The Indian Economy Blog

January 26, 2006

Lessons from India for China?

Filed under: Business,China — Reuben Abraham @ 9:33 am

Yasheng Huang of MIT and Tarun Khanna of Harvard created quite a stir back in 2003 when they suggested in a widely discussed Foreign Policy article that India’s chaotic development model may actually outstrip China’s in the long run. Yasheng Huang is back with an op-ed in the Financial Times in which he points to what China can learn from India’s quiet rise. Here are some of Huang’s observations about the state of the Indian economy.

From April to June 2005, India’s GDP grew at 8.1 per cent, compared with 7.6 per cent in the same period the year before. More impressively, India is achieving this result with just half of China’s level of domestic investment in new factories and equipment, and only 10 per cent of China’s foreign direct investment. While China’s GDP growth in the last two years remained high, in 2003 and 2004 it was investing close to 50 per cent of its GDP in domestic plant and equipment – roughly equivalent to India’s entire GDP. That is higher than any other country, exceeding even China’s own exalted levels in the era of central planning. The evidence is as clear as ever: China’s growth stems from massive accumulation of resources, while India’s growth comes from increasing efficiency.

An economic litmus test is not whether a country can attract a lot of FDI but whether it has a business environment that nurtures entrepreneurship, supports healthy competition and is relatively free of heavy-handed political intervention. In this regard, India has done a better job than China. From India emerged a group of world-class companies ranging from Infosys in software, Ranbaxy in pharmaceuticals, Bajaj Auto in automobile components and Mahindra in car assembly. This did not happen by accident. Although it has many flaws, India’s financial system did not discriminate against small private companies the way the Chinese financial system did.

With few exceptions, the world-class manufacturing facilities for which China is famous are products of FDI, not of indigenous Chinese companies. Yes, “Made in China” labels are still more ubiquitous than “Made in India” ones; but what is made in China is not necessarily made by China. Soon, “Made in India” will be synonymous with “Made by India” and Indians will not just get the wage benefits of globalisation but will also keep the profits – unlike so many cases in China.

Pessimism about India has often been proved wrong. Take, for example, the view that India lacks Chinese-level infrastructure and thereforecannot compete with China. This is another “China myth” – that thecountry grew thanks largely to its heavy investment in infrastructure. This is a fundamentally flawed reading of its growth story. In the 1980s,China had poor infrastructure but turned in a superb economic performance. China built its infrastructure after – rather than before – many years of economic growth and accumulation of financial resources. The “China miracle” happened not because it had glittering skyscrapers and modern highways but because bold economic liberalisation and institutional reforms – especially agricultural reforms inthe early 1980s – created competition and nurtured private entrepreneurship.

Admin update: Read a short interview with Huang and Khanna as a follow-up to this article.

25 Comments »


  1. With few exceptions, the world-class manufacturing facilities for which China is famous are products of FDI, not of indigenous Chinese companies. Yes, “Made in China” labels are still more ubiquitous than “Made in India” ones; but what is made in China is not necessarily made by China. Soon, “Made in India” will be synonymous with “Made by India” and Indians will not just get the wage benefits of globalisation but will also keep the profits – unlike so many cases in China.

    Sounds a positive and and interesting statement. Wonder when will India made products will start being more sold than Chinese made products

    Comment by Rahul M — January 26, 2006 @ 10:32 am

  2. what jingoistic crap..indian produts mostly suck….barring the IT “coolie” programmers and BPO night workers, what positive there is in indian market..
    Stock market in bubble territory primed to fall more than 50% that will wipe out the housewives/kids: the new retail investor in india..money supply is growing at more than 16%…current account deficit is creeping upto 5% of GDP…total budget deficit is near 10%…Oil bill is going to soar. When IT/Housing bubble bursts, india will be back
    to the old days..

    Comment by sanjay — January 26, 2006 @ 7:36 pm

  3. To borrow a quote from Xerxes Desai, ” We may not be able to make the made in india a preferred brand ,but, we must definitely not make it a deferred brand ” .

