India must compete with China Nov02

China and India each have a population of over 1 billion people. Their collective population amounts to more than 33% of the world population. Their countries are geographically large and their population is composed of a wide range of ethnicity, each speaking their own language or dialect. Although they have this major human resource, they have failed to utilise its potential to create a vibrant economy like that of the USA.

Over the last 20 years, China's GDP growth, GDP per capita growth and labour productivity have been significantly higher than that of India. Why is this? What should India do to compete with China and establish itself as the world's workshop, factory and supplier of quality goods and services?

Most people associate China's economy with over investment in singular and unprofitable pursuit of export products, low quality goods and marginal pricing. The truth is that China's growth is the result of not only significant investment, foreign and domestic, but by a sharp increase in labour productivity, a growing export based on foreign investment, strong domestic demand fed by low prices and improved quality of products.

According to McKinsey's analysis, China's lower prices are not just due to cheaper wages - Indian wages are comparable - but to lower taxes, lower cost of capital, higher productivity of workers and shorter delivery time. Productivity of Chinese workers can be 10 to 300% higher than those of Indian workers, depending on the product. Chinese shipments reach the US less than a month after they leave the factory gate compared to six to 12 weeks for Indian exports. Delays in India are due to bureaucracy in customs, loading and unloading in ports and long transit times.

Since 1990, China's GDP per capita has grown three times faster than India's. China has attracted 216bn in foreign investment (1980-2000) compared with 120bn in India. China's manufacturing sector in the 1990s expanded at a rate of 12% per year, double the increase in India. Whilst it is true that many Chinese state-owned companies receive loans from state banks at very low interest rates with long repayment periods, about 70% of China's industrial output comes from the private sector, including multinational companies, that have prudent cost accounting.

Nike produces 40% of its footwear in China while Galanz has 30% of the global market for microwave ovens because of quality enhancements in Chinese factories. China produces eight times more ceiling fans than India and half the price advantage is because of India's high indirect taxes that affect domestic and export sales. China produces more than 25% of the world's televisions and easily surpasses India in both domestic sales and exports. Lower taxes, import duties and raw material costs are important factors but a competitive environment and a higher level of component manufacturers also help.

What can Mr. Vajpayee do to stimulate India's economy? He must free the Indian entrepreneur from the shackles of state and federal bureaucracy. He must drastically reduce public expenditure and debt by rolling back the frontiers of government and release the savings through lower direct and indirect taxes. He must make "competition" India's national password and allow the Indian flair for invention and application to take root.

India must actively woo and encourage foreign investors, including NRIs, by offering a tax-free period for corporation tax as well as unrestricted import facility for inputs for the manufacture of their products. India's financial services - banking, insurance, shipping, stock exchange  - should offer appropriate incentives for foreign and domestic investors, including efficient regulatory authorities to safeguard against insider dealing and corruption. 

Such economic liberalisation will precipitate substantial unemployment in the public sector. Unfortunately, this is the only remedy that will cure India's problem of decades. The UK, under Mrs. Thatcher, privatised state enterprises and curtailed the power of the trade unions. Her reforms created unemployment and political problems for the Conservatives but they did transform the UK economy. The UK is no longer the "sick man" of Europe!