The Indian Economy Blog

December 7, 2005

India Ain’t That Far Behind

Filed under: China,Regulatory reforms — Amit Varma @ 10:52 pm

Tim Harford brings my attention to a post by Johan Norberg, the author of “In Defense of Global Capitalism,” about China and India. Norberg writes:

China has an advantage since it begun liberalising its economy 13 years before India. But China´s hidden weakness is the massive and often centrally planned investments, which are often less productive than the Indian investments. In the long run, that´s not going to work without more open competition, creativity and entrepreneurship. India´s hidden strength is that the country is already extremely entrepreneurial – but in the informal sector. An Indian friend mentions that most of the cars we see on the roads, and many computers in the offices, are assembled in small, informal factories, outside the law, to avoid the many regulations and taxes that still curbs the Indian economy.

Imagine what the Indians could do if all that energy was legalised. In that case the Chinese have good reasons to see them as serious competitors.

Bang on. In fact, I believe that India has been ideally placed to become a manufacturing superpower for a while now, instead of doing relatively well in services. Our strengths are ideally suited to labour-intensive manufacture (textiles, for example; link via Abhinay), but the impediments to industry and entrepreneurship placed by an oppressive government have held us back for decades.

Harford, in his excellent World Bank blog, thinks that India is, nevertheless, not too far behind China. He writes:

What are the barriers to doing business in India and China? Actually, they are still high in both countries. The Doing Business database ranks China a modest 91st on the overall ease of doing business, with India worse but not dramatically so at 116th. Looking in a little more detail, in China it’s quicker to start a business, get goods from factory floor on board a container ship, and register property. But Indians – perhaps surprisingly – seem to have more flexible labour laws and fewer hassles with licences. [Link in original.]

That last statement takes me aback a bit; I don’t know enough about China, but if their labour laws and licence requirements are worse than India, they must be pretty darn bad! Do check out the graph below, courtesy Tim’s blog. And please comment!

China v India

18 Comments »

  1. Tim hartford’s article actually reminds me of how cars in india started to run on LPG cylinders (that was used for cooking)..although not exactly legal, it was a brilliant idea to get more mileage ..all it needed was some kind of a converter to enable petrol engines to run on LPG..with LPG being heavily subsidized, it was a boon for car owners..

    I am not sure if such cars still run in india..

    Varun

    Comment by varun — December 8, 2005 @ 1:30 am

  2. Johan Norberg wrote
    “An Indian friend mentions that most of the cars we see on the roads, and many computers in the offices, are assembled in small, informal factories, outside the law, to avoid the many regulations and taxes that still curbs the Indian economy.”
    This does not seem accurate to me.
    Which car brand is assembled in an “informal factory”?
    The only thing that comes close that i have seen in india is a vehicle comprising of a diesel engine on a wooden board with 4 wheels (no suspension not even the leafspring)and which was used in the villages only to carry goods around.

    Regarding biege box ie Noname PC assemblers.
    The ‘assembly labor’ component in the price PC is very low(much lower than a car’s)
    There may be a few people doing there but thats not a big market.
    Where is the motherboard manufactured or the CPU or the harddrive or RAM?
    These things are harder to manufacture and design and thats where the value is.

    India has huge challanges. poor literacy rate being one of them the most challenging.
    Even an assembly worker worker has to be literate to operate machines(which is the way all manufacturing is headed.) and change jobs may be 8-9 times in his 40+ yrs of working life.

    Comment by Guru Gulab Khatri — December 8, 2005 @ 5:43 am

  3. The thesis that India, as a relatively more open polity will “win” over the long term has been advanced by several writers, thinkers and economists. The idea that China’s centrally planned investments are going to be less productive in the long run, though, is not neccessarily correct. One big issue is the lack of historical precedent for China’s success. The one major experiment in central planning – Russia – was a spectacular disaster, and perhaps several commentators have that at the back of their minds. The other issue is the Western world’s fondness for individual liberty and democracy, and the implicit belief that no society that supresses those can succeed in the long term. The reality of China, I think, is far more nuanced.

    a) The massive new state investments in China are predominantly in the infrastructure sector, which is as it should be. True, most companies are still fully or partially state owned, but through JVs with foreign partners and IPOs, China is ensuring that as these companies are privatized, they also become competitive globally. A case in point is the financial sector, where the major state owned banks are being slowly privatized via IPOs, but not before they’ve been reformed internally (with help from several foreign banks) so that they can compete. In the new technology sectors, China is encouraging entreprenuership – witness Alibaba.com – as it realizes that is the only way to go.
    b) On my periodic visits to Beijing (I was there two weeks ago), what strikes me most is the pace of construction. And here’s the thing – construction of housing estates, office blocks etc is all done by private companies like Hutchison Whampoa, and they sell the properties in the normal commercial manner. However, the infrastructure projects are funded by the government.
    c) The biggest bugbear for most commentators, I think, is China’s success inspite of having a social structure that inhibits individual expression. Here again, the Chinese have a long term view. They have realized, looking at Hong Kong, that as long as people continue to better their standard of living, they’re not going to really bother about not being able to criticize the government. However, as it becomes a developed nation, people will demand a greater say in running their own affairs. To that end, they’ve started experimenting with limited democracy in the countryside, with a view to find a democratic model that will suit them in fifty years time.