    What i personally infer from this point is that , we are at a stage where we can really prove that Indian made goods are not of lower quality as they are generally perceived to be . It would of course be unreasonable to try and produce goods that are of the tier 1 category and deem it to be a success.Strides are to be made by playing sales person selling a more generalized,more innovative product that quintessentally services the needs of the masses , the world over .

    Chinese goods that have flooded markets , have not on most occasions left an impression of a “preferred brand” .We can correct that aspect during our climb to being a manufacturing hub.And the time to prove it is now.

    Comment by Ashwath — January 26, 2006 @ 9:07 pm

  4. Can anyone explain the paradox of Mr. Huang’s first paragraph quoted. Even if one assumes India businesses are more efficient than Chinese, I would think its marginal at best. Then how does India continue to grown 7-8% with little FDI and terrible infrastructure and with exports level (and growth) that is nothing to crow about? India’s higher consumption, relative to GDP, probably explain a bit of it. But else does? Or am I discounting efficiency gains to easily? Edward’s post on productivity gains show India’s are modest.

    Comment by Chandra — January 27, 2006 @ 3:08 am

  5. “From April to June 2005, India’s GDP grew at 8.1 per cent, compared with 7.6 per cent in the same period the year before.”

    This is a meaning less statistic the growth difference is not significant also the sample time is too short. Pakistan’s gdp grew faster than India last year, China’s was faster still.

    Comment by epoch — January 27, 2006 @ 3:40 am

  6. Growth led by consumption cannot last, while investment (no matter how inefficient they are) pays off in the long term.

    I don’t doubt that Indian can create superior products that are truely made by Indians, “in the long run”. But I think what distinguish Chinese from Indians is that Chinese work more than talk (and in the case of Huang Yasheng, he also trys his best to make sure that Indians stay in the daydream and keep on talking. He is so sophisicated).

    Certainly high quality products are better than low quality products, and certainly it is better to keep all the profits. But I do konw that having something is better than having nothing, and Indians at this moment have nothing concrete to show us.

    By the way, China grew at 20% a year when its income was at India’s level. Anyway, one thing I have to admit is that India is more stable, and don’t forget that the United States became rich by consistently growing at 3% per year.

    Comment by R-Squared — January 27, 2006 @ 10:50 am

  7. Slow & Steady always wins the race . :)

    Comment by Pavan — January 28, 2006 @ 1:40 am

  8. Agree with S. David about “Chinese work more than talk” while Indians like to boast till there’s nothing left to boast.

    In 2005, China’s GDP grows 9.9% while most western economists believe it’s still underestimated. China’s 2.23 trillion GDP makes China surpass France and Britain to become World’s 4th largest by the end of 2005. Also China’s GDP is almost 3 times more than India’s.

    http://www.financialexpress.com/fe_full_story.php?content_id=115669

    While most predict China’s economy will still grow faster than 9.5% in 2006 and forth on, I believe the gap between the two countries can be nowhere but enlarging.

    Comment by S. David — January 28, 2006 @ 2:20 am

  9. All of you need to read Cities and the Wealth of Nations, by Jane Jacobs. The point Huang is making about FDI is precisely the point she makes, regarding the idea that growth has to come from within to be truly sustainable.
    Quality at this stage is irrelevant, and jingoistic sentiments along the lines of what I see above are just silly. Necessary, in that pride in one’s own country is necessary to supporting the work of one’s own, but silly nevertheless, in that it can blind you to the things that need to be done to get better.
    The point is to make things and learn from the experience of making things, and work your way up the ladder by learning how to make better and more sophisticated things, but only as guided by where the most money can be made at any one time, not by wild dreams of overtaking the advanced nations in some existing area or other. If that happens as a natural result of pursuing profit, fine. But deliberately trying it for the sake of something other than profit, like national glory, won’t get anyone anywhere.
    Infosys worked because there was a market opportunity. Huang’s point is that India is far more open than China to making market opportunities work. In the long run, that will win out.

    Comment by pantom — January 28, 2006 @ 8:40 am

  10. 1. It’s funny to hear sombody’s stereotyped comments that in today’s world, there are still something not profit driven but glory driven. Wake up buddy, it’s a free market world now and China is a commercial, capitalistic country just as what India is.

