The Indian Economy Blog

February 2, 2007

An Overheated Debate About India Overheating

Filed under: Business — Nandan Desai @ 9:33 am

Economist Cover.jpg

I didn’t know whether to laugh or cry when I saw the cover of the new issue of the Economist. The tiger’s face is hilariously confused, his tail is on fire; the Indian economy is overheated. Game, Set, Match.

Regular IEB readers have seen Edward, myself, and others question the premise of these judgments, and we have had some lively discussions. Clearly, there is opinion on all sides here, and it is based on sound observation and analysis. On the one hand, inflation and credit have accelerated way too fast, and reforms have seemingly slowed. On the other hand, productivity has accelerated, there is finally a glimmer of hope that some half-decent infrastructure may be built, and the ambitions of the Indian private sector are rapidly expanding. Economic opinion has split into two general camps: “the raging bulls and the raging bears.”

In its lead article, the Economist challenges two big notions that have been raised on IEB: one is the idea of the demographic dividend, and the other is the idea that Indian productivity has seen a step-function increase in the early part of this decade. “Many Indian economic commentators say that further structural reforms, though desirable, are not essential to keep the economy growing at 8% or more because of the “demographic dividend”.” Even our own Edward Hugh, perhaps the biggest proponent of India’s demographic dividend that I have come across, probably would not sign on to this. As I have repeatedly stressed here, the Economist is making a political judgment: ‘reforms are essential; and the government (and the, ahem, optimistic economic commentators) don’t realize this.’

“Yes, the economic reforms of the early 1990s spurred competition, forced firms to become more productive and boosted India’s trend—or sustainable—rate of growth. But the problem is that this new speed limit is almost certainly lower than the government’s one. Historic data would suggest a figure not much above 7%—well below China’s 9-10%.”

The comparison with China seems apt – inflation is low, their growth and productivity is higher, and their leadership knows what needs to be done. Not so for India. It is compelling narrative, but it misses the point. In fact, the defining feature of India’s growth over the last 15 years, and the last 4 years in particular, has been the wholesale move away from the command-and-control economy. The Chinese economy, by contrast, still functions at the behest of the Communist Party leadership – if they want to stop migration to the cities, they can; if they want to stop real estate construction, they can; if they want to build a dam…

India, meanwhile, has mostly been powered by individual initiative. Embedded in the Economist’s forecast for trend growth is a 30%-40% deceleration in total factor productivity – from a rate of 5%pa over the last 4 years, to about 3%-3.5% in the next five. Unlike the analysts at Goldman Sachs, they believe that the recent acceleration has been cyclical and not a structural up-shift. The Government of India is on the other end, believing that the recent acceleration can be sustained. Part of me is sympathetic to the Economist’s hand-wringing – no one wants our bloated government to get complacent. But it is disingenuous to extrapolate that a hard landing is imminent - because of this lack of confidence. (The Economist’s in-house data bank, the Economist Intelligence Unit, has made estimates of TFPG which are far more optimistic. Click here to see them in Google Spreadsheets)

“India’s demographic structure is indeed starting to look more like that in East Asia when its growth took off. But this mechanistic view of growth assumes that demography is destiny and that economic policies do not matter.” 

Demographics is not destiny – the economy has to be able to accomodate the increased workforce if the benefits of the DD are ever to be realized. But basic economics still hasn’t changed that much. Unlike in China, the domestic private sector is a very powerful force in India. They are hiring fast, and others are investing in private schools, colleges and training institutes. India’s civil society in the yin to the private sector’s yang - the NGOs, the social entrepreneurs, and the public-private types are probably more vibrant and active in India than anywhere else on the planet. In China, these people are mostly in prison. It is also worth repeating that, because we are a democracy, the voice of these masses actually has the potential to echo in the halls of government.

One example of this is the case of our beloved Railways Minister (now the subject of an upcoming Harvard Business School case study), who made Indian Railways the only profitable government rail system in the world – with an operating profit around $2 billion. And other examples abound. Hampered by the communists, reforms have been rather stealthy of late, but nevertheless substantial. The privatization of the airports was no small task, nor was the freeing up of civil aviation and the resultant boom. Tariffs are inching down, freeing up high-end exporting industries. A damn big highway system is being built, Delhi has a shiny new subway system, and Mumbai is set to get its own. Other big, ambitious infrastructure projects have been greenlighted – and, contrary to the Economist’s claims, private investors are starting to snap up these opportunities, now that the easy money (resulting from falling interest rates) has already been made – capex is the in thing.

With tacit approval from the government, the private sector has also brought us to the cusp of a revolution in the retail industry. Distribution, logistical, and back-end infrastructure is barely there in India – and thanks to massive investments on the part of the Wal-Mart’s and pretty much every big corporate house in India – this picture might change within the near future. (It is worth mentioning that, in most large countries, the retail industry is the largest employer).

Other, more ambitious structural reforms (like the loosening of labor laws) await – and once our leadership is endowed with the political capital to make them happen, they will. The budget presentation at the end of this month will be a defining moment, and time will tell how the “Dream Team” will seize the opportunity. Over the horizon, another such moment awaits. In 2009 (or perhaps earlier), Indian voters will render a verdict on high growth – decide whether or not they want it to continue, and empower those they think can best get them there. It sounds a bit idealistic, I know – but stranger things have happened. Amidst massive economic change, the politics of the day have to change as well. The MLAs and the MPs may drag their feet, but my guess is that the private sector, the NGOs, and masses who want to get out of poverty will gradually show them the way, as they did with Lalu.

I don’t normally consider myself an economic nationalist – but there is something in the Economist’s words which hearkens back to how Wall Street viewed East Asia before the crisis, or how the IMF prodded Argentina in the early part of this decade. Fortunately, unlike those two cases, the Economist (as far as I know) does not have the resources to carry out a run on the country’s equity market and currency. There is a part of me which can’t resist believing that this is another case of West misunderstanding East – but, until recently, the Economist has not always been prone to such error. It is not often that the magazine issues such a categorical denunciation of a country’s stated economic aspirations and prospects without so much as acknowledging the (fairly prominent and obvious) long-term trends.

Still, I must say, the cartoon tiger is hilarious.

78 Comments »

  1. [...] Still, I must say, the cartoon tiger is hilarious. [IEB] [...]

    Pingback by The Acorn » Funny tiger — February 2, 2007 @ 1:16 pm

  2. “Economic opinion has split into two general camps: “the raging bulls and the raging bears.”

    I would characterize those two camps as the Raging bulls and the dispa-raging bears, respectively.

    Comment by sudhir — February 2, 2007 @ 7:51 pm

  3. Not sure why but i cannot access the Spreadsheet you linked here is not accessible to my from Google.

    Thanks for the info article.

    Comment by Pavan — February 2, 2007 @ 8:40 pm

  4. I think the “demographic dividend” only pays off when the employees are skilled. With the terrible shape our primary and secondary schools are in, and the apparent dearth of qualified professionals, a large mass of unqualified people can’t really propel growth. Infosys and Wipro and TCS can take interest in colleges and their curriculum, but I think that is really a quickfix. Manufacturing has already taken the path of growth based on efficiency and not manpower, so it would be hard to put the un(skilled|qualified) people into manufacturing.

    I still think that infrastructure growth needs some serious work – and fast. More work than the author seems to mention. Power and roads really need to be fixed; and more importantly, it needs to happen rapidly.

    Comment by Varun — February 2, 2007 @ 10:54 pm

  5. Pavan – I have changed the link for the spreadsheet. It should work now. Otherwise, leave me your email address and I can email it to you.

    Varun – I agree that infrastructure needs to be built fast. Look out for the infra investment (as % of GDP) to notch a big uptick this fiscal. Ultimately and unfortunately, because we are a democracy, we have to accept this gradualism. I didn’t mean to under-stress how much work is needed there… I was simply trying to challenge the Economist’s implication that nothing is being done.

    Comment by Nanubhai Desai — February 2, 2007 @ 11:41 pm

  6. First off i concur with the authors view that ‘The Economist’ has taken a more pessimistic view than what the current economic environment suggests. Another important facet not related to the economy overheating argment per se but something which i believe will strongly affect economic growth is what is the social dividend from the growth. India more than any other country is prone to its growth being pulled down from within (naxalism, inequality, large sections of citizenry not taken along with the growth). That could be one of the negatives to come out of the demographic dividend. Which sector is mass employment going to be generated from. As Varun mentioned, manufacturing, which has been the bedrock of employment generation for the industrialized countries during their growth periods is going ‘Lean’. Could it be Retail as mentioned in the article, huge infrastructure development could also create some employment. What other industrie could do that in the near future? I think social indicators need to be looked at in addition to economic indicators in this situation. Having said that i do not foresee any hard landing atleast in the near future.

    Comment by bharadwaj — February 3, 2007 @ 3:17 am

  7. I think both infra and retail are going to be the most immediate large-scale employment opportunities. Hopefully, better infra will result in a larger labor-intensive manufacturing a-la-China.

    Still, there is something daunting about the numbers… 500-600m rural people. I think all this is useful, but it has to be combined with rising agricultural productivity.

    Comment by Nanubhai Desai — February 3, 2007 @ 3:22 am

  8. i think Economist should have been more blunt.. Trend growth is 6% and yet the mag bumped it up to 8%…
    Liquidity has reduced the deficit as payments are lesser, but the risk premium will go up dramatically.

    As foreign economies cool, remittances to india will dry up leading to more current account problem..(>5%)..A large portion of $ 180 bil reserves is a mouse click away from disappearing..

    Lots of palapappans forget, that last 4 yrs were unusual in liquidity.. It is time to pay higher risk premia..

    Comment by andiron — February 3, 2007 @ 3:54 am

  9. [...] Nanubhai responds to The Economist article which claims that a hard landing for the Indian economy is imminent. [...]

    Pingback by DesiPundit » Archives » Is The Indian Economy Overheating? — February 3, 2007 @ 11:24 am

  10. [...] The Indian Economy Blog on The Economist’s story on India overheating. “I don’t normally consider myself an economic nationalist – but there is something in the Economist’s words which hearkens back to how Wall Street viewed East Asia before the crisis, or how the IMF prodded Argentina in the early part of this decade.” Neha Viswanathan [...]

    Pingback by Global Voices Online » Blog Archive » India: The economy and The Economist — February 3, 2007 @ 2:17 pm

  11. Even if Chidambaram claims that he, and of course Congress I, is the driver of the current boom, reforms have an incredible amount of lag time – 3 to 5 years. There is a reason why Reddy is still increasing rates. You make good points about infrastructure – new airports in five big cities (what about the roads and ports in the rest of country?) – and probably, backdoor retail (although Kamal Nath is making the right noise now – probably will last until Sonia has something to say).

    But the back tracking on every other reform initiative doesn\’t bode well – insurance, agriculture, banking, divestment, oil and gas prices, and the newest one – SEZs (even if one ignore stealing of cricket broadcasting rights). It has been 3 years since any bold new reforms in policy have been announced where as thousands of crores are being spend on corrupting new social programs. And Chidambaram is planning for more in the next budget.