    As regards the issue of firing workers – the report cited may be right, and it may take longer to fire workers in China, but the important thing is that the Chinese worker cannot go on strike.

    To sum, then, I think the people who say that over the long term, India will go ahead of China, are ignoring both the pace and details of reform in China. Besides, they also ignore the fact that the Chinese have always had a long term view.

    I’ll give an example. Four years ago, I was at a conference in Beijing, where a Chinese minister was giving a talk. He said that in twenty years, China hopes to develop ten megacities – urban conglomerates of fifty million people each – so that almost half the Chinese population by then will live in urban areas. The reason for this, he said, was that as China develops, agriculture will become an increasingly smaller part of the GDP, and people would move to cities anyway. The government wants to pre-empt that process and make the cities the centres that drive development. I recently went to Chonqing, and I could see what he meant. That’s a city being developed keeping 2020 in mind.

    Comment by Aniruddh Gupta — December 8, 2005 @ 6:19 am

  4. [...] h, 2005 by Amit Varma

    Johan Norberg, in a follow up to the post I discussed here, writes: On the Indian highways we made 40 kilometers/hour when we were luc [...]

    Pingback by The Indian Economy Blog » Blog Archive » Accountability And Incentives — December 8, 2005 @ 1:35 pm

  5. China has an excellent population control policy– the most humanitarian act by the chinese government. Imagine if China did not have the one child norm: It would probably have millions of more people living in poverty, and their economy — in per capita terms — would be similar to Indian economy. It’s really unfortunatethat India cannot force a one child norm.

    Comment by sv — December 8, 2005 @ 1:55 pm

  6. Apropos sv’s comment (#5) re China’s
    humanitarian (sic) policy… is this sarcasm of the more subtle sort?

    Regardless, here’s my take on this entire population issue..
    http://indianeconomy.org/2005/10/07/the-population-non-problem/

    Comment by Prashant Kothari — December 8, 2005 @ 2:25 pm

  7. Cross-posting my comment from PSD Blog:

    The Doing Business indicators use specific, representative cases with the aim of producing indicators that can guide reform. Rather than concluding ‘licensing is bad’ you can point to specific regulations that need improving.
    The price of this is that you have to choose some case to represent everything. In the case of licenses, Doing Business measures the difficulty of getting permits for a construction company to build a standard warehouse.
    The methodology is supposed to be fully transparent and it’s here: http://www.doingbusiness.org/Methodology/Licenses.aspx

    Comment by Tim Harford — December 8, 2005 @ 10:36 pm

  8. Nice lectures on what leading economists think about China and India

    http://chicagogsb.edu/multimedia/chinaindia.aspx

    Comment by ik — December 8, 2005 @ 11:30 pm

  9. Regarding sv’s comment #5

    China has an excellent population control policy– the most humanitarian act by the chinese government. Imagine if China did not have the one child norm: ….It’s really unfortunatethat India cannot force a one child norm.

    A recent WSJ had a front page article on how humanitarian the forced abortion of fetus can be. Per capita is not the only thing in life…couple of children can bring joy to life too.

    Comment by Chandra Dulam — December 8, 2005 @ 11:33 pm

  10. China benefits from its undemocratic style of functioning. It has repeatedly shown us that it can change itself dramatically whenever it wants to. And in China, the forces of change are far better controlled by the government than they are in India.

    So when China decides that some aspects of the way things are done are really putting them at a disadvantage. they might clamp down hard. Hell, which other country on the planet is building a new thermal power plant every 5th day? In comparision, India has been dithering about one 2500 MW plant for the last 9 years.

    Thanks to this delay, Urban Maharashtra today faces 3 hours of daily loadshedding while rural Maharashtra faces upto 12. And this is a state that boasts of being the most industralised in the country. Calculate the costs to the economy here. And while there has been talk of so many more plants, MoUs were signed (most in 2005) only when the gaping disparity between supply and demand has achieved damaging proportions threatening to stunt economic growth of the state.