    I also want to ask how a country can sustain 25 years of double-digit growth and lift 300 miliion people out of poverty as a result of pursuing national glory?

    2. “India is far more open than China to making market opportunities work”? It’s even more amusing. phantom please go and talk with the MNC executive to know what kind of red-tape and efficiency they met in the India market. Some quote:

    [By Dan Bilefsky and Anand Giridharadas International Herald Tribune]
    DAVOS, Switzerland
    The beer giant SABMiller made big investments in China and India in the 1990s, hoping to conquer markets that together have more than a billion potential beer drinkers. But today, SABMiller sells more beer in Sichuan, a southwestern Chinese province of 43 million people, than all the beer companies combined sell in India.

    “Despite India’s reputation as the world’s biggest democracy where business is booming, we have found it a really difficult place to do business compared with China,” said André Parker, managing director of Africa and Asia at SABMiller, the world’s second-largest beer company with $14.5 billion in annual sales. InBev of Belgium is the largest beer company.

    At least part of the problem lies with India’s huge and messy democracy, where a dizzying patchwork of state regulations can make it difficult to operate.

    China, by contrast, has a top-down market economy that is adept at attracting global foreign investment and creating the necessary infrastructure for multinationals to compete.

    As legions of influential policy makers and executives gather this week at the World Economic Forum in Davos, Switzerland, the role of India and China in shaping the world’s economic fault lines is among the foremost issues on their minds.

    With the two nations vying for pre-eminence in the coming decades, how can India catch up to China, and what obstacles will China face in trying to maintain economic dominance over its neighbor?

    India at first glance may appear more inviting than China for many foreign companies. It lives by the rule of law and has a British-style legal code. It has a respected indigenous corporate sector, which China sorely lacks. It has millions of English speakers and has gained an international reputation as a leader in high technology, software and knowledge work.

    But China can be an easier place to do business, many company chiefs say.

    “Businesses like stability, and China’s state-driven market economy has created a reliable environment where decisions are implemented quickly and efficiently, which, coupled with a huge local market, is very attractive,” said Fred Kindle, chief executive of the engineering giant ABB, which has big operations in both countries.

    “India has primarily excelled in software and services but needs to catch up in offering reliable infrastructure.”

    According to a study by the World Bank, it takes more than twice as long to start a business in India than in China, at 89 days compared with 41, as well as to register property, 67 days to 32, or to enforce a contract, 425 days to 241.

    To add to the misery, when the business is established, the World Bank said, Indian factories suffer 17 power failures a month on average, compared with 5 in China.

    India is seeking to replicate China’s success as a place not only to outsource back-office work but also to manufacture and sell global wares.

    Economists, however, argue that India will have to streamline its bureaucracy and further liberalize sectors of its economy like retailing and banking if it wants to catch up with China – and perhaps even overtake it – in this century.

    Comment by S. David — January 28, 2006 @ 6:31 pm

  11. From your article:

    It has a respected indigenous corporate sector, which China sorely lacks.

    Which is my entire point. In the longer run, that will win out. I’m old enough that I may not be around in twenty years, but assuming you’re young enough, you probably will be. By then, I fully expect that India will at minimum have caught up to China and has a very good chance of surpassing it by then.
    It’s not about what makes life easy for SAB Miller, or any other global company. Those guys go where the money is, and to get that money, you need to have in place internal development that creates a middle-class seemingly out of thin air. India has that to a greater extent than China. Top-down always loses to bottom-up.
    I’m not Indian, BTW, ethnically or by birth. I’m writing this from New Jersey, USA.

    Comment by pantom — January 28, 2006 @ 8:40 pm

  12. Also, to be clear, I’m not taking anything away from what China has accomplished. But they have a very big long-run problem in that once the initial stimulus from FDI is over, if they don’t have a good internal mechanism for raising capital for new ventures, they’re going to stagnate pretty quickly. The poor record of their stock market vs India’s, and not just over a short time frame, but over a period by now of many years, is a quick-and-dirty benchmark of how poorly their doing in this regard vs how well India is doing.

