Is India really shining?

Recent reports from varied sources such as the Reserve Bank of India (RBI), International Monetary Fund (IMF) and several rating agencies and merchant banks that the Indian economy is poised to register a growth rate that could be as high as 7 percent have given rise to a self-laudatory mood. A recent article "Can India overtake China?", in the prestigious US journal Foreign Policy, co-authored by Yasheng Huang and Tarun Khanna accounts for a good bit of the gloss on it. Both come with impressive credentials. Huang is an associate professor at MIT's Sloan School of Management, and Khanna is a professor at the Harvard Business School. But it is Huang who, by virtue of being an ethnic Chinese, gives the article its special credibility. While 7 percent is good, evidence suggests that the underlying basics of the Indian economy remain unchanged. Nothing makes this more explicit than a comparison with the economic and social indicators of China after the economic reforms. Far from catching up with China, India seems to be falling well behind.

We must not forget that 7 percent comes after a year of 4.6 percent, preceded by performances of 5.7 percent and 3.9 percent, which shows the average growth rate to still be in a low trajectory. But even if we accept that India is indeed 'shining', how good is that shine? Is it a burnish that reveals the quality of the metal beneath or is it a thin coat of varnish that just puts a superficial gloss? To understand that we must go into how good the years after the so-called reforms have been. Very simply, the decade after the launch of the so-called reforms has not been very much better than the decade before it. Gross National Product (GNP) growth for the post-reform period (1992-01) crept up by a mere 0.2 percent to 5.9 percent. With a performance like that it would be extremely difficult to make a case that the economic reforms or liberalisation, call it what you will, have made much of an impact on the nation as a whole.

Of course some have benefited. As Sushma Swaraj, currently health and family welfare minister, famously told the lower house of the Indian parliament recently, there are no more queues for telephone and gas connections. But with India's teledensity a mere 3.2 per 100, and with just 58 million of the 180 million households with gas connections, clearly suggesting that most households with an annual income of less than INR 80, 000 are without cheap and subsidised energy, the country seems quite some way off from a satisfactory distribution of benefits. Nevertheless, no queues for phones, gas, and even for Maruti cars and Bajaj scooters and motorcycles is still good news. But certainly not enough to warrant an outpouring of self-congratulations for it is indices for infant mortality (69 per 1000), life expectancy (63 years), literacy (65 percent), as well as energy sufficiency (527 billion kilowatt hours) and energy consumption (a mere 379 kilowatt hours per capita) that make the living reality of India. Additionally, however well it might have done, the country has fallen well behind China and it will take some effort to catch up. (Tables 1(a), 1(b), 1(c) and 1(d)).

A comparison of the first ten years of the economic performances of India and China after reforms (from 1992 for India and from 1979 for China) is instructive. China entered the first decade of reforms as a fast developing and modernising country with an average decadal growth rate of 5.5 percent. But more important than this was the performance by 1980 of reducing infant mortality to 42 per 1000, elevating life expectancy to 67 years, and raising adult literacy to 66 percent. India by contrast had a better growth rate of 5.7 percent in the 1980s but came burdened with an infant mortality of 119 per 1000, life expectancy of 59.2 years, and adult literacy of 48.41 percent (Table 2). Many reasons have been advanced for China's stupendous performance. Few are as valid as what Amartya Sen wrote: "China's relative advantage over India is a product of its pre-reform (pre-1979) groundwork rather than its post-reform redirection".

Yet another comparison would be even more instructive. In 1978, at the inception of its reforms, China's per capita Gross Domestic Product (GDP) (in constant 1995 USD) was USD 148, whereas that of India in the same year was USD 236. Seven years after it began its reforms, in 1986, China caught up with India in per capita GDP terms (USD 278 vs USD 273) and a decade after reforms in 1988 was comfortably ahead of India with a per capita GDP of USD 342 compared with India's USD 312. In the first post-reform decade the Chinese economy grew at a little over 10 percent while the Indian economy grew at 5.7 percent in the corresponding decade (Figure 1 and Table 3). Quite clearly the 1990s was India's lost decade.