    While I worry about missed incremental growth due to non-reforms, current 8-9% growth instead of 10-11% possible growth, I tend to agree with RBI and Economist. RBI will tighten credit slowly but the impact of non-reforms will be felt 3-5 years from now. Congress I can claim its bogus economic performance even though it starts beating the retreat drums whenever the word reform is uttered. It’s the next government that will bear the impact.

    Comment by Chandra — February 4, 2007 @ 12:03 am

  12. realitycheck – IMHO, it depends on what your definition of national success is. It is easy to sacrifice liberties in order to achieve growth. And yes, I agree with you that the majority of Chinese have benefitted from the boom. However, I was just trying to point out that the big difference with India is the treatment of that disaffected minority. In 2004, farmers felt like they weren’t being included in the growth story so they voted in Congress. In China, rural protests are increasing. More importantly, I don’t think it’s at all irrelevant, that a blog such as this one, might be censored by the government.

    Anyhow, I don’t mean to come accross as a rosy-eyed optimist. I was just trying to point out that India and China are completely different stories.

    Comment by Nanubhai Desai — February 4, 2007 @ 10:55 am

  13. While everyone wants to remain positive, The Economist didn’t really say anything that extraordinary. The article pointed out obvious problems that, unfortunately, the India media and the Indian middle and upper class doesn’t want to hear. The reality is that there are more than 600,000 Indians living in poverty or close to it. The majority of eastern India, including Bihar, Jharkand, Orissa, and the NE states rank the lowest in terms of growth, and social indicators of well-being. In your post you make comparisons to East Asia, yet Singapore, S. Korea and other successful E. Asian countries focused on those exact areas where India is severely lagging behind — infrastructure and education, in addition to open markets. The furor of land acquisition in W. Bengal is not an isolated phenomenon, I’m afraid; you’ll see the same when tribal rights are asserted under the Schedule Tribes Act, and you see it already in the increasing Maoist/Naxalite threat. This also begs the more interesting question — are the changes we’re seeing in India the kinds of changes that Indians want as a nation? I’ll use an example: in all the new, modern bars, lounges, and restaurants you see, take a look at the architecture. It’s mostly a copy of what you’ll see in developed countries. When have you seen a new, architecturally significant piece of work that incorporates something of India’s many cultures and many histories?

    Comment by fsowalla — February 4, 2007 @ 11:28 am

  14. @realitycheck – Just out of curiosity, where in China did you go? Cities or rural areas? I’ve heard that the rural areas are not as rosy and cheerful as the cities (but I could have heard wrong, hence the question :-) )

    I think labour laws are really holding us back. Firms are going ahead and honing their technology so they can make do without labour, and by the time the reforms come around, they won’t need large amounts of (man|woman)power.

    I think the retail aspect is very interesting. Walmart employs a million plus people in the US. Tesco and Sarrefour employ 400,000 each. That could be a huge employment opportunity. Even though all our local grocers will be run of business, there will be a substantial net increase. One thing to think about, though – there is not enough space in the cities for large, sprawling supermarkets. So they will have to move to the outskirts and suburbs. And that’s where the transport beast comes to bite our behind. Walmart works well in the suburbs and outskirts because of the wonderful highways in the US. Unless we can fix our roads, getting to the supermarkets may be a problem.

    I think a lot of us are calling the Economist pessimistic, but I am beginning to wonder if we are optimistic and they are realistic.

    Comment by Varun — February 4, 2007 @ 12:56 pm

  15. There were reports of china’s economy overheating beforeand they have controlled it successfully. I think we wouldn’t be as successful as them but still we can to an extend.

    Comment by Anita — February 4, 2007 @ 1:36 pm

  16. reality check and others are largely right about China but rural areas (i have been to a few a mere 100kms from Beijing – they actually let you just drive) where the most noticeable aspect is a sterile (not in the sanitary sense) village life with no real market place unlike indian villages. On more than one occasion guides I hired, apart from a working knowledge of english, had no interest in the world beyond China and some even offered canned responses to whether they would like to go abroad – why I am proud of China! of course, many chinese do travel (usually in groups) but it is all so organized – individuality thy name is not Chinese. the only english language daily there had a headline one tuesday about the bird flu epidemic; thursday’s edition blared “Bird flu conquered!” Yes, India and China should not be on the same page but for different reasons

    Comment by Lionel — February 4, 2007 @ 9:30 pm

  17. As i am an ardent fan of Milton Friedman and other moneterists,
    i belive that the real estate and stock market valuations (or abnormal
    asset prices) are the result of “too much money chasing too
    few goods” ; the govt of India prints some 90,000 crores of legal tender every fiscal and pumps it into the system (roughly equal to
    our total defence budget) and borrows some 60,000 crores more to
    bridge the burgeoning fiscal deficts. 8% + growth rate of GDP can
    absorb only a part of this “pump priming” (may Keynes forgive us, as
    his prescription is only 1 to 1.5 % of defict financing, not our
    10 to 20 %). Hence the chronic inflation and asset bubbles.
    And don’t belive all govt statistics about rate of inflation ;
    retail prices are increasing at a much higher rate than the offical
    rate of 5 – 6 % inflation. And no sane Banker will bet on govt
    finances if he looks at the govt balance sheet, total debt (internal,
    external, states, etc) and debt service obligations…

    Comment by K.R.Athiyaman — February 4, 2007 @ 9:52 pm

  18. A lot of the comments above seem to be misinterpreting my view on China. Please do not mistake my optimism about India to be tantamount to pessimism about China. There are only two points of comparison I used in the article:

    1) \”The Chinese economy, by contrast, still functions at the behest of the Communist Party leadership – if they want to stop migration to the cities, they can; if they want to stop real estate construction, they can; if they want to build a dam…\”

    2) \”the NGOs, the social entrepreneurs, and the public-private types are probably more vibrant and active in India than anywhere else on the planet. In China, these people are mostly in prison.\”

    Neither of these points imply that China has not managed enormous economic success over the past 27 years since Deng\’s big opening – which seems to be the view that most of you think I hold.

    Actually, what I am trying to point out goes beyond the economic – it related to the means used to get there. In the first point, I am trying to show that the reason behind a lot of China\’s historic success has been the forward-looking economic policies of the communist party leadership. India, by contrast, has thrived in spite of the the policies of the government. Those are two radically different determinants of economic success.

    In the second point, I am trying to highlight that China has achieved a lot of incremental economic growth because of its ability to ruthlessly quell dissenting parties. The comparison between the Sardar Sarovar Dam Project on the Narmada vs. the Three-Gorges dam on the Yangtze is a case in point. In its finer days, the Economist did a far more nuanced comparison along these lines, and is still a must read: http://www.economist.com/surveys/displaystory.cfm?story_id=E1_PGRJPDR

    Comment by Nanubhai Desai — February 5, 2007 @ 1:26 am

  19. That India is growing despite the opposition to growth by the Medhas, Arundhutis, Vandanas, Mamatas and Anuradhas is indeed a miracle. How is it possible that despite fossilised socialists, naxalites and communists strangulating India’s economic growth, arrogant righties spreading communal hate and terrorists striking at will, that India managed to grow by 9& in 2005-2006? That’s what should be the cover story of the Economist because that is what is worth writing a thesis about. Maybe the Economist missed the big picture.

    However has anyone seen what happens to a tiger that has its tail on fire? It’s not going to stand there in bewilderment. It will run like no tomorrow to the nearest waterhole and cool off. That’s like having a high growth and cooling effect together. So much for the Economist’s cartoon.

    Comment by Sourav — February 5, 2007 @ 9:19 am

  20. Nice post. Sure has generated a great deal of enthusiasm. All said, I do not disagree that India can indeed grow rapidly. However, in the classic literature on financial (in)stability, it is widely noted that rapid credit growth (far in excess of nominal econ growth or deposit growth), coupled with rising (wholesale/retail) prices, and a broadening trade/CA deficit are -taken together- a recipe for either runaway prices, or BoP problems, or a banking crisis (or in worst case all of the above). India is currently showing symptoms of all three such problems. Currently, aggregate demand is clearly higher than aggregate supply. It is very likely that the supply side will eventually respond due to all the infrastructure items you referenced. But such capacity will take some time to come onstream (& I hope it does so smoothly). In the meanwhile, aggregatge demand ought to be put in line w/aggregate supply. And that is what the RBI is trying to do. With all 3 symptoms getting worse, of late, I am afraid the RBI will have to make increasing recourse to expenditure reduction methods rather than hope to get away merely with expenditure switching policies. Amidst such policy tightening, the downside growth risks are mitigated by rising capital deepening and growing productivity; but, such forces are probably not strong enough to avert a growing ST need for more sterner policy tightening.

    Comment by ASMitra — February 5, 2007 @ 10:05 am

  21. One clarification : Medha Padkar, Arunndhithi Roy are per se not
    against ‘development’ but are fighting for fair and honest
    compensation for the diplaced villagers, who’s rights have been trampled upon by cynical governments. Medha and others are leftisits and oppose liberalisation, no doubt ; but that doesn’t mean that the
    govt can get away, without giving just and honest compenstion for
    the millions who loose their lands and livelihoods.

    Comment by K.R.Athiyaman — February 5, 2007 @ 10:07 am

  22. Indian economy is overheated or not, whatever is happening is happening too fast. The Indian Economy is riding a wave which stil no one has surfed.

    Comment by Brijesh Padalia — February 5, 2007 @ 2:01 pm

  23. India was woken from her deep slumber when she was forced to mortgage gold to run government and get out of the debt-trap. The then political class was complacent with the ‘Hindu rate of growth’ until liberalisation and globalisation turned its role as ‘spoilers’ and observers rather than as ‘controllers’. Now that the giant has stepped on the gas, many who had written her off like the Economist are having discomfiture. India, after all, is too large to be over-heated with a rise of GDP merely from 5-6% to 8-10%.

    Comment by Satish — February 5, 2007 @ 3:32 pm

  24. The following dispatch just came in from Stephen Roach, Chief Economist of Morgan Stanley, after his recent trip to India. Since the topic is almost identical to the content of this debate, I’ve pasted it below.

    ____________________________________

    India on the Move

    I am returning from India with great enthusiasm. Many serious problems remain – especially the ravages of poverty. But in the past couple of years, India has faced many of its macro imperatives head-on – especially low saving, inadequate infrastructure, and lagging foreign direct investment. It is now making solid progress on two of those counts – saving and FDI – and infrastructure seems set to follow. These are the breakthroughs that can unshackle India’s greatest strengths – a high-quality stock of human capital and the magic of its entrepreneurial spirit. As a result, there is now good reason to believe that the macro and micro are coming together in the world’s second most populous nation. India is now on the move and could well be one of the world’s most exceptional economic development stories over the next 3-5 years.

    There’s no dark secret about India’s once seemingly chronic macro deficiencies. It is widely agreed that the key impediment has been an inadequate saving-investment equilibrium. The takeoff phase of economic development has long been associated with saving and investment rates in excess of 30% of GDP. China’s breakthrough came when its ratios pierced the 40% threshold. Yet for decades, those of India have lingered in the 20-25% range. Lacking in internal saving and maintaining a relatively restrictive stance toward foreign direct investment, India has been unable to achieve critical mass in infrastructure and capacity growth – the main drivers of any investment-led development strategy.

