India Versus China or India & China?

Walk into any Big Bazaar or a Metro outlet or a Wall-mart (in America) and you won't be surprised to see the shelves sagging with Chinese-made goods - everything from shoes and clothes to toys and electronics. China would grab 10% of the world trade by 2010 while India would be struggling to double its present share of 2%. This ubiquitous "Made in China" label interprets a serious matter on the invasion of China all over the world.

Why is the gap in GDP and other benchmarks still so wide? Why we are finding it difficult to match our economic growth with its population growth?

It is true that India is no match as compared to China when it comes to direct foreign investment. It may be investors or Diasporas, India attracts less of FDI. Irony is, Indians live abroad are not interested in building a powerful India. China’s FDI is a substitute for domestic entrepreneurship. During the past 20 years the Chinese economy has boomed, but left the country's private sector with no world-class companies as to compete the multinational titans.

In 1992, the income accruing to foreign investors with equity stakes in Chinese firms was $US5.3 billion; today it is more than $US22 billion. Good news to China is this money is not leaving the country; it is often reinvested in China. For democratic, post-colonial India, allowing foreign investors huge profits at the expense of indigenous firms is simply unfeasible.

However, the statistics tell only part of the story - the macro-economic story. At the micro level, things look different. There, India displays much dynamism. "Can India surpass China?" is no longer a silly question, and if it turns out that India has indeed made the wiser bet, the implications could be enormous. - for China's future growth, and for how policy experts think about economic development generally.

China has been far bolder with external reforms but has imposed substantial legal and regulatory constraints on indigenous, private firms; it is only four years since domestic companies gained the same constitutional protections that foreign businesses have enjoyed since 1980s. The restrictions were designed not to keep Chinese entrepreneurs from competing with foreigners but to prevent private domestic businesses from challenging China's state-owned enterprises.

In a World Bank study published last year, only 52% of the Indian firms reported problems obtaining capital compared with 80% of the Chinese companies polled. The Indian firms relied much less on internally generated finances: only 27% of their funding came through operating profits, against 57% for the Chinese firms.

It is worth recalling that India's economic reforms began in earnest only in 1991, more than a decade after China began liberalizing. In addition, India has had to make do with a national savings rate half that of China (another area where no interest is shown), and 90 % less FDI.

That India's annual growth rate is only about 20% lower than China's is, then, a remarkable achievement. (And, of course, whether the Chinese data are accurate is an open question.) The speed with which India is catching up is due to its own efficient deployment of capital.

Let us not worry about China's misallocation of resources that would become a drag on its economy. In the early 1990s, Beijing invested massively in the state sector. Most of them were not commercially viable, leaving the banking sector with a huge number of non-performing loans – as high as 50% of its assets. At some point, the capitalization costs of these loans will have to be absorbed, either through write-downs (depositors bear the cost) or recapitalization of the banks by the government, which diverts money from other, more productive uses.

India's banks are no models of financial probity, but they have not made mistakes like this. According to a study by management consulting firm Ernst & Young, about 20% of banking assets in India were non-performing as of 2004.

The real issue, of course, isn't where China and India are today but where they will be tomorrow? The answer will be determined in large measure by how well both countries utilize their resources.

China and India have pursued radically different development strategies. India is not outperforming China overall, but it is doing better in certain key areas. That success may enable it to catch up with, and perhaps even overtake, China.

Let us talk of more technicalities like Cost of money, FDI, GDP growth and what not, one factor that keeps India away from China is the commitment. We lack the vision. We lack a concentrated effort as a country to become powerful. This requires culture imbibed in us towards motherland.