What India must do to outpace China?
FT.com / Comment
By Martin Wolf
Published: February 14 2006
The “India Everywhere” campaign ... took this year’s ... World Economic Forum, in Davos, by storm. ... Indians were indeed everywhere, while the Chinese were relatively invisible. Since Indian economic growth is now forecast at 8.1 per cent this fiscal year ..., confidence is running high. Yet ... It is far from certain that India’s growth rate is now durably and decisively above the average of the past quarter of a century. It is equally far from certain that India will do better than China in exploiting its potential. Much reform is still needed...
Why ... might a reasonable analyst anticipate a surge in India? There are three broad reasons: first, Indian demography is relatively favourable; second, India has better institutions than China; third, India has more room to improve its policies and investment performance. These points have force. But they also describe potential, not performance...
Unfortunately, India has done a particularly poor job of absorbing its labour force into productive employment. ... Crippled by restrictive labour regulation, employment in organised manufacturing has remained stagnant ... The much-vaunted information technology sector employs just 1m – a drop in the Indian Ocean. Unused labour is not an advantage, but a terrible burden.
It is true ... that India has a number of institutional advantages over China: a well-developed private sector; a relatively entrenched legal system; a stable democracy; and freedom of speech. ... But... on regulatory quality and government effectiveness... there can be little doubt: China’s ability to mobilise resources remains far greater than India’s, as demonstrated in its vastly superior performance in provision of infrastructure.
This brings us to the third reason – the potential for policy improvement. India has a large opportunity to raise the investment rate, which remains well below Chinese levels... The difference in investment rates is the proximate cause of the difference in growth rates between the two economies.
Behind the huge gap in investment are significant and enduring Indian policy failures. Huge fiscal deficits are one example. Still more important have been the deep-seated obstacles ... to rapid expansion of labour-intensive production. That, in turn, helps explain the biggest discrepancy between Chinese and Indian growth: Chinese manufacturing grew at close to 12 per cent a year between 1990 and 2003, while India’s grew at just 6.5 per cent, well below the 7.9 per cent achieved by India’s services.
This pattern, suggests an illuminating working paper from staff of the International Monetary Fund, is connected to a long-standing bias towards a skill-intensive pattern of economic development. Up to 1980 this bias generated a relatively small, and skill-intensive, manufacturing sector. Since then it has generated an exceptionally large, but also skill-intensive services sector. ... Both of these patterns were biased against mass employment ... This must change if India is to thrive.
The improved performance of the Indian economy in the last quarter century is both a fact and an achievement. Yet it could be better still. ... change must occur in five pivotal areas: deregulation of labour markets and an end to the reservation of production to the small-scale sector; revitalisation of agricultural growth; increased investment in infrastructure; elimination of fiscal deficits in the current budget; and, finally, across-the-board privatisation and further trade liberalisation...
By Martin Wolf
Published: February 14 2006
The “India Everywhere” campaign ... took this year’s ... World Economic Forum, in Davos, by storm. ... Indians were indeed everywhere, while the Chinese were relatively invisible. Since Indian economic growth is now forecast at 8.1 per cent this fiscal year ..., confidence is running high. Yet ... It is far from certain that India’s growth rate is now durably and decisively above the average of the past quarter of a century. It is equally far from certain that India will do better than China in exploiting its potential. Much reform is still needed...
Why ... might a reasonable analyst anticipate a surge in India? There are three broad reasons: first, Indian demography is relatively favourable; second, India has better institutions than China; third, India has more room to improve its policies and investment performance. These points have force. But they also describe potential, not performance...
Unfortunately, India has done a particularly poor job of absorbing its labour force into productive employment. ... Crippled by restrictive labour regulation, employment in organised manufacturing has remained stagnant ... The much-vaunted information technology sector employs just 1m – a drop in the Indian Ocean. Unused labour is not an advantage, but a terrible burden.
It is true ... that India has a number of institutional advantages over China: a well-developed private sector; a relatively entrenched legal system; a stable democracy; and freedom of speech. ... But... on regulatory quality and government effectiveness... there can be little doubt: China’s ability to mobilise resources remains far greater than India’s, as demonstrated in its vastly superior performance in provision of infrastructure.
This brings us to the third reason – the potential for policy improvement. India has a large opportunity to raise the investment rate, which remains well below Chinese levels... The difference in investment rates is the proximate cause of the difference in growth rates between the two economies.
Behind the huge gap in investment are significant and enduring Indian policy failures. Huge fiscal deficits are one example. Still more important have been the deep-seated obstacles ... to rapid expansion of labour-intensive production. That, in turn, helps explain the biggest discrepancy between Chinese and Indian growth: Chinese manufacturing grew at close to 12 per cent a year between 1990 and 2003, while India’s grew at just 6.5 per cent, well below the 7.9 per cent achieved by India’s services.
This pattern, suggests an illuminating working paper from staff of the International Monetary Fund, is connected to a long-standing bias towards a skill-intensive pattern of economic development. Up to 1980 this bias generated a relatively small, and skill-intensive, manufacturing sector. Since then it has generated an exceptionally large, but also skill-intensive services sector. ... Both of these patterns were biased against mass employment ... This must change if India is to thrive.
The improved performance of the Indian economy in the last quarter century is both a fact and an achievement. Yet it could be better still. ... change must occur in five pivotal areas: deregulation of labour markets and an end to the reservation of production to the small-scale sector; revitalisation of agricultural growth; increased investment in infrastructure; elimination of fiscal deficits in the current budget; and, finally, across-the-board privatisation and further trade liberalisation...
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