    That is changing. Official data now put national saving at 32.4% in the 12 months ending March 2006 – up significantly from the 25% average of the 1990 to 2004 period. At the same time, the aggregate investment ratio has moved up to 33.4% as of March 2006 – a major breakout from the 26% average of the preceding 15 years. And foreign direct investment is on target to hit US$13 billion in the 12 months ending March 2007, more than double India’s previous best of $5.5 billion hit in the previous year. Infrastructure, however, remains a glaring laggard – likely to have held around 4.3% of Indian GDP in the 12 months ending March 2007 and little different from the range prevailing since the early 1990s.

    No, these are not Chinese-style readings – saving and investment rates in the 40-50% range and foreign direct investment in the $50-60 billion vicinity. And the infrastructure contrasts are painfully obvious to anyone who travels in both India and China. But the challenge for India is not the race with China but more the race with itself. I have long feared that too much is being made out of this comparison between Asia’s two giants. The more important point for India is that it is now climbing out of the macro saving-investment quagmire of the past. In my view, that’s what matters most insofar as the threshold effects of economic development are concerned.

    With India’s macro headwinds turning into tailwinds, it stands a much better chance of tapping its inherent strengths – namely, a high-quality stock of human capital, a large number of world-class companies, and a spectacular entrepreneurial spirit. In my earlier trips to India, I spent considerable time boring into the human capital story. My focus was on the dynamic IT services and business-process outsourcing companies – Infosys, Wipro, TCS, Accenture, and Genpact. Far from call centers and data processing, these organizations are all in the business of providing high-value added, increasingly complex systems solutions to multinational companies around the world. And they do it by exploiting what could well be one of India’s greatest inherent strengths – a highly educated, IT-enabled workforce that is benefiting from the addition of about 700,000 science and engineering graduates each year. That now puts Indian colleges and universities well ahead of those in the US, Europe, Japan, or China in turning out new entrants in these key segments of the knowledge workforce; that’s also a near quadrupling of the number of scientists and engineers coming out of India’s schools of higher education a decade earlier.

    While I don’t want to minimize India’s human capital angle, in many respects, it’s old news. What blew me away last week were the corporate and entrepreneurial stories. For all the buzz over China, one of the great paradoxes of the world’s greatest development story is that it only has a handful of truly world-class companies. By contrast, India has a much deeper and broader stable of very powerful businesses. Moreover, it’s not just IT services – it’s also telecom, pharmaceuticals, energy, steel, and auto components. The just-announced Tata-Corus steel merger could well be a harbinger of the next wave of India’s already impressive industrial prowess – the coming of age of the India-centric multinational corporation.

    The strength of Corporate India starts at the top with outstanding leadership. Over the past few years, I have had the pleasure of spending time with many of India’s corporate titans – from Ratan Tata and the Ambani brothers to its IT visionaries and senior bankers. True, it requires far more than brilliant executives for a nation to excel in competitive prowess. But in terms of strategic vision, innovation, execution focus, and cost-efficiency management, I would compare India’s corporate leaders favorably with their counterparts in any other country in the world. Not only is this a huge advantage when compared with China, but it is likely to be a major plus for India as it fights for market share in the global competitive sweepstakes in the years ahead.

    But the real spark in India’s talent pool is a truly extraordinary entrepreneurial spirit – the risk-taking, innovative visionaries who have an uncanny knack to view new businesses as solutions to important problems or as building blocks to new markets in goods and services. Mukesh Ambani, Chairman of Reliance Industries, is an excellent good example of what is so special about the Indian entrepreneur. Not satisfied with the success of Reliance’s core businesses in energy, petrochemicals, and textiles, Mukesh is now pushing ahead simultaneously on two of India’s greatest challenges and opportunities – retail and agriculture. India’s highly fragmented retail sector – populated still by over 12 million Mom-and-Pop-style establishments across the country – has long been ripe for a major efficiency campaign. In addition, India’s agricultural sector, home to over 60% of the nation’s population, has been the biggest laggard in the nation’s growth story. Mukesh Ambani’s current passion is to create a powerful synergy between these two opportunities – integrating what he calls the agro-input supply chain with a new network of large-scale retail establishments. His initial focus is on an IT-enabled agricultural distribution system, drawing on the scalable efficiencies of the Israeli kibbutz model while utilizing new IT platforms and growing rural connectivity. At the same time, he is forging ahead on the opening of new large-scale retail outlets – more than 50 stores have been opened in the past year with many more in the immediate pipeline. The concept and execution are both fascinating, and the benefits for India in terms of lifting rural incomes and boosting consumer purchasing power fit the nation’s macro imperatives to a tee.

    The entrepreneurs are also hard at work on the infrastructure story – tackling one of the most obvious of India’s bottlenecks. While the aggregate numbers have yet to turn up, there’s nothing but upside on the drawing boards. New Delhi highway construction is visible as soon as you leave the airport. The airport, itself, will be rebuilt by the GMR Group – the same organization that is pushing ahead on the new airport at Hyderabad. I had lunch with the Chairman and founder of this company, G.M. Rao – a self-made entrepreneur from very humble rural roots, who has an extraordinary vision of the future of Indian infrastructure. He spoke not just of new airports but of the “aerotropolis” concept that is now shaping the newest large airports of the world. GMR is also forging ahead on two other key aspects of Indian infrastructure – road construction and power generation. Mr. Rao’s impressive track record, along with his drive, determination and vision, was contagious.

    I had a similar impression after discussions with Dr. E. Sreedharan, Head of the Delhi Metro Rail Corporation and developer of a world-class subway in the Indian capital. I even took a ride on the new metro to see it for myself. As a frequent New York City straphanger, I instantly fell in love with the sleek, quiet, and ever-efficient Delhi subway. I also met with two key government officials charged with policy initiatives on the Indian infrastructure front – Praful Patel, Minister of Civil Aviation, and Sudhir Kumar, the number two official in the Ministry of Railways. These two very determined gentlemen stressed a powerful common theme – a customer-centric, market-driven public-private sector partnership as the only option for Indian infrastructure. Driven by reform-minded ministers who have remained steadfast in the face of political opposition, both India’s rail system and the civilian aviation sector are likely to benefit significantly from a major acceleration of investment in the years ahead.

    Finally, I spent some time with my old friend Rajiv Lall, Head of the Infrastructure Development Finance Corporation and a former member of our global economics team at Morgan Stanley in the 1990s. Rajiv is very focused on creative financing solutions that would enable India to achieve the intermediation capabilities to transform rising saving into accelerated infrastructure spending. He is confident in the macro endgame – an infrastructure investment share that rises from 4.3% of Indian GDP at present to 8% over the next 3-5 years. Based on what I learned on this trip from entrepreneurs, regulators, and financiers, it’s hard to argue with that conclusion – a point that Chetan Ahya, head of our India economics team, has been making for some time (see his November 2005 report, “India Infrastructure: Changing Gears”).

    This was my fourth trip to India in the past three years. Each of these missions is like peeling way the layer of an onion – the story comes into sharper and sharper focus. This time, I was focused on three key themes – infrastructure, rural reform, and entrepreneurialism. India impressed me as being on the move on all three counts. The China comparison is overdone. In my opinion, India suffers from excessive fixation in measuring itself against Chinese-style development metrics. We all know that China has opened up an extraordinary gap with India over the past 15 years – going from parity in per-capita GDP in 1991 to a tripling of India’s standard of living today. I am a huge fan of the Chinese miracle – and the investment-saving dynamic that has driven its spectacular development story. But China has pushed this model to its limits and now faces critical rebalancing imperatives of its own. Meanwhile, India is making great progress on the macro saving-investment constraint, which enables it to draw increasingly on its inherent strengths of human capital, thriving world-class companies, extraordinary entrepreneurs, and a well-developed financial system.

    In the end, the story is not China or India – but most likely China and India. And that poses what undoubtedly is the biggest challenge of all: Are the rich countries of the developed world prepared for the ultimate endgame of globalization? Right now, that is not the case (see my 2 February dispatch, “Unprepared for Globalization”). Meanwhile, the developing world is not about to wait for the developed world to get its act together. I saw that first hand last week in India.

    For investors, there is an important twist: As the darling of the liquidity play into emerging market equities, much of India’s good news may well be in the price. Even so, the longer-run outlook for Indian equities is still very promising. In light of India’s increasingly positive fundamentals, Ridham Desai, our India equity strategist, believes that any corrections in the 15-20% range should be viewed as an important buying opportunity.

    Comment by Nanubhai Desai — February 5, 2007 @ 9:55 pm

  25. In the end, Nanubhai Desai\’s argument is circular and illogical. He is optimistic about India because he believes that even with all the fumbles and intrusive policies of India\’s government, India has still managed to clock a high growth rate. On the other hand, he believes (falsely though) that the Chinese government\’s policies alone are responsible for China\’s amazing growth. Apparently, Nanubhai Desai has tremendous faith in the Communist Party of China (CPC), more so than me, a Chinese citizen. It strikes me as hilarious why Nanubhai Desai cannot conclude for China the same thing he concluded for India. Why isn\’t the CPC also a hindrance toward China\’s economic growth? Shouldn\’t it be? Perhaps Nanubhai Desai isn\’t really a neoclassical economist, perhaps he secretly believes in the power of the government.

    I will summarize in one sentence my position: India is NOT a functional democracy, stop pretending like it is.

    Comment by Jonathan Yin — February 5, 2007 @ 11:30 pm

  26. Nanubhai – Though we have democracy, it is largely taken over by Mafia. If you need evidence, look at the Mumbai corporation election results. Shivsena – who basically rules by fear and stick – got elected, and only 41% of population voted. If this is situation in Mumbai, I can’t even imagine situations in small towns. The trouble today and always has been quality of our Politicians. That has not improved, but has been steadily going down.

    You may see growth in overall numbers due to demographic trend, but is the quality and cost of living improving for citizens? The answer is emphatic No. Until grass root movements don’t get main stream, you can not gurantee long term growth. Yes, short term, we may do good, but for long term, the Democracy thing, need to be fine tuned.

    Comment by Shailesh Gala — February 6, 2007 @ 12:18 am

  27. Jonathan,

    It’s only an article and somebody’s viewpoint. Don’t get carried away too much by it.

    I firmly believe India is a functional democracy. It is not perfect and few people claim it is perfect. However the roots of democracy are growing stronger every year. That’s why you will see so many view points – left, right and centre – debating and arguing over various issues. Sometimes such debates and arguments can go wild but that is the price to be paid for a democractic setup which is making inroots slowly but steadily. Also in a democratic set up, you will mostly hear negative news because everyone is trying to catch everyone on the wrong foot. The tidal wave of “negative” news often buries the “good” news because good news doesn’t sell. Bad news does like hot cakes. Just google and you will see all kinds of negative news about India from riots to caste wars to murders to militancy to disasters. It’s because India has a relatively open media despite what the Reporters without borders ranks it.

