What is the issue?
- Chinese economy has rose to a position of dominance in international trade from humble beginning just about 50 years ago.
- Considering the similarities at the start and the size of their populations, India has much to learn from the Chinese story.
How does China’s and India’s growth fare?
- History - China and India started rebuilding their economies as independent nations in the 1950s, with India having a greater structural advantage.
- Both economies struggled after the initial euphoria and faced tremendous challenges in tackling a burgeoning population and a very poor growth rate.
- Significantly, the same time saw Japan, Germany and South East Asian countries seeing miraculous growth rates.
- Excessive government control, corruption and civil dissatisfaction were proving to be a serious menace in both.
- Growth - In 1978, after the death of Mao, China liberalised its economy, by inviting foreign capital and promoting its coastal areas for investment.
- Also, agriculture was freed from state control and “One-child policy’ was introduced to reduce population.
- Today, China is a $12.5 trillion economy - the 2nd largest in absolute terms and the largest in PPP terms.
- India took to liberalisation in 1991 after an economic crisis and grew at around an impressive 8% per annum from then.
- But with a $2.5 trillion, it is currently way behind China.
How did China’s case evolve?
- China first focused on labour-intensive industries to create jobs for its huge labour force — textiles, garments, toys, assembly lines, electronics etc...
- It created multiple “Special Economic Zones” (SEZ), where large tracts along the coast were provided with a differential pro-business ecosystem.
- It soon attracted over massive FDI and become the factory of the world and the largest global importer and exporter.
- With liberal bank lending, it also enabled the growth of large firms which could invest and sustain a virtuous economic cycle.
- Also, a decentralised economic model that empowered provinces to make many economic decisions, helped reduce bureaucratic bottlenecks.
- China invested massively in skill development and higher education, promoted urbanisation by nudging over 400 million towards cities.
- Through mercantilist policies, it created a foreign currency kitty of over $4 trillion and managed its currency to keep its advantage.
How is this in contrast to India’s?
- Contrarily, India incentivised capital-intensive industries and missed focusing on job creation in the initial years.
- India championed the romantic notion of rural villages, failing to understand that rapid urbanisation and effective city governance was the future.
- Also, its policy of reserving many goods for the MSME sector and the regressive labour policies inhibited free business.
- Notably, only an effective 4.7% of India’s GDP was invested whereas the need was at least 6.5%, which was 8.5% in China’s case.
- Resultantly, India’s supply-chain costs are at 14% of GDP in contrast to China’s 6%, which makes India highly uncompetitive.
What is the way ahead?
- While GST is a good move to boost trade, huge investment in infrastructure and job creation is need for bettering the entire eco-system.
- Removing restrictive labour regulations and reducing corporate taxes to 25% for all and special tax breaks for select industries needs to be considered.
- Increasing investment to at least 6.5% of GDP, release divestment in state-owned mature infrastructure assets would also help.
- Bettering port, power, highways and rail infrastructure and investing in higher education for developing human capital are essential.
- Promoting innovation by providing considerable autonomy to research institutions and investing in urban governance is another priority.
Source: The Indian Express
