India’s Journey to Economic Power Based on the Most Important Lessons from China

In October 2014, the International Monetary Fund projected that India’s economic growth rate would surpass China’s by 2018. Over the course of the next few months, this prediction appears to have gathered momentum, with the OECD, World Bank and Goldman Sachs all releasing similar forecasts. While having what observers see as the credible potential to outgrow China is in itself a significant achievement, (which can be attributed to combination of expected high growth in India and a slowdown in China), it is notable that the absolute gap between the Indian and Chinese economies remains sizeable. A closer look at the economies of both countries indicates that across key areas such as investment, exports, research and development spending and international reserves, India lags a decade behind China, with its current position across these indicators similar to that of China in the early 2000s. Between 2000 and today, China’s economy has expanded by 16 percent per annum, and taking a look at China’s growth across the areas outlined above provides important insights into the likely key policy areas that India will need to address in order to achieve its economic transformation.

The Indian and Chinese Economies: A Comparison through Five Indicators

Removing the complexity, there are five outcomes that Indian policy needs to have as their end goal in order to match China’s historic economic success story.

The Path Ahead: India’s Challenge

India has a decade’s worth of important changes to make to the way India works and its impact on the world to catch up with China. The comparison between India’s economy today and China’s in the early 2000s suggests that there is a distinct similarity between the position China had at a key inflection point of its meteoric economic rise and the position that India finds itself in today. Accordingly, many of China’s key development initiatives of the past decade have the potential to be adopted as drivers or at least guidelines that can define India’s next growth cycle. For example, much like China in the early 2000s, India’s economic growth hinges on its ability to emerge as a global manufacturing hub, and the quality of infrastructure that it will need to develop in order to cope with the wave of urbanisation that is expected over the next two decades. Accordingly, industrialisation, fixed asset investment, infrastructure build-out, the attraction of foreign direct investment, the maintenance of a low exchange rate and the accumulation of foreign exchange reserves are all important elements of India’s economic development agenda during the next decade.

That being said, the underlying structural differences between the Indian and Chinese economies mean that even if it learns the key lessons from China’s growth model, it is unlikely that India’s growth cycle will mirror that of its benchmark.“India’s economic growth hinges on its ability to emerge as a global manufacturing hub, and the quality of infrastructure that it will need to develop in order to cope with the wave of urbanisation that is expected over the next two decades.”China’s economic growth has been massively aided by the scale and power of its state-owned enterprises, which are a legacy of consolidated employment during the Cultural Revolution, an exchange rate policy that protects the economy from volatility and a high degree of capital account convertibility. Further, China’s single-party political system has allowed successive governments to implement sweeping economic reforms without facing any serious political opposition. These are luxuries that the India does not have. It does, however, have a number of other unique factors to leverage which, if appropriately utilised, could be very powerful compensating factors. These include a favourable demographic profile, the first government with an absolute majority in more than two decades, valuable technology related services sectors, an open information economy, a US that is increasingly committed to partnering with India and renewed international investor interest in the country. In previous versions of the Sign , we have detailed the sum of policy actions, both unique and derivative, that the new government would need to take in order to capitalise on these growth drivers and put India on the path towards double-digit economic growth.

Eight months after securing a decisive victory in the general elections, while Prime Minister Narendra Modi’s government has made some progress on its commitment to bring about rapid economic development, most of its policy actions have been gradual (rather than structural), and have been aimed towards clearing existing regulatory and investment log-jams. Although this has been disappointing to many voters who expected a “big bang” of reform and growth, the government’s approach is understandable, given the economy that it inherited from its predecessor, and the approach has begun to pay dividends. GDP growth, following an almost four year slump, is inching back towards six percent.

Dreaming Big: Leapfrogging Development

India has a number of revolutions to launch simultaneously if it is to not just catch up but leapfrog China. These include an agricultural revolution, and industrial revolution and an information revolution, namely all three of Toffler ’s “Waves ” that underpin the change of civilisations.“The New Indian Way will require India’s coming emergence as a global power to be based on an execution strategy on a global scale while engaging with other powers increasingly as an equal.” In order to facilitate the industrial revolution that will take to the next level employment, economic growth and maintain stability, the government will need to solve some very basic impediments. These include reforms in key areas such as labour laws, land acquisition, taxation and foreign investment. Further, and perhaps more importantly, the government will need to embark on one or better yet several Big Ideas that will help shape the course of its long-term development and differentiate its markets and industries from that of other countries. These could include:

1. 1. Create India’s MITI: Strategic Coordination of Public-Private Industrial Policy.Create government institutions similar to Japan’s Ministry of International Trade and Industry (MITI), South Korea’s Ministry of Trade, Industry and Energy (MOTIE) and Taiwan’s Ministry of Economic Affairs. The economic “miracles” experienced in these countries were a product of public sector support of and coordination with private companies in key sectors such as electronics and automotive. These bodies shaped industrial policy in consultation with the private sector, funded research and development and facilitated investment allocation decisions to help create world class industries.

   2. Create Multiple Silicon Valleys and Hubs: Engineer Conditions for Sector Leadership. Create world-class sectors based on the development of currently emerging technologies, including alternative energy, material sciences, nanotechnology and others. Silicon Valley’s origins lie in the development of semi-conductor technology and has developed in a fashion that has turned the US in the world’s technology and innovation leader. India has the potential pursue a similar path through the highly selective development of key technologies through a concerted push from government funding and coordination, academia and R&D, private sector investment and venture capital financing, creating emerging technology hubs that will spawn follow-on innovation and the birth of new sectors.

   3. Create Global Education Hub: Open the Sector for Physical and Online Mass Roll-out of Education Solutions. India has not only the world’s largest population under the age of 20, it also has the world’s largest population of English speakers. This massive reserve of potentially globally employable labour and talent can be fully unlocked though coordinated education on an equally massive scale. India can create a global education hub addressing not only domestic demand but attracting, training and eventually retaining international talent to fuel the country’s ongoing development.

No man is an island and neither are countries. Any growth strategy India embarks on will be executed in a dynamic environment with strategic partners, competitors and shifting sources and destinations of capital, resources and markets. President Obama’s recent visit to India, and China’s public reactions thereto (see this month’s Pointing to the Future), highlight the importance of picking allies and managing potential competitors when developing and executing a long term growth and development agenda.

China’s development lesson has much to offer India. For India to not be the poor neighbour, it will need to execute much of what China did but in a very New Indian Way.

This New Way will require India’s coming emergence as a global power to be based on an execution strategy on a global scale while engaging with other powers increasingly as an equal.Mr Modi has already embarked on an impressive plan to do this by resetting India’s international standing. There is a gap at international forums which India can fill, namely India as a big developing country that is seen as an ally on the most important matters to its democratic counterparts in well developed nations on matters such as trade, climate change and security and conflict. The coupling of politics and economics is a place that India can play a constructive role in. From the perspective of the development of the global economic and political landscape, it is timely for Mr Modi and his team to link up the foreign policy and domestic growth agendas into a comprehensive development strategy for India for the next decade.

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