    Another problem is that our common source of information is the western media. Now what is the news we read about each other? It is mostly negative or overtly dramatic or fear mongering created by western journalists (or Indian journalists trying to get published in the Guardian types aka Mr Pankaj or Mr Praful). For example I read Amelia Gentleman or Justin Huggler’s news reports with lots of pinches of salt but a Chinese reader will probably believe what is reported by them as 100% true. Same case with all the ‘human rights’ reports manufactured in the West. Some of the reports about India make me think whether those who report such things even do proper homework but then they have a right to say such things because that is freedom of speech. And we have to accept it even if we have to with two pinches of salt and ten winks. I am sure any Chinese reader will think that all of those reports are 100% true. The same holds for Indians when it comes to viewing China through the western prism. It is a coloured viewpoint and not necessarily a correct one.

    You have raised a good point about illiteracy. Don’t go too much by Indian stats. We are into weepy socialist statistics glorified and interpreted by the likes of Jayati Ghosh and Prabhat Pattnaik. Whether India really reaps the benefits of the upcoming demographic change, only time will tell. It is like the tiger on fire, just a hot debate as of now. Statistics in India is basically a clash between right wing and left wing blocks. Take them with a pinch of salt. And always remember that beyond all the negative stuff, the reality is probably more positive than thought of.

    My confidence in India is pretty high. I firmly believe that India has bright future and so does China. There is no point in running each other down.

    Here is what Mr Chidamabaram said today:

    “India has often been compared with China…I invite comparison with China. There is enough room in the world for both China and India to grow. China and India in many ways complement each other but in many areas we compete with each other. There is much to be learnt from China. But we are proud of our political system, we believe that we can learn from China about execution of projects within time, strict discipline and reward-punishment system for those who are incharge of the project execution. We do not envy China, we wish to emulate China in the matter of infrastructure.”

    It was great to see so much of informed discussions going on here. Keep the good work going in this blog.

    Comment by Sourav — February 6, 2007 @ 1:10 am

  28. One thing in that article by Stephen Roach kind of stuck out for me. He mentioned the ‘massive’ number of professionals that Indian educational institutions were pumping out, but neglected to mention that only a small portion (25%) of them were actually employable. Do I have my information wrong?

    Comment by Watcher — February 6, 2007 @ 1:21 am

  29. \”I will summarize in one sentence my position: India is NOT a functional democracy, stop pretending like it is.\”

    It\’s all well and good to get all worked up about, and defend against, others\’ perception about China, whether they are bordering on racism or just plain wrong headed.

    But where did you come with this gem about India? Sure our politicians are utterly incompetent and babus are utterly corrupt. But to say we are not a functioning democracy is a stretch! How long have you lived in India? I wonder how much of that is your bias?

    Comment by Chandra — February 6, 2007 @ 1:52 am

  30. I think Roach was making a comparison to Western education standards since that’s his basic frame of reference (as chief economist of a major US i-bank) – so I don’t think he considered employability. Judging from his past missives, his basic concern is that if India becomes the hub for low-cost services just as China is a hub for low-cost manufacturing, then what the hell will the US/EU do.

    Comment by Nanubhai Desai — February 6, 2007 @ 2:03 am

  31. Chandra – Thanks for your comment. I have moderated it because I don\’t want this to devolve into a India-China swingfest. Let\’s try to keep the focus on the substance rather than trying to figure out who\’s better.

    Jonathan - same applies to you. I understand that you interpret all this as China-bashing… but trust me, it\’s not.

    Comment by Nanubhai Desai — February 6, 2007 @ 2:09 am

  32. For those of you who don’t have Economist subscription, I have copied and pasted the article from the survey which I linked above. For those of you who have subscriptions, cancel them. Judging from recent performance, they won’t be producing nuanced and well-thought out gems like this anytime soon.

    ____________________________________________________________

    Two concepts of liberty?

    Mar 3rd 2005
    From The Economist print edition

    Democracy and growth are not in competition

    PUT ten Chinese in a room, goes an old joke, and you would be hard pressed to get them to speak. Put ten Indians together, and you would never get them to shut up. It is a gross generalisation, but anybody who has worked in both countries would recognise a grain of truth, in political as well as cultural terms.

    China is incomparably more relaxed than it was a generation ago. People are still not free to bring about political change, but they are, by and large, free to ignore politics. Yet it is still a one-party dictatorship where the one party has remained in power only because, in 1989, the army shot people to keep it there. Tens of thousands of people are locked up merely for exercising their rights to freedom of expression, association or belief. Torture and ill-treatment remain widespread. All of this is bound to breed a certain diffidence.

    In India, on the other hand, every shade of opinion is noisily expressed. Pratap Bhanu Mehta, of Jawaharlal Nehru University in Delhi, in a book called “The Burden of Democracy”, quotes Clement Attlee, a former British prime minister: “Democracy means government by discussion, but it is only effective if you can stop people talking.” India, it sometimes seems, will never reach that point.

    Arun Shourie, an Indian journalist, economist and former privatisation minister, expressed a similar exasperation in 2003 when the proposed sale of government shares in two oil companies was blocked by a Supreme Court ruling: “This is the difference between India and China. In India everybody has a veto.”

    This is an excuse often given for the maddeningly slow pace of reform in India, its stop-go cycles and its constant back-pedalling. In China, goes the argument, the government or party no sooner issues an order than it is done. A mind-boggling scheme to dam the Yangzi river and generate electricity at the Three Gorges, involving the forcible resettlement of 1.3m people, the destruction of priceless cultural relics and the risk of silting, flooding and the nightmare of an earthquake? No problem. By contrast, in India, the argument continues, such pharaonic ambition would not stand a chance.

    There are three obvious objections to this. First, China is not a monolith, and decision-making there can also be painfully slow (for example, the Three Gorges project was first mooted in the 1920s). Second, that this could never happen in India might be a good thing. And third, India has had its own controversial grandiose projects, including dams. But most Indians seem to accept that a more indecisive, less radical government is the price of democracy. As Jia Qingguo, a professor of international studies at Beijing University, puts it: “Democracy in essence is a conservative arrangement. If all interests are represented, how can you make rapid and fundamental reforms?”

    The compensation for Indians is stability. Except for the brief interlude of “emergency” imposed in 1975 by Indira Gandhi, the then prime minister, Indian democracy has stuck. It may have seemed an improbable experiment in such a poor, ethnically divided and hierarchical society, but it has proved resilient and deep-rooted. Turnout at elections is higher than in many developed countries—and it is the poor who vote in large numbers. The system may not deliver economic growth rates of 9-10%, but nor has it imposed Mao Zedong’s murderous millenarian lunacies.

    India’s stability should not be taken for granted, and it is relative. It has encompassed several insurgencies, in Punjab, Kashmir and the north-east, and a long-running Maoist rebellion that has affected a quarter of India’s 593 districts. On several occasions, most recently three years ago in Gujarat, parts of the country have been scarred by vicious communal violence. The war in Kashmir, whose flames are fanned from Pakistan but whose fuel is disaffection with Delhi, has taken perhaps 60,000 lives, and seen Indian forces engage in persistent human-rights abuses. Yet none of this has posed a systemic threat to India’s democratic structure.

    In China, by contrast, the big question is how a party that presided over such catastrophic blunders and crimes, in particular the famine of 1958-61, has managed to remain in office. Only recently has it offered anything resembling stability. Indeed, the 15 years since the Beijing massacre of 1989 are not only the longest period of relative political calm since “liberation” in 1949; they probably represent the longest such period China has enjoyed since the Opium Wars of 1840. Professor Jia argues that the present stability dates back to the Deng Xiaoping restoration of 1978. The protests in 1989 were, in retrospect, “a minor interruption”. That is indeed how it now seems, though by the party’s own account at the time, “serious turmoil” afflicted dozens of China’s cities.

    On this view of India, it has chosen stability of a sort over growth. In the words of Meghnad Desai, an Indian-born economist, “to stay a peaceful and stable society, India has to be a muddle and a mess.” India has more than a billion people, 29 states enjoying considerable autonomy, 33 main languages and 1,650 dialects, and six main religions, one of which—Islam—is followed by 13% of the population. A slow-moving but flexible democracy is the only way of holding all this together.

    The corresponding analysis of China is that there the party has done the choosing. It has opted for growth over freedom, imposing stability by force. The people accept this because the party has delivered on its side of the bargain, and because it has generated nationalist enthusiasm for regaining China’s place in the world, overturning a century of humiliation at the hands of foreigners.

    Like India, China is as big and diverse as a continent, though it is ethnically far more homogeneous, with more than 90% belonging to the Han majority, and has spent far more of its history as a united nation. But, argue the doomsayers, because China has no institutional framework for managing dissent, and because its ossified political structures cannot cope with the economic transformation of the country, it risks a huge explosion: “The Coming Collapse of China”, as one book title succinctly puts it.

    Blame the player, not the instrument

    These caricatures of the two countries do democracy an injustice. It is not to blame for India’s relative poverty. After Jawaharlal Nehru became independent India’s first prime minister in 1947, his Congress party enjoyed three decades of uninterrupted rule, most of them with a large parliamentary majority. It took the chance on offer to make radical choices and changes. It is not democracy’s fault that many of them were the wrong ones.

    But that is not to deny that India needs political reform. Again, the present government talks much sense on the issue. But the very reasons the system needs an overhaul may make it impossible to implement. There are three main needs: for better politicians; for less fragmented ruling coalitions; and for greater decentralisation.

    In every country, politics attracts some unsavoury characters, but India may be worse than most. According to research by the Public Affairs Centre (PAC), a Bangalore-based monitoring outfit, of 541 members of the lower house of parliament elected last year, nearly a quarter faced criminal charges. The proportion is higher for less educated MPs, who also tend to be richer. “Do political parties attract them,” asks the PAC, “because they compensate for their low education through their asset power and criminal prowess?”

    More than half of the MPs facing charges that could lead to lengthy prison sentences come from just four states in the Hindi-speaking “heartland” of northern India: Bihar, Jharkhand, Uttar Pradesh and Madhya Pradesh. In these places there is a special risk of criminals seizing political power, operating like warlords and sometimes winning election by “capturing” polling booths by force. Office holds out the chance of political protection from prosecution, as well as of income from corrupt practices.

    A stalwartly independent Election Commission does its best, but it faces an uphill struggle. Late last year, for example, Laloo Prasad Yadav, the political boss of Bihar (and railways minister in the federal government), was caught on camera dishing out 100-rupee notes to crowds of poor people, apparently to encourage them to attend a rally before the state elections in February. The Election Commission let Mr Yadav off with a “severe reprimand”.

    The chief election commissioner has expressed sympathy for the idea of giving voters the option to reject all candidates on the slate, but that would achieve little beyond perhaps a healthy embarrassment. Speeding up the judicial process so that more guilty politicians spend time in jail rather than parliament would help. However, some argue that the only way to attract higher-quality candidates and ensure fair contests is to finance election campaigns with public money.

    The second political obstacle to reform is the growing power of change-resistant regional and caste-based parties like Mr Yadav’s. Last year’s election was portrayed as a triumph for Congress over the Bharatiya Janata Party (BJP), the Hindu-nationalist party that led the previous coalition government and is now the main opposition. That disguised a more important trend. For the first time since 1996, these two big national parties won less than half of the total vote (49%). State and special-interest parties have increased their share from 21% in 1989 to 37% (see chart 6). In only one of India’s six most populous states does either of the two big national parties have a majority in the state legislature.