But what did India achieve in the first decade of its reforms? In 1992, the first year of reforms, India's per capita GDP was USD 331. This grew to USD 477 in 2001. In the same period the Chinese per capita GDP surged from USD 426 to USD 878 in 2001. In the 1990s China grew at rates close to 10 percent while India grew at 5.9 percent. Quite clearly, far from beginning to catch up, India fell well behind.

China's GDP (1995 constant USD) has grown eight-fold since 1979 and stood at over USD 1 trillion in 2001. Chinese GDP was lower than that of India in absolute terms in 1978 but caught up with India in the very next year. The size of the Chinese economy now is twice that of India's. In 2001 India's GDP stood at a mere USD 492 billion with a population of 1.03 billion. While India seems to be catching up with China on the population front, China's GDP still remains a distant and difficult target (Table 4).

It is true that both countries have transformed themselves after they embarked on the path of economic reform. But the transformations were entirely different in nature. In 1980, the sectoral break-up of China's economy was as follows: agriculture 30 percent, industry 49 percent and services 21 percent. In 1990 that changed to agriculture 27 percent, industry 42 percent and services 31 percent. In 2000, that picture transformed further. Agriculture fell to 16 percent; industry grew further to 51 percent while services steadied at 33 percent. Note the growth in the share of industry now. This was primarily made possible by overseas foreign direct investment (FDI), which amounted to USD 290 billion (Ministry of Foreign Trade and Economic Cooperation, Beijing) during the decade (Tables 5 and 6).

Apart from the millions of new jobs created, the role of FDI in making China a major manufacturing centre in the world is seen in the share of FDI enterprises in total exports, which rose from under 2 percent to 45.5 percent in 1999. In India it was just 8 percent for the same year. The share of world trade in the GDP's of the two countries, not surprisingly, is also very different. While trade accounts for as much as half (49 percent) of China's GDP, it accounts for less than a third (29 percent) of India's GDP. Also, while China's enjoys a 3.7 percent share of total world trade, India's share in world trade is less than one per cent.

In recent days there has been much speculation as to whether the FDI gap between China and India is indeed as large as it is made out to be. Chinese (as well as the IMF's) MI figures include what are classified in India as Foreign Institutional Investor (FII) investments in equity markets, loans etc, whereas in India FDI refers only to direct investment in industries. Even if these adjustments are made, however, FDI in China is still many times larger than that in India.

The emergence of China as the global base for manufacturing is also predicated on the surge in China's research and development (R&D) expenditure. The latest Organisation for Economic Co-operation and Development (OECD) science, technology and industry scoreboard has ranked China as the third largest R&D spender in the world, amounting to -USD 60 billion (Purchasing Power Parity) in 2001. Though India ranked among the top ten spenders worldwide, it spent only a third (USD 19 billion) of what China invested in R&D in 2001. Such huge Chinese investments in furthering the base of knowledge suggests that India can only fall back further in terms of industrial growth rates and competitiveness.

The Indian sectoral picture makes for a study in contrasts. The share of agriculture fell somewhat from 31 percent in 1990 to 28 percent in 2000. The share of industry too fell from 28 percent to 26 percent. Services grew from 41 percent to 46 percent. Software apart, the biggest contributing factor to the growth of India's services sector has been the growth of public administration, which has been bounding at an average rate of 32.5 percent each year from 1993-94 onwards. In 2001 alone, central, state and local governmental salaries together topped INR 167,715 crores. This kind of spending was not what Keynes had in mind when he advocated public spending to stimulate the economy (Tables 7, 8(a) and 8(b)).

The impact of these sectoral growth rates is reflected in the job creation patterns for the two nations. Today China's workforce is 705 million (1999). About half of this workforce, or 353 million, is employed in agriculture, 28 percent or 190 million in services, and 22 percent or 162 million in industry. By contrast India's total workforce is 397 million (1999). The major employer is still the agricultural sector with 60.5 percent or 240 million, industry is a relatively small at 16,8 percent or 67 million, services seem rising but employs only 22.7 percent or 90 million (of which government alone accounts for 19.4 million). Quite clearly, in terms of employment we are still an agrarian society (Table 9).