    Comment by pantom — January 28, 2006 @ 8:50 pm

  13. Hi phanton, I’m writing from King of Prussia, PA. We are neighbours :)

    But I have to suggest you update your knowledge to catch up witht the new era. Yes, India has many brilliant domestic enterprises (I visited couple last year), so does China. China has 12 large telecom companies, two of which manage to absorb a total 300 million cell phone subscribers (about the whole population of US). Have you heard of Haier, CNOOC, Lenovo, Huawei etc? They are not as famous to you but they are big and better in potential. India has advantage in IT oursourcing but talking about domestic software market sector, China has the edge. India has a better developed banking system, but compared with China’s banks, they are too small. Phanton you may read too much about the India’s hunger at FDI. But in China it’s a different story. I visited both India and China in 2005. The biggest challenge for India is to raise money for a better infrastructure. But for China the focus is how to raise the poor people’s income. The deposit savings in China is $1.7 trillion. The lack of FDI cannot stagnate China’s economy. Actually China 2005′s 60 billion FDI is less than 2004′s figure but look who cares.
    http://www.financialexpress.com/latest_full_story.php?content_id=115414

    Why do you criticise SAB Miller for its greed? Isn’t it the so-called profit driven that you preferred? :) Why aren’t you talking “India is far more open than China to making market opportunities work.”?

    What? You are talking about middle class in the two countries? Can I inform you it’s China’s 80 million vs. India’s 12 million?
    http://www.expressindia.com/fullstory.php?newsid=60668

    I’m not young either. I can’t afford a lot of something “in long run”. How long? a decade, 50 years or a century? Since China’s beginning of economic reform in the 1980s I’ve heard too many of these shit. After Russia collapsed, they said China will lose, then after 1989 then after SARS. But after so many years, I’m just curious to see China’s economy is becoming healthier and stronger. phantom, please no longer let me wait for anything “in the long run”, OK?

    Comment by S. David — January 29, 2006 @ 2:50 am

  14. first of all i feel very happy to hear some optimistic views about indian economy.gone are the days of pessimism everywhere.
    In my view Chinese and Indian economy are in different growth phase.So Comparing both economies is itself a mistake.Indian economy is similar to Chinese economy of mid 90′s.When we compare that way China fares better than India in all aspects.

    Comment by balasubramani — January 30, 2006 @ 4:34 pm

  15. as a fan of democracy and Chinese, i personally believe India will defeat China in long run, maybe 50yrs or 100yrs? but in short term, honestly, i must admit that before 2050, there is no chance, even the minium chance that India can even catch China. anyone who doubt about it, can pay a visit to both inland China and inland India.

    Comment by liwang — January 31, 2006 @ 5:01 am

  16. Chinese banks may be big, but they are technically insolvent, frequently bailed out by the communist government. In the next 20 years, median age of Chinese will be higher than India and even U.S., which means falling productivity and growth.

    I don’t care how fast China grows,but if it continues disrespect capital it will eventually collapse, not withstanding the communist party pontification about chinese future glory and like such..

    Comment by Krishnan — February 1, 2006 @ 11:50 am

  17. Right Chinese banks are big and flawed. But they have constantly and successfully supported China’s high speed growth for 25 years and they have improved a lot since the last 5 years. On the other side, India’s mass infrastructure construction has not started yet. That’s why India’s banks are more stable. In some sense, India doen’t have a real banking sector yet. (A good article talking about this on http://www.bankresearch.org/economicpolicyblog/2006/01/fix_mexicos_ban.html)

    Most of westerner’s impression on China’s banks are based on that from 5 year ago. Things have changed a lot since then. China’s banks’ bad-load rate has been reduced to 8.9% from the double-digit figure just 2 years ago (still high but improving fast). Do you know the world’s last year (Year 2005)’s largest IPO is from China Construction Bank ($8billion)? Before this summer, another big bank, Bank of China, will file the IPO. Then China’s largest bank, China Industry and Commercial Bank, will do the same thing. At the same time, almost all western banks and financial institutions are injecting funds to China’s banks because China will open her Banking sector by 2007. This will largely raise the local banks’ managerial skills and competitive ability. Overall I feel the Chinese banking sector’s future is bright just as other sectors through these years.