    Three ideas of India

    Coalitions, which have formed the last three governments, seem likely to rule India for years to come. The present one involves more than 20 parties. This can have a healthily moderating effect. In office, the BJP, for example, had to refrain from controversial policies promoting the interests of Hindus in order to keep its coalition together. But it can lead to paralysis. The present government faces debilitating rows with its coalition partners and “outside supporters” (mainly Communists) over every reform—be it a small cut in the above-market interest rates paid to pensioners on their provident-fund accounts (subsequently withdrawn) or the permissible level of foreign investment in the telecoms industry.

    Keeping coalitions together is not just a handicap in making policy. It is expensive. Lord Desai points out that the fiscal deficit grew in tandem with the decline of the big central parties. He argues that the various parties have three different ideas of India. Congress is Nehru’s heir, and custodian of his vision of a united, secular, syncretic India. The BJP is the party of the Hindu majority, with a view of a proud, resurgent Hindu nation. Most of the smaller parties, however, are subnational. The Communists are hardly an exception, so geographically defined is their strength. Their appeal is to caste, regional or linguistic loyalty. Politics becomes a matter of redistributing the national cake, not baking a bigger one. Nor are voters foolish to elect them. These narrowly based parties, offering only to advance the interests of their “vote banks”, may actually be better at keeping their promises than those pledging economic development.

    Lord Desai’s solution is for the two parties with a “unitary” vision of India—the BJP and Congress—to work in coalition. Because each is committed to raising India’s long-term growth rate, and broadly agrees on how to achieve that, this makes some sense. But because each defines itself in opposition to the other, it seems fanciful. Likewise, given the difficulty of forging consensus and of persuading politicians to acquiesce in loss of power, some of the ideas floated by members of the present government seem unrealistic. Prithviraj Chavan, for example, a minister in the prime minister’s office, has suggested laws limiting the number of parties contesting national elections. Salman Khurshid, another Congress leader, has proposed introducing some proportional representation into the electoral system, with candidates chosen from a national list.

    However a government is elected, it is likely to suffer from corruption. Rajiv Gandhi, a prime minister in the 1980s, once said that, of every 100 rupees of public money spent on the poor, only 15 ever reach them, and he is still often quoted. Many argue that the best way to monitor the graft of elected and non-elected officials is to devolve decision-making—and funds—to the lowest levels of elected government, the village councils or panchayats. Efforts to do so in the past have often been thwarted by the vested interests under threat. This government has promised a renewed effort.

    If political reform in India seems daunting, in China it is life-threatening. There has been some change at local level. Elections have been held in villages and in some urban districts, and in some party and state bodies. Meanwhile a proliferation of new outlets and growing internet usage have broadened the scope of allowed discourse. But the party has never contemplated relinquishing its monopoly on power.

    Two million mutinies now

    Hopes that Hu Jintao, who took over as the party’s leader in 2002, might usher in a period of faster political change have been dashed. Mr Hu has ruled out a separation of powers on the western model. According to Tony Saich, a China expert at the Kennedy School of Government at Harvard, he clings “to the belief that the answer lies in improving the quality of local officials and instilling in them a more upright, moral vision of what a good official should be”. As Mr Saich points out, this is in all but name a Confucian notion: “the rectification of names”.

    How fragile does this rigidity leave China? There are plenty of causes for disaffection: inadequate compensation for farmers’ requisitioned land; no work and no welfare system for migrant labourers; large-scale corruption; and sharply rising inequality. According to police statistics, the number of public protests in China in 2003 averaged about 160 a day. The protests in 1989, and later the mushrooming of the Falun Gong cult, showed how quickly popular enthusiasms can spread. But the party has made sure it faces no national opposition that might join these isolated protests into a co-ordinated movement.

    Mr Saich oversaw a survey in 2003 in which people were asked about their level of satisfaction with the government. They grumbled about local authorities, which are responsible for delivering services and often fail. But on the whole they were happy with the central government. This suggests it is given some credit for its national role: it is guiding China to great-power status. It will remind its people, and the world, constantly of this as it prepares to play host to the 2008 Olympic Games.

    Sooner or later, however, the party will have to loosen its grip. Optimists argue that a number of countries have managed impressive “catch-up” growth under authoritarian systems—for example, Germany, Japan and the Soviet Union. One could add Taiwan and South Korea. But none has stayed in the first rank without democratising. Leadership demands innovation. And, for all its failings, democracy is better at producing that.

    Comment by Nanubhai Desai — February 6, 2007 @ 2:36 am

  33. All these data for and against overheating Indian economy don’t seem to factor an important point that it’s an Iceberg Economy. Decades of excessive bureaucratic controls and chains of socialism have taught most of people to hide income, and lie through whole life. More over India’s domestic consumption of 64% is way ahead of China’s 38%. Still India has to catch up fast, but Indian communists do have some nuisance value to hold its growth down by neck for ever. Is it a leftist conspiracy to let China move fast and hold India down?

    Dear Nanubhai it was not hindu rate of growth but socialist rate of decay.

    Comment by Madhav Singh — February 6, 2007 @ 7:27 am

  34. PUT ten Chinese in a room, goes an old joke, and you would be hard pressed to get them to speak. Put ten Indians together, and you would never get them to shut up. It is a gross generalisation, but anybody who has worked in both countries would recognise a grain of truth, in political as well as cultural terms.

    I don’t see how talking a lot or less is relevant. Is the author suggesting that the East Asian (not just Chinese) custom of talking less, doing more is somehow detrimental to their economies? Don’t make me laugh out loud. The article you posted starts with a gross generalization and concludes with a gross generalization. You say you don’t want this thread to turn into an India vs. China bash, but you continue to post articles here comparing China with India, articles that contain little substance, but a heck lot of conjecture.

    My point has been that China’s government is as much of a handicap to China as India’s government is to India. India in my opinion isn’t all that different from China, it’s just at an *overall* earlier (about 10-15 years) stage of development than China. The basis of your argument is that economic measures from China and India are incomparable (China = evil centralized state, India = vibrant liberal democracy), yet you compare them so much. I’m here to tell you that your generalizations and assumptions are false. India’s economic development level is too low to enjoy its liberal democracy, and China’s economic regions are too free and autonomous to be characterized as a centralized state.

    Comment by J. Yin — February 6, 2007 @ 7:31 am

  35. More over India’s domestic consumption of 64% is way ahead of China’s 38%.

    This is not necessarily a good thing for a developing economy like India. No one today would deny that South Korea is rich country. Let me ask you, what was South Korea’s savings rate from 1960 to 1990?

    Comment by J. Yin — February 6, 2007 @ 7:39 am

  36. My 3 day trip was to Beijing. No, I have not visited interior rural areas of China. I dont think I have to in order to draw my conclusions about the people I met. I really do not believe that everyone in my path was putting on an act of being happy , largely content, and hopeful.

    I also do not believe that every village, every nook and cranny, must be equally developed. So what if the growth is somewhat or even heavily lopsided. Throw in four city clusters like Beijing, Shanghai, Guangzhou, and Hanzhou, and I believe we have hit a home run.

    Stepping back a bit, I think I am guilty of starting this “lively ” debate in this thread. Let me continue this one post before shutting up.

    I think it was a year back that The Economist carried another interesting article about Indias “democracy excuse”. I still remember it very well.

    India is an exception among democracies for not being able to address its social and economic aspirations. On the other hand, among autocratic regimes, China is an exception for accomplishing what it has. Most countries with a regime like Chinas’ end up like sub-saharan states, or like Iran, Cuba, or Uganda.

    I have to agree with Jonathan Yin on this point. I think the Chinese people have to be credited for pulling off this type of growth *despite* the Chinese governments interference. Along with the communist party’s inevitable dilution, the Chinese will demonstrate even better results.

    So the question for India is:
    What is peculiar to Indian democracy that it becomes an excuse for not growing ? Why dont other democracies Thailand, Malaysia, Korea, Taiwan, Turkey, Israel, Brazil, and almost all new democracies of eastern europe, feel that democracy is not a hindrance to growth ?

    Some of the largest infrastructure projects have been carried out in democracies not in communist regimes. This is why India is an exception among democracies. Examples look at K-Rail of South Korea, the Malaysian and Turkish highways, the brazilian dams.

    One final point, we need to look into ourselves to find the answers. The perversion of the Indian political system has meant that the interests of the public have narrowed to scary levels. The “slowness” of Indian democracy means that we are comfortable with a 200-300 year horizon for development.

    Medha Patkar, and Arundathi Roy, are two bit players. In a democracy, it should be easy for the state to counter and completely shut them out with facts and data. Should it not ? Why are we not able to build the media reach required to articulate the benefits of these mega projects ?

    I am reminded of the movie title, “There is something about Mary”. Likewise, I think “Theres something about *Indian* democracy”, that does not apply to other democracies.

    Comment by realitycheck — February 6, 2007 @ 9:14 am

  37. That was a nice article. I think the indian economy is much more overheated than it appears to be. I’d like to bring to light some more info, though it is unrelated to the article.

    I’m wondering whether RBI is looking at the right inflation numbers. I had looked at the WPI for cement for the last year. It went up by 17%(SOURCE – http://eaindustry.nic.in/). At the retail end, the cement prices have gone up by 42% (from Rs.120 per bag to Rs.170 per bag). So, in essence, the numbers put up by the ministry of commerce and industry are wrong (unless I’m missing a big piece). I don’t want to get into the reasons (whether they are deliberately misleading the public or not, etc).

    My question is to the RBI governor, Mr.Reddy – Your macroeconomic policy encompassing repo rates, CRR, SLR, etc – all will go for a toss if it is based on an inflation rate of 6%. I think these numbers are highly misleading.

    Any common man can tell that there is a big trouble burgeoning below the tip of the iceberg. The construction demand and supply mismatch will jack up asset prices and spiral an inflation bubble. From lower rates of inflation, I’m seeing a period of gallopping inflation unless the prices are checked.

    Comment by Prasad — February 6, 2007 @ 1:11 pm

  38. Though I am not an economist, I enjoyed this article and the one in Economist too. So here are some questions from a layman, request any of the economists to enlighten.

    1. The Economist’s central point is that demand is growing too fast. If demand is growing, then why is it such a bad thing? It reflects a capacity and willingness to consume! Won’t supply automatically grow to keep pace. Won’t our slow democracy eventually yield to the booming demand (another term for people’s aspirations voting with their wallets) and necessarily force the state to intervene to stimulate supply?

    2. The second point Economist makes is about the credit boom. Isn’t our credit off take as % of total consumption, still miniscule compared to Western countries? How does this compare to China?

    3. The third point and concern of Economist is on short term capital inflows into India and how they could quickly evaporate. Why is this concern valid in an age when Indian companies are so easily raising money to acquired companies globally? Aren’t these short term capital flows in India mainly into the stock market (unlike FDI) and equity trades? So they are invested into additional capacity and anyway not contributing to a better supply. Instead perhaps they are raising asset prices in the equity markets.

    On the China-India debate, we do have one historic commonality – unlike the West are not funding our industrialisation ‘raising resources’ (plain stealing) from colonies.(China though is innovatively doing a different kind of deal making in Africa to secure ‘resources’).

