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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!
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