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A Tale Of Two Economies - India and China

China's mind-blowing growth in last 3 decades has surprised the whole world. Today all the mega factories and companies establishing their manufacturing plant in China, making it the world's leading economic superpower. China has the world's fastest-growing major economy, with growth rates averaging 6% over 30 years.

As of 2018, China's private sector accounted between 70% and 80% of the GDP; the private sector is also responsible for 80% of urban employment and 90% of new jobs as a result the unemployment rate of china is just 3.8%. China also has the world's largest total banking sector assets of around $40 trillion (268.76 trillion CNY) with $27.39 trillion in total deposits. It has the world's largest foreign-exchange reserves worth $3.1 trillion.

It has the world's second-highest number of billionaires with total wealth of $996 billion. Of the world's 500 largest companies, 129 are head quartered in China. As of 2017, 109 of the Fortune Global 500 companies are based in China .

China is the world's largest manufacturing economy and exporter of goods.It is also the world's fastest-growing consumer market and second-largest importer of goods. The Shanghai Stock Exchange and Shenzhen Stock Exchange are one of the world's largest stock exchanges by market capitalization and trade volume. The economic development of Shenzhen has caused the city to be referred to as the world's next Silicon Valley.

A Quick Glance of Chines Economy
China which has Global output by value in 1990 was just 3% , became 25% in 2018 ,and as of now :- China Manufactures world's 80% Air conditioners, 70% Mobile phones, 74% Solar cells, 60% shoes, 50% Coal Production, 45% Ship Production, 50% Steel. (China is at first position in Apple exports to world market that is of 50% , with 6% America is at second position, that's the gap).

With the Nominal GDP of $ 14.140 trillion (2nd Rank in world ) and PPP of $ 27.307 trillion (1st rank) , china is the 2nd largest economy in the world. With the exports valued at $ 2.5 trillion (est. 2018) , the Chinese economy surpassed the US to become the world no. 1 exporter.

China produces 60% of the branded luxury goods on their land, thus, defying the notion that it manufactures only cheap goods.

This is the same China which is poorer than most of the African and Asian countries till 1975, then how it suddenly became the economic superpower, did china founds El Dorado, or gets Elder wand and cast any spell, moreover how It suppress India which is in stronger position till 1990, as the per capita income of China was $318 while India's was $368 at that time.

How The Gap Grows

In 1950, both China and India were rebuilding their economies after a long period of war and unrest. Both independent, one communist and the other democratic. India was in much better shape, the largest economy in Asia notwithstanding almost 200 years of colonial exploitation, with a relatively sophisticated economic system. China was in the catching up game and went its own way, plunging into the chaotic and destructive Cultural Revolution and the Great Leap Forward which turned out a disaster for both its citizens and economy. By 1978, after the death of Mao, it was an economy going nowhere with a bloated population and great poverty.

The new leadership of Deng Xiaoping ( Architect of Modern China ) started the Boluan Fanzheng (eliminating chaos and returning to normal) program which brought the country back to order. In 1978 Xiaoping's opening-up-to-the-world policies and the 1979 Equity Joint Venture Law. Together they have allowed (among other things) foreign capital and Western companies to enter China, transforming the domestic economic landscape entirely from one that is traditional and obsolete to one that is dynamic and modern.

The communist China regime started freeing agriculture from state control - a big-ticket reform in the country. It enforced one-child policy in order to defuse the population bomb and so that the demographic dividend could be utilized, then started investing in infrastructure and promoting its coastal areas for investment.

In contrast, India, whose traditional rule of law provided for the open market - that was chained in by the British colonial rulers to maximize their own industrial progress - under Pandit Nehru adopted a socialist economic model where wealth creation and big private enterprise were not encouraged. Indian economy grew at around 3.5 per cent rate through the 1960s and 1970s while population grew in excess of 2.5 per cent. The population growth rate was a curious case as India was among the first few nations in the post-World War II phase to roll out population control policy. However, the family planning centres in India practically functioned as a family expansion facility due to the very low penetration of medical facilities in remote areas and lack of awareness.

In 1987, GDP (Nominal) of both countries was almost equal. But in 2019, China's GDP ($14.140 trillion) is 4.78 times greater than India($3.202 trillion). On PPP basis, GDP of China($27.307 trillion) is 2.38x of India ($11.321 trillion). China crossed $1 trillion mark in 1998 while India crossed 9 year later in 2007 at exchange rate basis.

Both countries has been neck-to-neck in GDP per capita terms. As per both method, India was richer than China in 1990. Now in 2019, China is almost 4.61 times richer than India in nominal method and 2.30 times richer in PPP method. Per capita rank of China and India is 72th and 145th, respectively in nominal. Per capita rank of China and India is 75th and 126th, respectively, in PPP.