    Comment by Ram Medury — February 6, 2007 @ 1:41 pm

  39. Here are some of my comments.

    1. Demand growing too fast will increase prices. Supply may not increase because of the limited nature of resources. This will impact people whose salaries do not proportionately rise with the demand growth in the economy. Too much inflation is a bad thing for the general populace.

    2. Credit boom is good and bad. If credit is used to fund investments, it’s usually treated good. But, West primarily used credit for consumption. Their interest rates are pithy. So, the overall strain on their pockets is less compared to India where interest rates are high. Also, it is seen that in India credit is primarily being used to fund real estate investments and stock market investments. These are financial assets and very volatile. More the credit quantity, it is the quality of credit that is the primary problem.

    3. The short term capital inflows will be a problem if they fund long term capital projects as there will be a mismatch in cashflows. Also, if they fund assets, it may be a cause for asset bubble as it happenned in the ASEAN countries. If the asset prices fall suddenly, people will not be in a position to service the debt by selling off assets – the principal portion of short term debt repayment will be very high.

    Comment by Prasad — February 6, 2007 @ 2:33 pm

  40. Prasad,

    with regard to your earlier comment, you can’t look at cement prices as a proxy for economy-wide prices. For one, cement prices are highly procyclical and rise and fall faster than overall inflation. If you look at the “All commodities” index on the website you linked, you’ll see where the 6% number came from.

    The measure that I use to track inflation in India is the weekly WPI release from the Office of the Economic Adviser. I use year over year calculations… Since November, it has been between 5-6%. For a while in December, it looked like it was subsiding, but it’s back up to something like 5.7% or something. Because of the lagged effects of monetary tightening, it wouldn’t surprise me if it accelerated a bit to 6.5% or so before coming down. 6.5% would probably be my high-end estimate for the next 12 months (though I may come to regret those words!).

    Comment by Nanubhai Desai — February 6, 2007 @ 9:09 pm

  41. Thanks to all the commenters for a fantastic debate on IEB. Of course, feel free to continue it below, or on any of the other related posts which are sure to follow as we enter a (fiscal) year where real GDP growth is likely to be the highest in our contemporary history.

    Some of the things I took away from this discussion:

    1. The Indian economy is not necessarily overheated, but supply-side constraints need to be addressed.

    2. China and India are not comparable at this moment in time, though their historical trajectories may be similar. Different politics, different economies, and different national imperatives.

    3. Whatever happens, the Indian economic story is going to get very interesting over this coming year.

    4. The Economist\’s editors have figured out how to short the SENSEX.

    Comment by Nanubhai Desai — February 6, 2007 @ 9:21 pm

  42. One thing in that article by Stephen Roach kind of stuck out for me. He mentioned the ‘massive’ number of professionals that Indian educational institutions were pumping out, but neglected to mention that only a small portion (25%) of them were actually employable. Do I have my information wrong?

    Like China, the hundreds of thousands of “engineers” that India produces each year would qualify only as vocational school technicians in the United States.

    Comment by J. Yin — February 7, 2007 @ 4:02 am

  43. To each his own, but some interesting takeaways for me…

    One thing that is definitely growing faster in India, right now, than even in China is — Hype.

    China maybe destined to be a great power, India is guaranteed to be great democracy.

    As we can see… us Indians can never stop talking/debating, but heck we have one unquiet Chinese here! A warm loqacious welcome to him and his very interesting & assertive views (keep it coming, we need to hear it). :-)

    Overheating (& bubbles, etc.) are like pornography — you know it when you see it (but how you react to it depends on how sheepish you are!)

    Agree with Nanubhai, rest of 2007 is going to a very interesting year, but in more ways than one.

    Comment by ASMitra — February 7, 2007 @ 6:48 am

  44. Chandra wrote: Sure our politicians are utterly incompetent and babus are utterly corrupt. But to say we are not a functioning democracy is a stretch! How long have you lived in India? I wonder how much of that is your bias?

    From Foreign Policy, Feb 1, 2007:

    As many as 70 percent of Mumbai\’s poorest cast ballots, compared with fewer than 25 percent of the middle-upper class. (This figure is particularly striking compared with the United States, where, generally speaking, poor are less likely to vote than those with more assets and interests to protect.) Why is Mumbai different, then?

    In a word, patronage. Voters in Mumbai\’s poor areas turn out to vote at the behest of slumlords, who pay local politicians\’ campaign expenses and ensure they get elected through orchestrating the voter turnout. Gerson da Cunha, who works for a good governance organization in India, reveals to the FT that, \”Many of the people who deliver money and votes to the political parties are either goons or near-goons, so they tend to nominate goons.”

    Is this your idea of a functional democracy?

    Comment by J. Yin — February 7, 2007 @ 1:32 pm

  45. Nope. You are dead wrong on this one J.Yin. India’s and Mumbai’s elections are widely regarded as free and fair. If anything, India’s (including Mumbai’s) voters have one of the highest records of anti-incumbency voting trends. Put simply, they relish in “throwing the bums out.” This is hardly characteristic of, as you say, politicians (& their goons) ensuring that “…they get elected through orchestrating the voter turnout.”
    Put another way, India (or Mumbai) is hardly the kind of place where poor, defenseless people are forced out of their beds on election day by thugs and coerced into voting one way or another on the basis of caste/religion/economic-compulsion. That said, there is undoubtedly an element of fiscal populism and/or campaigning on the basis of caste/religion; but such things happen in practically any democracy. To cut to the chase – India (& Mumbai) has a well established track record of free and fair elections that is taken for granted domestically, and widely acknowledged and respected internationally.
    All told, we do have some blemishes. In some of our less progressive states like Bihar or politically troubled states like Jammu and Kashmir there have been instances of coercion, but such problems are widely known are being addressed and constitute the exception rather than the norm (Bihar + J&K are less than 7-8% of India’s total population).
    Last, but not least, India also has an independent election commission that monitors electoral rolls, campaign finance, voter turnout, ballot counting, results tallying. There are also several media outlets, psephology/consusltants, and NGOs who also get involved in election coverage and monitoring of fairness, and on-the-ground voting trends.
    The sight of computerized vote-counting machines being transported by camel or elephant back in the far reaches of Rajasthan or Arunachal Pradesh and accompanied by electoral commission officials and its assigned federal guards and then the sight of the poorest people of India turning out to vote, in their finery, and lining up patiently to vote is –frankly- too inspiring to belittle.

    Comment by ASMitra — February 7, 2007 @ 8:27 pm

  46. I don’t believe India’s election system either. It’ll be humiliating to democratic countries if India is called a functional democracy: Politicians issuing roti to villagers for the ballot, every year voting fight in villages, not mentioning tens of thousands of untouchables (slaves in modern society)…

    Comment by jeff — February 7, 2007 @ 9:40 pm

  47. Jeff,

    No one is claiming to say that our election system in India is perfect. Pols giving out free TVs because they claim it\’s a \”human right\” is something which tends to stick out.

    But you have to be truly delusional to believe that such inanity, in some form or another, doesn\’t happen in every other *large* democracy. I lived in the US through the 2000 and 2004 elections, and the system was if anything, worse than in India. Votes could not be counted, blacks were disenfranchised through intimidation, registration cards were thrown out, and one of the elections was decided by the supreme court. And that\’s only the openly sketchy stuff. There is also the problem of legalized corruption – where companies pay lobbyists, lobbyists pay politicians, and politicians essentially work for the companies. Maybe it\’s just my perspective, but this makes India\’s \”non-functional\” democracy look like a model for good governance.

    Of course, the point isn\’t to compare the US and India, but to say that anytime you have a large heterogenous country, democracy is going to create a lot of friction. Groups will vie against each other. Those with resources will try to coopt both voters and pols – because they are convinced that power can be purchased.

    Nevertheless, it remains the best system because it is the only thing which can hold such diverse groups together – by giving all of them power, a voice, and a stake in the future of the country.

    Comment by Nanubhai Desai — February 8, 2007 @ 12:36 am

  48. I really don’t understand why ppl got offended by that article.

    The economist cover story basically is saying that India is overheating and its current rate of growth of near 10% is not sustainable. do you agree with this view or not?
    While alot of what Nanubhai said is also true, India does have vast potential, but isn’t this why most of ppl (the economist included) agrees that India can keep growing at 7% range?
    These two are not conflicting views.

    Comment by Nami — February 8, 2007 @ 2:41 am

  49. Comparing India and China is like comparing apples and oranges. One is a homogenous society with an authoritarian government, the other is a multi-lingual, multi-ethnic, multi-religious society which has no alternative to democracy. Nowhere in the world has a late developing economy taken off under conditions of full adult franchise, a free press and all the trappings of democracy. If India pulls it off, it’ll be the first of its kind.

    Comment by akhondofswat — February 8, 2007 @ 8:08 am

  50. [China] is a homogenous society with an authoritarian government, [India] is a multi-lingual, multi-ethnic, multi-religious society.

    So is China. Everyone in China is at least bilingual (Standard Mandarin + Regional language). Religious beliefs, superstitions, cultural values and mores, traditions and cuisine vary tremendously between different Chinese provinces (even amongst the coastal provinces). China as a homogenous society is a myth propagated by people who have never been to China. South Korea is a homogenous society, China is like a hypothetical united Europe. It is anything but homogenous.

    Comment by J. Yin — February 8, 2007 @ 10:15 am

  51. Take it easy. Its not good if India or China make any mistake (economically or politically). They are neighbors and any failure in one country will resonate in another one quite loud. So, even if you are an Indian or a Chinese or a korean…just hope that things get better. Instead of fighting on “whoz better, or whoz worse”, try to find a solution if there is a problem. A realistic solution. It is not a zero sum game. Everyone wins or everyone suffers (if not loses).

    Comment by Chillfactor — February 8, 2007 @ 11:55 am

  52. [...] Well Nanubhai has certainly stirred up a storm with his overheating post. So now that the intial burst of energy has started to die-down, and the dust has begun to settle, it may be well worth sifting through the various pieces that constitute this whole debate, to try and see what exactly is at issue here, why the issues are important, and what can be learnt from the episode. [...]

    Pingback by The Indian Economy Blog » Why Japan Matters To India — February 8, 2007 @ 8:35 pm

  53. J. Yin, I like to reply to you but Nanubahi decided to edit my comments.

    Anyway, you can have your say. Quoting left wing FP on India, unfortunately, is not going to get you anywhere – btw, there is another article by Ms. Crossette that’s even more damning on India. You can use that too.

    And enjoy those Chinese political freedoms and miracle economy!

    Comment by Chandra — February 8, 2007 @ 10:51 pm

  54. “China as a homogenous society is a myth propagated by people who have never been to China. South Korea is a homogenous society, China is like a hypothetical united Europe. It is anything but homogenous.” Well, this is what Wikipedia has to say: “The Han is an ethnic group originating from China. As the ethnic group forming the majority of the Chinese population, it is the largest single human ethnic group in the world, numbering over 1.3 billion people. The Han people constitute about 92% of the population of mainland China.” That’s very different from India. Also unlike China, it has rarely been a unified country before the British came. India has a million mutinies, China has perhaps the Tibetan and Xinjiang ones, largely inconsequential.
    Services form the dominant component of India’s economy, completely unlike China. Domestic consumption drives Indian growth, again unlike China. The list could go on and on. What’s common to both the countries is that they have recently become part and parcel of the circuits of global capitalism. And primitive accumulation best flourishes without the liability of democracy.

