India vs China: Which Economy will succeed?

Last updated on: April 23, 2006 at 1:39 pm by Desh Kapoor

India vs China: Which Economy will succeed? 2006-04-23T13:39:00-05:00 Desh Kapoor

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This is a good article on the differences between India and China as economies. I am personally for the Indian economy vs the Chinese. Not because of my nationality but because of the way they are shaping up. At least the Indian economy has an element of a self governance business element. Factories or offices come up based on an entrepreneurs estimate of ROI! Very little of that happens in China. The entrepreneurial base and the divergence in it can be amply judged from the Forbes Billionaires list this year. The Chinese Billionaires this year were 9 and the Indian number was 28!! This is not consistent with how the economies at present are stacked up! Chineses economy with its current strength should have had 10 times more millionaires vs India.. but that is not how it is… It points to the Chinese Govt.’s intervention in business and how IT decides what is good and what isn’t and ultimately subsidizes or invests in those areas! In the short run – a great way to do things.. but in the long run… a sub-optimal way to run an economy!

The great financial game of the 21st century will be guessing who ends up supreme: China or India. Investors who get this right will make money. To get a better feel as to which horse to back, I went to India recently to see the action. You can almost feel the ambition, energy and potential of a giant nation revving up – and the obstacles it faces.

Short term there can be no contest about who is top dog: China, economically and politically, is a more powerful nation than India. It has a larger population, better infrastructure, much more extensive manufacturing, less poverty, more investment from overseas, and consistently grows faster. But in the medium to long term, things become rather harder to predict.

India has some important things on its side: India is a democracy, the largest in the world, which celebrates the 60th anniversary of its independence next year. China, meanwhile, remains a totalitarian state, where citizens have no vote or automatic right to a passport.

For how long can its communist leaders keep a lid on the growing demands for real freedom from its 1.3bn people? And how easily will its system cope with the inevitable transition? Investors need political stability to ensure returns. China might just blow up one day.

India enjoys the rule of law, an independent judiciary and a framework of established property rights. These are essential bedrocks for a successful capitalist society. Are they present in China? Who knows? Permanent private ownership of assets is still a murky area. The state, the party and the military do what they want. When things go well there are limited problems: but if there are disputes, I would rather rely on the legal process in India than China.

India is younger and its population is growing faster than China’s. Almost 70 per cent of its population is under 35. But China faces the demographic difficulties confronting the West: an ageing population. Within 25 years, India’s population will be greater than China’s.

Indians have learnt to be personal entrepreneurs, especially since key reforms were introduced in 1991. It has hundreds of millions of self-employed people crafting a living, and the billionaire businessmen of recent times have become folk heroes. Meanwhile, China’s export-driven manufacturing boom is largely driven by foreign direct investment, not individual innovation or enterprise.

India has perhaps the most materially successful diaspora anywhere. They are easily the highest achieving minority in both the US and the UK, and reckoned to be 20m-strong globally. In total, people of Indian origin living abroad are estimated to be worth $350bn. Their remittances home are the highest in the world. They represent a massive resource of talent and investment available to help their mother country, dwarfing that of the exiled Chinese.

India has a large, rapidly-growing, vibrant and free media, across the press, television, radio and online. It has an enormous entertainment industry, with Bollywood now easily the world’s second largest film centre. This helps provide its billion-plus citizens with information and hope, and is a way for the public to monitor their politicians. China censors its media extensively.

Indians speak English. It is the de facto national language of the country for those who want to get ahead. Thanks to the might of the US, English has become the language of world commerce; in the era of globalisation and the rise of knowledge industries, this skill will become ever more significant.

China’s state-owned industries and banks may hide huge credit risks, bad loans and deeply unprofitable enterprises. Its dramatic growth is unsustainable if these fears prove real. India has sounder lending institutions and more transparent large public companies.

India does have barriers. It needs huge investment in basic infrastructure like roads, sanitation, electricity generation and education. It needs to handle the menace of corruption more vigorously. It needs to tackle overpopulation and poverty, and to ensure its new-found prosperity is spread across society, not just concentrated amongst the educated elite.

Tags: China, India, Economy

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