Reem With A View

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Jonathan Power, India overtaking China

Jonathan Power, India overtaking China

Watching India overtaking China
By
Jonathan Power

May 6, 2004

LONDON – India is now in the middle of what many Chinese would give their right arm for- a general election. Yet China is the power that gets all the attention. When president Richard Nixon first went to China it was widely assumed at the time that the reason he ignored India and courted China was that China had nuclear weapons and could help balance the Soviet Union.

Since 1998 India has possessed nuclear weapons and can balance China. Slowly Washington is waking up to the fact that the tortoise soon might overtake the hare. Still the investors and the press continue in their old ways. Last year the inflow of foreign capital into China was two and a half times that into India. The press barely covers the Indian election whilst every day there is a story out of Beijing.

This skewed appreciation has been going on since the time of Mao Tse Tung. Whilst in the 1960s and 70s China basked in accolades, India’s economic planners were widely abused. India was mocked for its “Hindu growth rate”. China’s people were fed, housed, clean and tidy, while India’s were ragged, hungry and sinking into a trough of despondency- “a wounded civilization” wrote V.S. Naipaul.

Neville Maxwell of Oxford University was one of the more prominent of the legion of Western intellectuals who in the 1960s and 70s thought China had found the answer to underdevelopment. In 1974, he wrote, “Mao and his party triumphed where Stalin cruelly failed, basically because Mao understood and trusted the peasantry”. It was hog wash.

With the 1981 famine we could see, to use George Watson’s phrase, “the intellectuals were duped”. As Watson exposed the romantic gullibility of Beatrice and Sydney Webb, Stephen Spender and Andre Gide and their glowing reports of the Soviet economy in the 1930s, so too the China seers of the 60s and 70s were held up to the harsh light of day. China had to beg around the world for grain whilst India had managed to survive the savage drought of 1979 without having to import a sack.

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Now with Mao long dead and the capitalistic reforms of Deng Xiaoping well into their stride the story is being repeated but in a more complex way. To many China’s economic progress has been nothing less than spectacular. But inflationary pressures, bad bank loans, a fast increasing maldistribution of income and crime all threaten its economic stability.

India meanwhile has been gradually but with increasing speed loosening up its old Fabian socialist system. After a major economic crisis in 1991, finance minister Manmohan Singh (now Sonia Gandhi’s principal economic advisor) introduced major promarket reforms and fiscal expansion and India’s economy has never looked back. Annual growth averages above 5% and now thanks to a good monsoon is 8%. Singh believes that with more reforms than the present government has so far countenanced an average annual growth rate of 6.5% is sustainable- which is what he privately thinks China’s over-hyped growth rate actually is.

In reality India is better placed for future growth. Its capital markets operate with greater efficiency than do China’s. They are also much more transparent. Companies can raise the money they need. India’s legal system whilst over slow is much more advanced and is able to settle sophisticated and complex cases. Its banking system has relatively few non-performing assets. Its democracy and media are alive and vital which provides a safety valve for the incoherent changes that modern day economic growth brings. India has religious riots, secessionist movements, urban squalor and bitter rural poverty. But the voters know they can throw the rascals out, and regularly do.

Moreover the massive flows of foreign investment into China are a two edged sword. It has become a substitute for domestic entrepreneurship. Few of the Chinese goods we buy are in fact made by indigenous companies. And the few that exist are besieged by regulatory constraints and find it hard to raise domestic capital. Its remaining state owned enterprises remain massive but bloated and possess a frightening number of non-performing loans from China’s vulnerable banking system. It is India that has created world class companies that can compete with the best in the West, often on the cutting edge of software, pharmaceuticals and biotechnology.

India’s trump cards are its language, English, its emphasis on maths in its schools (begun in Indira Gandhi’s time), and the talents of its diaspora. For decades China has benefited from the wealth and the investment potential of its diaspora and the economic energy of Hong Kong and Taiwan. After years of ignoring its diaspora India is now welcoming them back- and they have much more “intellectual capital” to offer than China’s, much of it coming from Silicon Valley where the Indian contribution has shone.

Watch the tortoise continue its course as the hare starts to lose its breath.

I can be reached by phone +44 7785 351172 and e-mail: JonatPower@aol.com

Copyright © 2004 By JONATHAN POWER

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