    Comment by akhondofswat — February 8, 2007 @ 11:46 pm

  55. “The Han is an ethnic group originating from China. As the ethnic group forming the majority of the Chinese population, it is the largest single human ethnic group in the world, numbering over 1.3 billion people.” That’s very different from India.

    I’m saddened by the narrow assumptions based on nomenclature that you and others make about China. If someone (say Hitler) claims by decree that the white Europeans are all “one people” and creates an ethnicity called “White European,” does that suddenly make the Europeans a homogenous people? Of course not. The concept of a singular Han people did not exist in China until the late 19th and early 20th century. The Hans speak mother tongues as diverse as European languages, and are at least as genetically diverse as between the Germans and Spaniards. Cultural differences are just as large. The Northern Han Chinese generally do not eat rice, for example. Surprised?

    Comment by J. Yin — February 9, 2007 @ 3:36 am

  56. Yin,

    No one is putting down your China or saying that India is the best. Infact if you look at the previous posts, everybody has prasied China. Infact according to most Indians, india has to look at some of China’s policies. This is an Indian economy blog.If you got to say somethign abt your China..go reply in one of your Chinese blogs.

    Thanks!

    Comment by Vidya — February 9, 2007 @ 5:18 am

  57. it’s interesting to see people exchange opinions here. I wanna say something from a foreigner’s perspective (I live in PA, US, having visited both countries)

    India is not like many have mentioned, as a total chaos, some IT hubs are quite beautiful and it’s improving fast, its potential might be greater than China, but need time to prove. indian people are kind, warm-hearted, with better English skills.

    China is not like many have imagined, no freedom at all for most people, on the contrary it’s a pretty vibrant and exciting place. neos, bars, night clubs everywhere — western people will find more fun in China due to its openness and better facilities.

    Hope this can throw some light for people who have never visited each others.

    Comment by jeff — February 9, 2007 @ 8:42 am

  58. A great documentary. You can view it online.

    http://www.pbs.org/wgbh/pages/frontline/tankman/

    Comment by Nanubhai Desai — February 9, 2007 @ 11:01 am

  59. Anybody who claims that China’s population is as diverse as India’s hasn’t travelled in both these countries. Anybody who claims that India isn’t a functioning democracy has no clue about India. They’ll be claiming that China has a caste system next, or that it split into two after a religious partition.
    The simple fact is that India is far more heterogenous than China and the only way it can hold together is by being a democracy. It’s also a fact that no country started down the development path on the basis of full participatory democracy, free elections etc—not even England, which had universal frachise only in the twentieth century nor the US, which had slavery. The Indian development experience is therefore unique. And democracy, as Indians know very well, slows down growth considerably.
    It does, however, allow people to let off steam. On the other hand, whether China will change from being a fascist state to a democracy, or whether it will do so peacefully, is an open question.

    Comment by akhondofswat — February 9, 2007 @ 11:45 am

  60. I’ve watched that documentary before I came to China. If I’m not mistaken, it happened in 1989, almost 20 years ago. China is now a totalitarian but not dictatorial, let alone fascist :) For normal people’s life, it doesn’t make much difference if you live in a democracy or not. Development is the main task for both countries.

    I was really surprised how open and happy people are when I arrived Peking 2 years ago. Often people here have a negativee image on China thanks to our media.

    I want to hear more comments from Indian people who has been to China or Chinese people who has been to India.

    The point I want to make is, never underestimate India’s economy growth as it’s well comparable to China’s; never overvalue India’s democracy as Chinese average people may have a happier life without it.

    Comment by jeff — February 9, 2007 @ 1:51 pm

  61. ““Unlike in China, the domestic private sector is a very powerful force in India.”

    The author of this blog obviously knows very little about China’s economy, besides the usual right-wing drivel from India. China’s domestic private sector is BIGGER than India’s. Chinese provinces like Zhejiang are primarily driven by the domestic private sector. ”

    I don’t think his point was in reference to size. The point was more in reference to the power of the private sector to bring about change. There is no argument in so far as a comparison between China and India when it comes to whose government is more responsive to economic freedom. But there is just as little argument as to how arbitrary that freedom. As private investors go in India, they seem to face much more hurdles than they do in China, but they are dealt with an even hand, not matter how bumpy and reclusive that hand is.

    Comment by Abhishek Nair — February 10, 2007 @ 3:50 am

  62. Jonathan,

    With regard to the Economist article you referenced. There is something very disengenuous in the way that they aggregated over years (they used 1993-2004). As per my earlier post, India’s productivity “miracle” would have started in 2004 (with very low prodcutivity growth in the preceding three years). So the averages they use hide the true story. There will be plenty of time to have this debate as the data comes in.

    Again, with regard to the India-China comparison, I used it in the post because the Economist is hell bent on comparing the two. What I was trying to highlight was that they are two completely different stories. If you watch the documentary I linked above (it might be censored if you are in China), you will see what I mean. China’s economic reforms were in large part driven by the political chaos of 1989. The CPC sealed its hold on power by guaranteeing the people economic freedom in return for political repression. India’s reforms, which came later, were driven by an economic crisis – not a political one.

    If you actually want to have this debate, I would suggest addressing these serious concerns, rather than what you call “right wing drivel”. The simple questions that most Indians would have with regard to China would be:

    1. how do you think the political transition will happen and will it happen peacefully?
    2. do you agree with the policies of the CPC?
    3. how do you balance the need for economic growth with the basic socio-political freedoms (like free press, judiciary, legislative, etc.)? is it justified to reduce the latter in order to get more of the former?

    It seems almost absurd that I have to say this, but Indian people don’t hate the Chinese. The comments that so offend you are, in reality, a concern about the policies of the government. We want to know how the Chinese people are thinking. How do they balance the fruits of the boom with the costs?

    Are they satisfied with the current social contract that they have with the government?

    Comment by Nanubhai Desai — February 10, 2007 @ 7:19 am

  63. 1. how do you think the political transition will happen and will it happen peacefully?
    2. do you agree with the policies of the CPC?
    3. how do you balance the need for economic growth with the basic socio-political freedoms (like free press, judiciary, legislative, etc.)? is it justified to reduce the latter in order to get more of the former?

    I’m glad you have opened this discussion toward this direction.

    1. It will happen from within the party, much like it did within the KMT party in Taiwan (Lee Teng-hui’s ambush that led to Taiwan DPP’s rise). There are three factions within the CPC: Hu Jintao, Shanghai Clique and the ‘Princes’ (descendents of the original revolutionary party). Of these factions, the pro-business Shanghai Clique poses the greatest long-term and ideological challenge to Hu Jintao supporters. It is quite forseeable that the CPC might evenly split into two (with ‘Princes’ joining the Shanghai Clique) if tensions continue between these two factions. That may be the eventual evolution into a multiparty state for China, from within. We can predict from the experiences of South Korea and Taiwan that China’s transition will occur generally in a peaceful manner, however like S Korea and Taiwan, there will be some degree of riots and political arrests, but nothing catastrophic. The country will churn along just fine, economy may take a brief hit during the period of uncertainty, but ultimately the economy will bring the country together.

    2. I don’t agree with the more socialist, confrontational and “world power” politics of Hu Jintao’s administration. However, I do believe that Hu Jintao is also being held moderately in check by the other two factions within the party. I also believe Hu Jintao will step down in 2013 (in the footsteps of Jiang Zemin), at the end of his tenth year. The public expects that he step down by 2013. China’s largest city, Shanghai, is strongly right-leaning and will continue to dominate China’s economic direction and produce rival political figures for years to come.

    3. Expect to see greater judiciary independence in the years to come. Hu Jintao supporters will try to prevent this from happening, but there have been recently too many people calling for judiciary independence for it to be put off ad infinitum. Most of the Shanghai Clique, including former president Jiang Zemin had wanted eventual judiciary independence. It may not happen next year or before 2010, but it’ll become inevitable as parts of China move up the economic ladder and demand greater Rule of Law and property rights protection. Expect to see property rights amended into the Chinese constitution this year or the next. China will increasingly emulate Hong Kong’s Rule of Law institutions, bits by bits through trial and error.

    Regarding the control of other socio-political freedoms, I think most Chinese for the moment feel that it is mostly justified in the name of stability, of course until they get screwed by it. But the Chinese are typically aware of their circumstance. Every Chinese person learns to read Chinese newspapers with a grain of salt. Far from being the unquestioning masses that many Indians and Americans attribute toward the Chinese, the average Chinese is often more skeptical of their government than the former two, who are often shockingly quite complicit of the actions of their elected governments. America’s free press still managed to lead America into an unnecessary War in Iraq. Even now, a large number of Americans trust their government more than the national free media.

    At some point, China’s economy will begin to be more obviously hurt by the actions of its government; when that point comes the economy will force the necessary reforms. Until then, why use expensive hydrogen fuel cell, when you can use cheap oil?

    Comment by J. Yin — February 10, 2007 @ 12:40 pm

  64. INDIA Vs CHINA – Some Facts Generally Missed By Everyone….

    The Single Most Important point that is missed by everyone is – Geography is Destiny of a Nation. Whatever may policy makers try, China and India are as different as Chalk and Cheese.

    For starter consider this – China, with only 30% more population than India is a full 3 times bigger in size. What it means ? Simply more natural resources – espically energy Resources. China has 2-5 times more resources of Coal and Oil and this transalates into much greater energy production per capita for China than India. … and this has automatically transalated into lower costs in manufacturing for China and lower costs of raising physical infrastructure…

    And then compare the farmlands. China has slightly less cultivable land area than India (surprising)… But what matters is the extent of irrigated Land. Much of China’s Arable land is irrigated by the 3 big rivers , unlike India where only 40% of land is irrigated. And remember, almost all of China has perennial rivers – Bottom line? China has had much higher agricultural production per capita than India ,which transalates into healthier, well nourished and physically fitter population over there.

    Given these, it is no surprise that China is growing at 10%. And we should not be surprised if we make 6.5% growth only in Long term. Geography is Destiny.

    And add to it History – India’s huge religious/linguistic diversity vs China’s Homogeneity, India’s Democracy cum Open Society vs China’s Closed Totalitarian State Society, it is hardly surprising that China grows faster.

    Of course, it is also not surprising that India finds its own niche in IT Service Sector to grow up. Yes, given our geographic destiny, we will have no choice but to play second fiddle to China, in manufacturing and physical infrastructure. But our very weaknesses are a strength when it comes to Service Sector. A open, heterogeneous democratic India has its obvious edge in people oriented industries – be it Bangalored Sector or Bollywood Sector.

    It is obvious that China is going to be for the world, what germany was to 20th Century Europe (Industrial Powerhouse and Economic Engine). But we have nothing to worry – we can very well be the France and Britain of 21st century world , both rolled up into one – the Epicenter of global Finance, Trade, Services and Culture Industry. I strongly think that this is how things will shape up.

