologies recalls how his company was wooed to set up a centre in China.
Zensar was wooed by Zhuhai, a tiny city in South China's Guangdong province. The city's mayor rolled out the red carpet for the company, laying perfect roads, building the software park and putting all the facilities in place even before company officials could visit the city for the first time.
The result was that when Zensar officials made the trip to Zhuhai they were greeted with impressive facilities that convinced them immediately to set up a centre there.
Now when was the last time India pursued any investment so aggressively?
#4. A consistent and thoughtful marketing effort
China has sold itself on a single point: the size of its market.
"Every businessperson of any size anywhere in the world knows what the number 1.3 billion means: China's big market. How many know the population of India? Chinese leaders discarded their Mao suits immediately and put on coats and ties, talked the language of commerce, organised thousands of delegations, hosted endless conferences and exhibitions, and laboured to convince foreign investors that China was pro-business, stable, and committed to reform and an open-door policy," suggests Dewoskin.
According to him, leaders like Zhu Rongji mounted the world stage as a leader who was all about business and nothing else.
In contrast, India's corporate leaders agree that the country's politicians have never sold the country.
Much of the investment flowing into the country today is on the back of India's reputation as a place for skilled people who have proven themselves in the information technology services sector.
#5. Creation of zones and infrastructure for businesses
China has created many flexible investment zones, export processing zones, free trade zones, high tech zones, complete with tax incentives and good infrastructure.
India has tried to replicate this with its creation of export processing zones and software technology parks.
But the difference lies in some key areas like creation of infrastructure and quick approval of investment proposals.
#6. The business-above-all attitude
"China has had the good fortune of having Hong Kong and Taiwan outside its political control for decades or centuries but within China's ethnic and investment family," says Dewoskin.
"China always set aside political, social, and ideological differences in the interest of getting investment, technology, and export channels," he adds.
However, in India, trade and economic growth have never been paramount.
India's economic growth has always given in to the sentiments of the local industry; like in cases where foreign investments have been curbed or restricted.
#7. A passionate Diaspora
Much of the 60 million Chinese who live outside the country are economic forces to reckon with. But they also give back heavily to their country in terms of remittances and investments.
China has recognized the importance of its Diaspora and has worked to cultivate it. The Chinese government has a special cabinet ministry to deal with the overseas Chinese matter.
Incentives are offered to Non-Resident Chinese to come to China and participate in various socio-economic activities of the Mainland. The current economic boom in southern China, for example, is largely due to the capital investments made by overseas Chinese entrepreneurs.
In the case of India, there has been a lack of consistency in government policy towards Non-Resident Indians.
India thus needs to harness the knowledge and capital of the Diaspora and develop plans on how NRIs can contribute to the country's economic growth.
#8. A strong manufacturing base
China has become the world's manufacturing hub.
The shelves of giant store chains like Wal-Mart are testimony to the fact that msot of the low-cost products today are made in China because it offers the cheapest source of manufacturing.
In electronics and hardware, China is the manufacturing hub for companies like Siemens and Hitachi Global Systems.
China's success in manufacturing has attracted companies from other sectors too. Michelin, the world's biggest car tyre manufacturer, plans to make its Chinese operations its biggest global manufacturing base.
The strong manufacturing base means that China is able to offer employment to a larger section of its population, compared to India which has shown growth predominantly in the services segment.
#9. Ability to respond quickly
"China is very fast and efficient in the redirection of resources into higher education, economics, management, computer science, electronic and biotech engineering, and law," suggests Dewoskin.
"It has a permissive and supportive policy to study abroad, coupled with an aggressive marketing and incentive programme to bring stronger graduates back," says Dewoskin.
In contrast, India has yet to counter the problem of brain drain or promote itself as a destination for entrepreneurs who want to set up companies.
#10. Putting Chinese interests above everything else
China has had a stubborn set of investment policies that opened some doors, shut others, forced technology transfer and permitted liberal IPR (intellectual property rights) appropriation, says Dewoskin.
rediff.com
Part II: Why India can match China
rediff.com |
