Transcript Could India “overtake” China?

Could India “overtake” China?
Is India catching up to China?
• Not in terms of international finance: its
foreign exchange reserves are still less
than $130 bn, versus China’s $700 bn,
HK’s $122 bn, Korea’s $200 bn,
Singapore’s $115 bn, Taiwan’s $250 bn,
Russia’s $150 bn, and Japan’s $1000 bn
++.
Is India catching up to China? Look
again …
In 2005 India’s GDP growth rate was almost
8% and rising, versus 9.5% and falling in
China.
• In 2005 India’s stock market rose 15% in
dollar terms, versus a fall of -12% in
China.
• India’s growth has been more in services,
versus China’s in manufacturing.
India’s strengths
• India’s population growth is faster than
China’s, and its population is much
younger.
• Indians speak English. Their universities
have become among the best in the world,
esp. in engineering, IT and bio-technology.
• Their banking sector is much healthier
than China’s, and the return on capital is
much higher.
India’s weaknesses?
• Indian democracy is fractious and has thus
far blocked infrastructure development.
But now a massive “autobahn” is being
built connecting Mumbai to Delhi and
Calcutta.
• BUT India’s democracy also fosters
creativity, and provides an outlet for
discontent that China lacks.
World Bank Report on India
• Carl Dahlman and Anuja Utz,
“India and the Knowledge Economy”
World Bank Institute Development Studies,
June 26, 2005, 178 pages.
• Macro-stability
Since the 1991 crisis, when energy
imports exhausted reserves, India’s
GDP growth is up (averaging 5 – 7%),
volatility is down, inflation is down and
all three trends have been resilient. The
debt burden has been stable and FX
reserves have increased to safe levels.
India’s youthful labor force
India’s “demographic peak” (when its
ratio of income-earners to dependents
peaks) is, unlike China’s, yet to come.
Democracy and a free market
India has the world’s largest population
under democracy and the world’s
fastest growing free market. Good or
bad for growth? More later.
Outsourcing human capital
India has mastered 21st century Information
Technology, leap-frogging the need for
transportation infrastructure. Its youthful population
embraces this technology. Vocational training is at
last taking off, after decades of strictly academic
education.
Outsourcing – to Hyderabad and Bangalore – is now
legendary, documented anecdotally in Thomas
Friedman’s “The Earth is Flat”. Young Indians can
sell services to rich countries without leaving India,
and H. and B. are now attracting engineers and
investment bankers from all over the world.
Domestic vs Foreign Demand
Retail Banking
• India’s growth is driven by domestic demand;
China’s by foreign demand
• The 1991 reforms sparked consumer lending, as
India’s (gov’t) banks were opened to pvt
competition, and subjected to BIS regulations.
India’s retail banking is now growing at 30% per
year, although retail loans are still only 5% of
GDP (versus 40% in Taiwan). Electronic banking
is much more advanced than China. India’s
NPLs are only 2.3% of assets.
21st Century Farming
• 65% of India’s population is rural, and the
gov’t recognizes that rapid movement
from farms could be disastrous (also,
democracy and private property rights
constrain such a plan).
Instead, India espouses “21st Century
Farming”: eg, rural village kiosks (“echaupals”) where world prices are quoted
and small sellers can trade.
The Indian Touch
• India’s concentration on manufacturing for
domestic rather than export demand
encourages the “Indian touch”: easy-torepair cars and trucks, a “smart” health
card, a cell phone for truckers (with a
flashlight!), Maggi Sauce becomes Maggi
Pickle.
Design versus Mass Production
• India doesn’t mass produce as effectively
as China, but it does win quality and
design awards: eg TAPS got the “GM
supplier of the year” award last year.
• Some of India’s traditional non-tradeables
are becoming globalized: eg, the 3 “Fs”:
Food, Fashion, and Film.
Recycling
• A scarcity economy and shortage of
capital have made Indians inventive about
improvising on inputs and reducing costs.
• For example, 60% of India’s plastic waste
is recycled, compared to 10% in China
and 12% in Japan.(Pavan K. Varma, Being
Indian p. 74.
Small Scale Industries
• India provides financial and fiscal incentives to
SSIs; also Indian banks extend small loans.
• India’s SSI sector employs 80% of factory
workers, 50% of value added in manufacturing,
and about one-third of export value.
• There are about 2.5 million small scale
enterprises in India, and they pay about 1 billion
dollars a year in bribes.
• Only 3% of India’s work force is in the formal,
organized sector: private, corporate and public
Democracy vs Autocracy
• India is very diverse and decentralized, with 15 states
the size of typical European countries, but more
populous. It is remarkable that it has proved
democratically governable since independence. Some
eg, Pranab Bardhan) fear that India is paralyzed by
fragmented political parties. Democracy has pros and
cons for growth (eg India’s income dist is, surprisingly,
more equal than China’s, and the potential for serious
unrest and political crisis may be lower; but its ability to
relocate people and install infrastructure is constrained:
eg, Mumbai’s putative superhighway). Since India is less
coordinated from the top, its potential for large-scale
error may be lower. But to be fair, China’s CCP is
increasingly sensitive to popular opinion.