    Comment by Ramki — February 10, 2007 @ 10:41 pm

  65. And May i also add this -

    1. China never faced the inflation problem growing at 10%, while India faces inflation growing at 8% . Why?

    Because energy and food costs are higher in India… Thanks to our geography. China is having more energy resources and arable land and water availability per capita than India.

    2. China saves 40% of its GDP while India saves only 25%. Why?

    Simply because, the average Chinese family has less kids to spend on. China’s fertility rate is less than 2 while India’s fertility rate is 2.9. Infact, one must be surprised as to how an Indian Family, with 3 kids saves 25% , while a one child China Couple saves 40%….

    Comment by Ramki — February 10, 2007 @ 10:45 pm

  66. “Of course, it is also not surprising that India finds its own niche in IT Service Sector to grow up. Yes, given our geographic destiny, we will have no choice but to play second fiddle to China, in manufacturing and physical infrastructure. But our very weaknesses are a strength when it comes to Service Sector. A open, heterogeneous democratic India has its obvious edge in people oriented industries – be it Bangalored Sector or Bollywood Sector.” -Ramki

    But isn’t China fast catching up to India on the services front?
    Also, China isn’t as homogenous as we are led to believe. From talking to my Chinese friends, there are as many dialects and languages in China as in India. The same thing with cultural differences with in China. I believe this has been stated by Jonathin Yin a few times in this thread as well.

    Comment by GSG — February 11, 2007 @ 12:59 am

  67. While I don’t believe China is currently that much more homogenous than India, I do believe that in 2 more generations, China will be far more homogenous than India. The reason is that mass urban migration, standardized primary education, and national retail chains have led to a gradual “Americanization” effect in China. That is, as China further develops and expands its economic growth to the interior provinces, different parts of China will look more and more alike. The success of propagating the national language (Standard Mandarin) has created a powerful national identity that had never existed before in China. The current youth generations in China are more “Chinese” than ever. Mass urban migration will continue to dilute China’s regional languages/dialects and customs, because the extensive transportation system in China allows for migrants from very distant regions to work in the cities they want. These large migrant populations (all from different regions) forces local populations to speak in the national language, rather than their local languages/dialects.

    Comment by J. Yin — February 11, 2007 @ 2:08 am

  68. No.

    China (like any other large nation with huge population) does have its own ethnic differences, but they pale in comparison with India.

    Please Note that Language and accents and dialects are not the only marker of cultural uniformity/heterogenity. What about Food? What about Clothing Customs? What about Religion? What about Festivals? Cultural Etiquette?

    I can confidently say that there is more diversity in Indian Food Habits than whole of Rest of Asia put together. Staggering diversity. Ditto with Clothing habits. The diversity is huge across communities, classes, and even across generations. Ditto with cultural practices and etiquette – What is acceptable in Gujarat may be abhorred in Guwahati ….

    And yes, the rapid economic development in China has made things homogeneous and much of the Country is far more westernised (in food and clothing and personal customs) than India. Something that could have been a consequence of Mao’s Cultural Revolution and the consequent erasure of traditions and cultural heritage.

    Comment by Ramki — February 11, 2007 @ 11:07 pm

  69. GSG,

    China’s Service Sector is much bigger than India, but that is almost wholly oriented towards Domestic Economy (unlike their export focussed manufacturing Sector). India’s Service Sector- espically Technology Services is so much export oriented.

    China could attempt to catch up with us, but Technology Services is a niche area, which needs things other than wonderful infrastructure . Things like English language skills. I always believed that learning a Language is one thing and putting it into active day to day usage is another thing. The latter is much harder than what is generally believed to be. Language Skills come easier to Indians because of our heterolingual history. This is a big advantage in this age of Technology and User Directed Services.

    India’s Edge in Technology Led Services, (a niche area) is set to stay, unless Indian Government does something stupid to kill this advantage. And yes, India does have a chance in pushing opportunities in People Oriented Industry Sectors. We(India) have barely scratched the surface …..

    Comment by Ramki — February 11, 2007 @ 11:13 pm

  70. Thanks to all the commenters.

    In the future, please try to keep comments focussed around the original post – otherwise – when readers start responding to comments of other commenters, the discussion tends to go all over the place – which at times can subtract from the overall debate.

    Comment by Nanubhai Desai — February 12, 2007 @ 3:00 am

  71. i agree to some points with demographic dividend and producty and of course half-decent infrastructure. we have too much integration of politicians into policy making to decisions to work execution. unless and until we go away from it like few of countries in west we will not have too much planned and well done growth stories.

    if one rail minister manages to bring profitability does it mean he is very thoughtful person or does it mean he is pulling all possible strings to show profit or does it mean his predecessors werent capable at all. On our railways we still have very bad km/hr average for almost all trains. its high time we move away from 100 yr old infrastructure and move into super trains era of today, of course cannot happen overnight but has to start somewhere and done in planned phases.

    same story with roads, ports, irrigation, health, education u name a thing.
    even we can get acts properly defined and started on infrastructure betterment, we have few 100 bn dollar worth market of own, but yes politics and development needs to be segregated/seperated soon as they are different streams altogether.

    Comment by vijay kurhade — February 13, 2007 @ 10:56 pm

  72. after much effort got this interesting link onunimaginable diversity of India

    http://www.vdare.com/sailer/india.htm

    Comment by yash — February 17, 2007 @ 2:32 am

  73. [...] Whether or not inflation is a symptom of an overheating economy is one debate. In practice, this debate involves criticising the Reserve Bank of India’s monetary policy: tightening necessary, goes one side; unnecessary alarmism, says the other. It’s a good debate, but also a very technical one. The central government, for its part has engaged in variety of short-term measures using blunt tools. It has banned futures trading in some pulses, ostensibly to prevent speculation. It has lowered import tariffs on capital goods, steel, cement, chemicals and edible oils, and waived them entirely on wheat, pulses and sugar. And it has banned their export. [...]

    Pingback by The Acorn » Nothing like expensive onions to focus minds — February 18, 2007 @ 12:10 pm

  74. Review of Economist take on India
    http://www.prudentbear.com/articles/show/349

    The Economist’s leading article last week suggested that India’s long boom was about to end in a credit crunch. At first sight, this seems unduly pessimistic. China’s boom hasn’t yet ended in disaster, so why should India’s? However, when India’s position is examined more closely one comes to the conclusion that, while a crunch is not imminent, India’s economic miracle is a lot more vulnerable than it appears.

    Comment by Kamalraj — February 21, 2007 @ 2:43 am

  75. J Yin,
    Before talking about quality of democracy in India,lets first talk about the illegal occupation of Tibet,supression of Falun Gong, harvesting of prisoners organs, ethnic riots in Xinjiang etc. I am not saying that India is perfect, but neither is China. If India is not a functioning democracy, then China is a fascist dictatorship. Google was forced to censor itself in order to do business in China. In india google can pretty much print whatever they want. And indeed as you claim, if Chinese are so happy in China why do so many Chinese fall over themselves to reach America? In short people living in glass houses……… You will never find a Tiananmen kind of thing in India where tanks simply crushed unarmed protestors to death.

    Comment by AS — March 23, 2007 @ 10:05 am

  76. hi,I found this article by accident and I’m not that clear about economy or politics for that matter….
    I always thought India is a great nation, and I do respect the democracy of India.
    I’m now living in the uk, and to be honest, I don’t feel I’m any more free here than back in China (I’m not uk citizen, so I can’t vote either)
    chinese people can complain and talk bad about the government whenever they want(well, maybe not in front of the ccp, but I don’t think you guys could cursing in front of your PM either),I guess people have to live in China for a short time to really understand how open and free China has not become.

    Comment by Fiona — April 22, 2007 @ 3:01 pm

  77. Is credit Growth the key to US economic expansion in the 1990s than much proclaimed productivty?

    Analysis:

    STEP1:
    Take a look at the data at Federal Reserve historical data on consumer credit. The raw data shows over a 90% growth in credit during the ’90s. When one adjusts these values for Department of Labor historical statistics of the Consumer Price Index, one finds that total consumer credit has grown by 70%.

    STEP2:
    An adjustment needs to be made for growth in real per capita earnings since as real income grows so does the capacity to carry credit. When using that data to adjust the consumer credit values, in the last decade there has been a 30% increase in real individual income for the nation (non-government). Scaling the 70% personal total credit growth against the income growth yields a net 30% growth in real consumer credit carried.

    STEP3:

    …how much has individual credit really been growing?…
    Personal credit amounts are currently about $6k/person according to the aforementioned Federal Reserve data. The average household (2.6 people, $55k/year income … historical data from the Census Bureau household income tables) carries ~ 16 k$ in credit. This is a credit/income ratio of ~ 0.3. Applying this factor to the previously determined 30% credit growth/decade (or ~ 3% growth/year) by straight multiplication, then only about 1%/year would be attributable to credit growth IF the multiplier factor were only equal to 1.

    STEP4:
    GDP in the US has grown by about 31% in the last decade (see The Bureau of Economic Analysis’ historical data on GDP ), or about 3%/year. Depending upon the multiplier factor, you can see that credit probably makes up a substantial fraction of the GDP growth just by itself.
    There is at least one more important factor in the the GDP that we can adjust for in this simplified analysis: population growth in the work force. Between Jan 1, 1990 and Jan 1, 2000, the US population grew from 248 million to 275 million …. (source data Census Bureau’s population statistics ) or about 10%. Assuming the workforce proportion is similar, the GDP adjustment per capita yields a growth rate of about 2%/year.

    …What does this all mean?…

    Conclusion 1: if the per capita GDP growth rate is ~2%/year, then credit growth–which is an absolute minimum of 1%/year and probably higher–makes up the bulk of the US economic growth in the 1990s.

    …but what about productivity?…

    Isn’t productivity the source of the economic expansion? Productivity gains between 1990-2000 were about 25% ( Bureau of Labor Standards Productivity Statistics ) and outstripped per-capita CPI-adjusted GDP gains which were about 18%. If GDP gains had exceeded productivity gains, then the increase in credit is a consequence, all else equal. But with the percentages reversed, productivity does not appear to yield as much “gain” (to use an engineering term) on economic growth as one would hope to see.

    IT WOULD BE QUITE INTERESTING TO DO A KIND OF COUNTER ANALYSIS JUST FOR THE SAKE OF DSICOVERING THE REAL CAUSE OF THIS ECONOMIC GROWTH WITNESSED BY US IN LAST DECADE.

    WOULD REALLY LOVE TO SEE PRO-PRODCTIVITY-TRUMPING PERSON TO DO A COUNTER ARGUMENT BASED ON HARD DATA AND FACTS, RATHER THAN THEORETICAL PRODUCTIVITY ARGUMENT!!!!!!!!

    ANY ONE UP FOR THIS CHALLENGE???????

    Comment by Krishna Moturi — August 3, 2007 @ 1:48 pm

  78. [...] this whole debate is ongoing. Nandan Desai had an excellent piece here earlier in the year which put things pretty much in perspective and in October 2006 I had another piece in the IEB, basically in response to the Sizzling India [...]

    Pingback by The Indian Economy Blog » The Economist on India — December 19, 2007 @ 5:30 pm

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