    The point is, despite its gargantuan proportions, China tends to be fleetfooted. And at the same time, India is much more like the elephant that western stereotypes associate it with. Though I’d stick with democracy anyday, we seriously need to tighten up the bureaucracy and loosen up the license raj further if we want to gain a distinct advantage over China.

    Despite all the benefits that the Chinese system gives them, I’d really worry when they become a democracy. And the change might not be far away either.

    Comment by Alok Patel — December 9, 2005 @ 1:02 pm

  11. “couple of children can bring joy to life too”

    May be for the parents. But how about the children and their joys? I read a news item during the Mumbai floods about a poor construction worker stranded with FOUR small kids. What’s she thinking? Why is she having four kids? If it’s China, there will be THREE less kids living a miserable life.

    There was another news about a woman in Orissa selling one of her kid because she can’t afford to raise him. If she had stopped with just one kid, there was no need for her to sell kids.

    There is nothing wrong in forcing a one child norm because it prevents millions to be born into a miserable and hopeless existence.

    Comment by sv — December 9, 2005 @ 6:23 pm

  12. Article from McKinsey Quarterly (free access till Dec 16, 2005):
    When to make India a manufacturing base
    http://www.mckinseyquarterly.com/links/20030

    Excerpts:
    “India leads the market in offshored back-office services, but as a manufacturing center it lags behind China, Thailand, and the rest of Asia (Exhibit 1). The reasons are well documented: multinational companies operating in India must overcome erratic electricity supplies, poor roads, and gridlocked seaports and airports while contending with government policies that discourage hiring and hold back domestic demand for goods in many sectors.”

    “Automakers in developed markets must contend with twin pressures: to innovate and, at the same time, to reduce costs. On the one hand, they must not only develop expensive new features to please consumers but also ratchet up their environmental and safety standards; on the other, the base price of a car is expected to remain flat over the next decade. This combination of factors is pushing companies to source more components from places where costs are lower. McKinsey analysis suggests that, as a result, outsourcing in this sector could be worth $375 billion by 2015, up from $65 billion in 2002.

    We think that India could capture up to $25 billion of this amount, to become (along with China, Mexico, and Thailand) one of the developing world’s top sourcing bases. Already, out of a sample of more than 400 Indian suppliers, 80 percent have ISO 9000 certification—the international standard for quality management.”

    Comment by Badri Hiriyur — December 10, 2005 @ 12:14 am

  13. [...] s salaries,” says McKinsey & Co partner Noshir Kaka. Quite. As I’d mentioned here, our strengths are much more suited to labour-intensive manufacture than ser [...]

    Pingback by The Indian Economy Blog » Blog Archive » Running Out Of Knowledge Workers — December 13, 2005 @ 4:19 pm

  14. [...] build infrastructure? (tags: India China Economics Economy Language English Investments) The Indian Economy Blog » Blog Archive » India Ain’t That Far Behind China ha [...]

    Pingback by HawkEye » links for 2005-12-16 — December 18, 2005 @ 1:20 am

  15. definettly these days china is ahead of INDIA in many aspect but if any one want to know the real capacity, the real streangth of INDIA go back in history when there were no colonialism when all nations got equal chance to grow up to 17th century indian population was one third of world poplation and chinese population was one fourth ane their respective contribution in world GDP was also one third and one fourth then how can anyone say that chinese are better then indians let the indians get the chance ,let the ondoans avail the chance what chinese have achieved till now is only because of political scenario in the time of cold war and when cold war finished i mean after cold war whatever india started india is faar faar ahead of china in that field take any example from nuclear power to in fornation technology

    Comment by shekhar suman — November 18, 2006 @ 2:39 am

  16. There is nothing wrong in forcing a one child norm because it prevents millions to be born into a miserable and hopeless existence.
    ——————————————————————
    Who determines what is hopeless or miserable? I may believe that human existence itself is hopeless and miserable. Hence, having children would be regarded as a crime.

    A state that changes my core identity from the child of my parents to the slave of society is inherently evil.

    Comment by Sanket — December 6, 2007 @ 9:31 pm

  17. How can India become a superpower if it isn’t even recognized as a regional power yet? They may eventually have a better economic ground than China eventually, but never do I think any time soon it will become a super power. Since India barely influences the world in any way so far – a new economic force EVENTUALLY? Yes.
    - Super power? I doubt that.

    Comment by KingR3a — July 9, 2008 @ 4:20 am

  18. This super-power is nothing more than a ploy to open up the economy for abuse by ‘global powers’. India does not have penis envy with other super power wananbes. The ruling elites have thus far resisted the temptation to pull down the pants at the cost of the rural populace. Lets just keep it that way. Let somebody else inflate their currency and disenfranchise their population.

    Comment by goldwinner — July 9, 2008 @ 9:55 pm

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