According to CIA Fackbook, sector wise GDP composition of India in 2017 are as follows : Agriculture (15.4%), Industry (23%) and Services (61.5%). Sector wise GDP composition of China in 2017 are : Agriculture (8.3%), Industry (39.5%) and Services (52.2%). Our service sector has done outstanding job, it can be considered as backbone of Indian Economy.

With the growth rate of approx 10% in last 3 decades, China lifted more than 800 million peoples from poverty (as per world Bank ).

Differences – India V. China
  1. Mass Production and Dumping
    Chinese economic reform help them to scale up their production so massively that their cost of production has comes down drastically. It has become home to mass production that's why, China also known as Factory of the world. Chinese companies observe the local market, import goods in bulk almost identical to those that sell well on the spot but on much cheaper price, leaving the local industry to struggle for its survival. This is how the chicken industry in Zambia, bikini industry in Brazil and the smart-phone industry in India were severely hit.

    On the contrary, India has become the dumping ground for massively produced Chinese goods. For instance, home ground smartphone market such as Micromax, Lava and Intex once cornered nearly 54% of the Indian market share. The same brands have 10% market share today. In the plea, Bansal - alongside chief executives of other Indian smartphone vendors like Micromax and Karbonn Mobiles - accused Chinese smartphone vendors of dumping low-cost smartphones in India, making it tougher for the local businesses to survive. The government should introduce an anti-dumping duty on such phones, the CEOs suggested. Every child needs hand-holding by their parents, Bansal said at the time.
  2. Competitive Pricing with Reverse Manufacturing
    Chinese manufactures do not waste their energy and resources in innovation, instead they copy the technology from advanced countries like USA, France and start making their own products. It saves their cost and resources on innovation, R&D, and IPR. As a result the final product have a much cheaper price than original. For instance, iPhone X which cost around Rs 70k in India, while GooPhone X, a Chinese clone of the same will cost Rs. 6500.

    On the contrary, the Indian business community lacks in global exposure. They still believe in traditional way of doing business .Now the things have been changing in India as well, but it takes some time.
  3. Cost-Effective Labour
    China has a competitive advantage due to cheap labour owing to a big population. Its a Myth! Rather Chinese labour is highly productive. The Chinese govt. in collaboration with industries worked on the skill development of labour force. As a result, the output of Chinese labourers is many times higher than that of India.

    On the contrary, India which has the largest number of Youth in the world, but only 2.3% of the workforce in India has undergone formal skill training as per Periodic Labour Force Survey (PLFS) of 2018, although Indian govt has taken many initiative for skill development like “Skill India program, PMKVY, but failed to implement it effectively due to mismanagement and non-availability of Funds. As a result, the maximum labour force is either unproductive or less productive.

  4. Experience and Expertise
    “Karat karat abhyas te jadamati hot sujan, India has formulated this principle and China applied this, and by the virtue of their continuous labour, Chinese workforce are so skilled and experienced that china has become the first choice for setting up a manufacturing unit for companies around the globe.

    On the contrary, India has just began to establishing manufacturing clusters which will take time to produce skilled labourers, whereas it has reached each household in China.
  5. Stability Of Government
    Political stability is the prime reason behind china's emergence as a popular destination for
    manufacturing. China is considered more stable to a global partner in comparison to India due to its political stability.

    In India due to bureaucratic red- tapism, it takes more time and energy to get clearance to start a business, which is why international investors are reluctant to come to India.
  6. Education
    An investment in knowledge pays the best interest, Education system is the most important factor behind how china became economic superpower. They have brought major education reforms in education by making it more global and pragmatic, as a result 24 universities of china(mainland) is in top 500 universities of the world while in case of India its only 8 (Q S Top universities Ranking 2020). Chinese eduction system also encourages vocational courses.

    On the other hand, the Indian education system still looming around what is known as the British legacy. 92% of government schools are yet to fully implement the RTE Act. India is ranked at 115 out of 157 countries in female literacy rate while China ranked 27. As a result overall, China literacy rate for 2018 was 96.84% while India's was 74.37% ( UNESCO Institute for Statistics)
  7. Industrial Network Clustering
    China has established a vast network of industrial cluster and supply chain cities for manufacturing products. Like
    • Province-Industry
    • Shanghai-chemicals, pharmaceutical, automobile, electronic apparatus, financial
    • Shenzhen-IT, semiconductors,communications, electronics information
    • Beijing-IT, communications, electronics
    • Guangzhou-Automobiles, electronic appliances, textiles, apparel, toys, petrochemicals

    On the other hand, India has also started industrial network clustering, every state promoting themselves and convincing investors to invest in their state. So, it will take some time to form that level of industrial ecosystem which China have. Industrial network clustering helps in creating millions of job thus ultimately boost the economy of any nation.
  8. World Class Infrastructure
    China has developed world class infrastructure which is a pre-requisite for developing a manufacturing hub. China's highways, roads, ports, Airports, supply chains, infrastructure etc. in totality is more advanced than India. According to Forbes, between 2011 and 2013, China consumed 6.6 gigatons of concrete - that's more than the U.S. used in the entire 20th century, just imagine that level of development. Before starting a project, China makes a vision for the next 20-25 years(long term vision) like Made in China 2025, a plan to achieve 70 percent self-sufficiency in high-tech industries by 2025, and by 2049(the 100th anniversary of the PRC)—it seeks a dominant position in global markets.