    The birth control policy and median age issue are very controvercial. When I was in India, I learned that some Indian states also carry out two-children policy (i.e. Andre Pradesh). On the other hand, China has already loosed its birth control policy and in many areas, families are allowed to have more than one child. So I don’t think this will be a factor to affect the China’s economy after 20 years.

    At last, China is a capitalist country now. Some westerners say it’s a hyper capitalist society. US president Bush says it’s “Very capitalistic” (which I personally don’t like it very much). And China’s top-down system is also debatable but it has been successful for over two decades. So I couldn’t see a clear reason why China will collapse as you guys always say. And this is the same as I couldn’t see a clear reason why India will collapse, though India may have a higher risk suffering some social and economic crisis.

    Comment by S.David — February 1, 2006 @ 8:21 pm

  18. In the next 20 years, median age of Chinese will be higher than India and even U.S., which means falling productivity and growth.

    It doesn’t matter that China’s median age will be higher than India, when China’s youths are FAR MORE educated and healthy than the average Indian youth 20 years from now. China’s productivity will increase regardless of its aging population. Female illiteracy rate in India is over 50%!!! One in 2 Indian children under 5 years old today is MALNOURISHED. You think malnourished Indian children can compete against Chinese children who go through 12 years of public schooling?

    Comment by Santosh Shah — April 3, 2006 @ 9:49 am

  19. As a fan of democracy i personally believe India will defeat China in long run, maybe 50yrs or 100yrs?

    What makes you so sure that China won’t also become a democracy 50, 100 years from now? Look at Taiwan and South Korea.

    Comment by Santosh Shah — April 3, 2006 @ 9:53 am

  20. The wealth of a nation should not be measured by GDP alone. I have been to both countries, and on first impression the Shanghai and Bejing look vastly superior to Delhi and Mumbai. The slums of the Indian cities are astounding…unlivable by most standards. Then is when you realize the fundamental difference…China can simply ‘remove’ the slums at will.

    Personally I would say the ability of India to stay together and democratic for so much of its history is an accomplishment as great as any in the modern world. Indians often complain about corruption….all countries have corruption even at the highest levels. I would say that the leadership in India is actually quite scrupulous. Noticeably most new democracies in the last 50 years have collapsed due to violence…while in India transfer of power has remained fairly peaceful, which if you think about the neighborhood is an astounding achievement.

    I suggest you check your stats on literacy. Literacy of those under from 10-18 is something like 85%(from census). Literacy of people over 40 is like 45%. In twenty years there will be a monstrous jump in literacy. In addition many many Indians are literate in more than one language. The linguistic talent in India is unique, and a source of wealth in itself.

    China overproduction: China’s economy is fundamentally flawed in that it is based on investments/exports in the manufacturing sector. India’s is based primarily on domestic demand. It is service oriented. Now go compare China, India and the US in service/manufacturing distribution. India is much closer to the US model. China’s advantage in manufacturing is inherently limited by labor prices. China will have to increase worker wages or risk rioting due to the rise in income inequality. Its advantage therefore is short lived, while India and its knowledge-based service economy is better poised to handle growth.

    I see China as a grand gamble by the communists. The previous poster must realize that China will not transform to a democracy quietly, it will be chaos and a probably blood-bath. To survice intact, China must raise wages and keep up growth at the same time. It must ensure that unemployment does not rise to levels it cannot control. There is the impending gender gap of 30 million surplus males in the next five years.

    On the other hand India has built a vibrant democracy that has stood the test of time. No doubt it has paid for this freedom with a lower growth rate. The creation of long-lasting institutions of democracy is an expensive, but beneficial, investment. China will have to make this investment at some point or face unimaginable problems. The question is, how much will it cost?