But there is something else to be understood. China's population in terms of age break-up is passing through a phase of great demographic advantage. The cohort in the productive phase (15-60 years) of the life cycle is at its peak. On the other hand, the dependency ratio in India is, relatively speaking, adverse (Figure 2). While 64 percent of China's population currently falls in the productive cohort, the corresponding figure for India is 59 percent. However in 20 years from now, while China's productive population will stagnate at 64 percent India's productive cohort will rise to 64 percent and hence catch up with China. The picture will further change by 2050 with India (61 percent) overtaking China (55 percent). Transformation is however not just limited to percentage terms but is more importantly also palpable in absolute terms as India would have become the most populous country in the world with 1.5 billion. Thus while at present China's productive population stands at a whopping 812 millions, and India's seemingly way behind at 599 million, by 2050 India's productive population will be a huge 962 million and China would be far behind at 824 million (Table 10). But whether India is able to convert this into economic advantage will have to be seen? For this, India will have to tool up to create a more productive and able workforce, stimulate investments and create a much bigger market for goods and services.

This favourable demographic trend is as much a window of opportunity as it presents a danger. If India grasps the opportunity, it can elevate the economy to a much higher level of prosperity. On the other hand if India fails in this, it will move into a period of unfavourable demographic distribution when the society will be saddled with a rapidly greying population that will act as a natural brake against fast economic growth. China has so far successfully seized this opportunity, but will India be able to?

On the face of it, China seems to be deploying about the same proportion of its GNP as India towards education and health. Yet it seems to be achieving better results. Quite clearly there are lessons to be learnt. While under the communist system supreme power may be centralised in a coterie of un-elected leadership, it is equally true that the management of the economy and services like education and healthcare are greatly decentralised. By contrast, India with a supposedly more representative political system has become highly centralised. Nothing reflects this better than the pattern of expenditure on salaries for government employees (Figures 3 and 4). The percentage share of central government salaries and expenses of the total under this head in China has been continuously declining and has come down from a high of 73.9 percent in 1953 to 28.9 percent in 1998. The corresponding trend in India is discouraging, as it hovers at around 40 percent over the decades (Table 11). Quite evidently in China government is moving downwards to the tiers that have greater interaction with the people, whereas in India decentralisation is as distant a goal now as it was in the early years of the republic.

Yet another notable feature of the Chinese economic reforms and decentralisation has been the degree of autonomy conferred to the state owned enterprises (SOE's). In sharp contrast to this, Indian public sector undertakings (PSU's) have become adjuncts of administrative ministries with all entrepreneurial spirit crushed by mindless bureaucracy and uncertain politics.

From the inter-sectoral picture we have now it is quite clear that China is a fast industrialising country whereas India seems to be entering the post-industrial phase without having industrialised. This trend needs to be reversed by stimulating industrialisation, especially since it creates more jobs and has greater multiplier effects on the economy. This calls for far greater investments in infrastructure especially since civil projects such as roads, railways, dams, canals and building construction require not only large amounts of material such as steel and cement, but they will also employ large numbers of the least skilled workers. The uncontrolled growth of this segment of India's population poses the greatest economic challenge and their gainful employment is its only solution. Quite clearly, government must spend less on itself and more for the people.

The challenge ahead of India is not catching with China's growth rate, which inevitably must slow down. When nations compete, growth rates matter little if one is already well ahead in terms of robust social-sector indices. Can India do what China did to India in 1986 when it caught up with Indian per capita GDP rates within seven years of its initiating market reforms? Can India come abreast with it? To do that in 2020 India needs to grow at 11.6 percent and to do that long after most of us alive today are gone in 2050, India must grow at 8.9 percent every year. Catching up with growth rates is not good enough. If that were the game India is already doing much better than the United States, Europe and Japan. So if the RBI or IMF says that India will do 7 percent, that is very good. But that is just one swallow and it does not mean that India's season in the sun is at hand.