    On the other hand, India makes project by taking account into the next elections. Here in India, appeasement is more than development and vision is very short lived. For example, you can take account of Allahabad's city roads which are totally renovated just before Kumbh 2019 and now scrapped within a year. Another important point is, India did not invest adequately in infrastructure, only 4.7% of GDP where the need was for 6.5%. China over-invested, at 8.7%, while it needed only 6.5%. As a result India's supply-chain costs are at 14% of GDP creating a highly cost-uncompetitive economy while China is at 6% creating a competitive low cost economy.

  9. Government and Industry Partnership
    Chinese government works in tandem with the corporate sector. Also, the Chinese govt. is directly involved in expanding its economic activities in foreign countries. Best example is China's The Belt and Road Initiative (BRI) a global infrastructure development strategy adopted by the Chinese government in 2013. Currently China has engaged 138 countries and 30 international organisations in the BRI Infrastructure projects include ports, railways, highways, power stations, aviation and telecommunications. Like Gwadar Port in Pakistan, the Hambantota Port in Sri Lanka etc. Through project like these China also found the ways to boost its economy, Chinese construction company that has fewer opportunity within their own country shows huge boost from BRI contracts, 7 out of 10 biggest construction firms in the world are now Chinese.

On the other hand, India's democracy has been a bottleneck in extending its economic interests in foreign countries like we have seen the example of Gautam Adani. However, India has also started infrastructure projects in partner countries, like modernization of The Rift Valley Textiles factory in Kenya. Some of the big-ticket projects completed recently in Africa include the construction of the presidential office in Ghana, the National Assembly building in Gambia, and the Kosti power plant in Sudan. But all these projects are relatively small in comparison to China. Analysts say that India has a long way to go in catching up with China vis a vis undertaking big ticket infrastructure projects.

The lessons for India are very clear either spend big or plunge deep. Former PM Dr.Manmohan Singh's has truly said that “mere tinkering with economic policy will not help revive India's ailing economy and a stronger medicine is needed. Nobel Prize winning economist Abhijit Banerjee had also said policy makers should “worry more about demand and advised that India needs to pump in money into the economy, especially in the hands of the poor.

“India is a very attractive opportunity. But it is going to have to compete against a global ecosystem…India provides a large market, a large labour and a stable government and can be a very attractive place to locate much of the manufacturing. But India needs to take measures to make itself more competitive as well, said Nisha Biswal, president of the US-India Business Council (USIBC). All these above comments pointing towards one common thing i.e., to do some major reforms in economic policies.

Challenging China means unlearning many things and re-learning many new things. India championed the romantic notion of rural villages, failing to understand that rapid urbanisation was the future. Romance with village is good but its not bad to have affair with urbanisation. As its really important for India to invest in its cities, including in new cities. To promote rapid urbanisation which could enable delivery of civic services to improve quality of life, give freedom to cities and towns to govern themselves and create new jobs.

Incentivise and increase investment in labour-intensive industries to create more jobs. Remove restrictive labour regulations to increase job-creation. Allow firms to grow faster in all areas by de-reserving goods for MSME and making them grow bigger. Reduce corporate taxes to 25% for all to increase internal generation of resources and reduce capital intensity by reducing depreciation rates. Incentivise job creation by special tax-breaks.

Increase investment in infrastructure to at least 6.5% of GDP, release investment resources by divestment in state-owned mature infrastructure assets. Improve productivity of ports, reduce power theft, improve speed on highways and in railways and reduce the cost of doing business by removing unnecessary regulations. Keep a level playing field between Indian business and FDI.

Allow investment in education by the private sector to improve skills and human capital, grant full autonomy to the top 200 universities to increase innovation. Encourage vocational education. Experts said that if the infrastructure bottleneck and slow approval process is dealt with efficiency, India could replace China over next few years.

China has many lessons for us. Chinese companies will dominate the world in future. It is not an overstatement to say that India needs to learn a few tricks of the trade from China as it is the only country with a 1.3-billion population which started off in 1950 with similar economic and social structures, and succeeded in dominating the world. 

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