    Comment by Binyamin Kohn — April 27, 2006 @ 8:33 am

  21. For india to grow at a very high speed a lot of modification must be enforce by force to erradicate the political differences,personnel differences,resisting the governments proposals,removing the old politician and abssorbment of new and young blood.
    Some serious changes are really needed in the labour law for the benefit of the foreign investors snd the local investors.Our labour law seems to be very lenient and open for demonstrations,work strike as and when they like.The tightening of the law are really vital to attract more investors.The country should create an environment of investors friendly to attract more and more to enlarge the employment market and not to deter by scaring them with all kind of strikes and demonstration.
    In my country(Malaysia),we developed very fast,all because of the intergrity,support,hardworking and worked together with the ruling governments advise.Unlike in your country,hardly see any government completing two terms.You tell me what can you do in five years,a very short time most, and of the time ends with bickering and quarelling and not developing the country.
    Media freedom should be reduced, and some kind of harsh implementation of law are really needed.China did not grow bcs of their BRAIN but on their stringent control on their people and media.The comunists government controlled their freedom to certain extent and concentrated on their country development without waisting much time on quarelling and solving internal matters.In order to win one you must be prepared to lose one.
    Our media and the people(Malaysia) are very careful to what they are talking and saying,a simple mistake can land you behind bars.What is important is the country and the people’s growth.We are happy and enjoying all benefits and money is no problem to us.We work and the returns are there.India should create an invironment like that.
    Thank You
    Sivakumar Art Pillay
    Subang Jaya

    Comment by sivakumar malaysia — April 30, 2006 @ 12:33 pm

  22. we must know the factors why these countries are developing rapidly and what are the factors that are lacking in our development path. Actually we young generation must not only learn this but also implement by ourself. The most important factor what i saw in these countries are that these people has planned life and hard working for as per their plan. whereas indians are not planning but they are doing instantly as per their need. So this attitude must be changed.

    Comment by Rituraj, Taiwan — May 22, 2007 @ 6:45 am

  23. I keep hearing India will surpass China ‘in the long run’. But the way of reasoning is that whatever problem China has right now will not get fixed in the future, and will grow so large that a major collapse will happen eventually. However, when talking about India, any problem will get fixed and the good things will stay good forever. Is this rational projection? No. Seems to me more like wishful thinking.

    Comment by zhonghua — June 28, 2007 @ 11:10 pm

  24. The so called China/India race is specious. It just gets some people’s juices speeding. These are two countries speeding towards a goal at different rates and with different baggages or crosses to bear. However there is some truth to the fact that India as a democracy, where most changes are opposed and require consensual adjudication generally solves its problems democratically and consensually. Thus most solutions are decided sub optimally and are less than perfect. It is indeed somewhat of a surprise that India is growing as fast as she is.
    On the other hand decisions, I am given to understand, in China are made by executive fiat by the Party, without the consensual give and take of a democratic society .This tends to thrash out underlying problems. Thus, in China the populace is generally not a party to decisions which emanate from on high from, The movement of populations, the closing and opening of factories,changes in landscape and in the means of production are made by a small coterie of people while India this is impossible. It is surmised, because of this vital difference in decision making, there is bound to be greater pent up anger in China with the consequent greater probabilities for future explosive dislocations in China.
    But, on the other side of the coin, important decisions are put on hold or inordinately delayed in India, such as the Golden Quadrilateral(road building) Project because of the nature of the democratic beast, that could cause future disclocations in the economy.Slow pace of infrastructure development, caused precisely because of the push-pull of democratic chaos that is India is the single most significant factor, that could hamper India’s long term growth.

    Comment by Girdhar Gopal — June 29, 2007 @ 1:55 am

  25. Zhonghua,

    Surely the argument is more complex than that…I think what is being asserted is that for China to sustain the type of growth it has enjoyed so far means fixing things like introducing the rule of law, a democratic process and a healthy financial system. Yasheng Zhang and Tarun Khanna are arguing that these things – unlike the type of reforms China has carried out so far – cannot be fixed easily and since India does enjoy these things (well, at least more so than china currently), they can translate into competitive advantage over the “long run.”

    As usual in these discussions, things have got mixed in with nationalistic feelings. What is interesting, however, is not so much whether “India will overtake China” but the idea that there are institutional constraints to growth. Since neither India nor China has “perfect” institutions, this is an issue of concern to both countries. It would be nice to examine what exactly are the institutional constraints to growth in India.

    Comment by suresh — July 2, 2007 @ 2:48 am

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