Wednesday, December 19, 2007

Crouching Dragon and the Hidden Tiger

Browse any newspaper or magazine discussing on Politics or Economics and China is spoken atleast 10 times as much as India. In fact, India has started to get mention only in the last couple of years and mentioned only in a few selected instances and in most contexts taken as a passenger in the sentence about China. But, Indians are far more aggressive and everywhere you see an Indian comparing China to India. This is a dramatic turnaround from our past, when India had an indifferent attitude towards the world. When Chinese, Arabian and European sailors came observed and wrote scholarly works, Indians were living in their own world. And we know the history, dont we? We paid the price of not knowing about our neighborhood. Now, we have made a 180 degree turn. We speak about other nations more than any other culture in the world. An average illiterate in a tea shop in rural India could talk about the politics of dozen nations and a cheap regional magazine could carry as much foreign news as some of the top newspapers in the US. We are in a constant state of comparison and China has taken most of our debate space. After all, it was a poor buddy of ours 2 decades back and now sits with rich nations. Thus, nothing moves Indian society or polity than a talk about China. Without China, it is doubtful whether we even could have got so many economic reforms in India.

Given that Indians have the highest sense of self-pride and over-confidence, most of the comparison between India and China specifies only three things - English language proficiency, Democracy and Demographic dividends. And all of them are tricky and India might not be strong in any of the three, compared to all hype. English can we well spoken and written by probably 10 million people - less than 1% of population, and the kind of politcal system in major states like Bihar and Uttar Pradesh can be anything but democracy. And the demographic dividends can do far more harm given the dozens of separatist organizations in India, unless it is handled with high care. But, with all that in future India can still grow substantially, not because of these 3 factors but that we are so low in every indicator that is there is no room to go further down.

So lets take other things into comparison with China and as usual for an Indian we will beat China down (!).

Looking at the overall numbers, China's GDP measure both in current exchange and PPP is only between 2 to 3 times as big as India. And given that it has 30% more population, 3 times more area, 13 year headstart in reforms and a history of never ever been ruled long by aliens, it is not that impressive. It is ok. In fact if India had slightly started early by around 80 and increased the growth rate by 2% in that decade, the GDP numbers wont be too different.

And Indian numbers were achieved with just 65% literacy and a miniscule share of world trade and investment. Given such a low baseline, there is an enormous headroom for India. Even If we manage to increase literacy by 10% every 5 years, we could still have 10% growth rate irrespective of what happens in global economy. And this is not such an impossible task given the technology and resources we have. One good example to see is the rise of telecom. 6 years back we had probably 1 to 2 % teledensity and now we are adding that many every month. So, we can attack our social problems like illiteracy with tools that no other advanced nation had the benefit of. And miniscule upper middle class could multiple many times over the next decade leading to an exponential growth in many other sectors.

And if the last 2 years is any indication, the share of India in world trade and investment has only one direction to move. And India has a lot more cards kept close to its chest. Most of the bigger sectors are still unopened and only the soup has come out so far. The meal is still in the kitchen. Retail, transporation, banking, agriculture education and dozens of major sectors are still locked and as they keep getting out of state control, growth could accelerate and may more than compensate for any loss in US slowdown or even if IT sector dies.

And more importantly India is still under the radar and treated as innocent observer. China with a percapita income 3 times less than a poor European country - Romania, is under attack from around the world, accused with tampering the world economy. No one has taken note of the threat India could possess. All the extremities - Iran & Israel, US & Russia, China & Japan have started enormous startegic partnerships with India and none of the major nations nowadays even criticize India openly.

In comparison, China has already started to face resistance in too many quarters and could threaten its future growth. It has done the simple things well - made its people literate and provide basic health care, but how about future challenges as a first world country. Given its current growth pattern, if China has to grow even to the economic level of Turkey, it has to completely take over world trade and investment and to keep yuan week it has buy the entire debt of whole world, that looks a tough task (!). So, it has to find new ways to grow and the old ways of low cost production, high foreign investment and bulging exports but may not scale to China's ambitions.

So, China is charting an untravelled territory and faces with questions on how sustainable its growth will be, given it has maxed out on most items. How many more toys can it produce or how much more foreign direct investment will get? How long will Yuan remain weak and withstand world pressure?

China is definitely ahead of India in most aspects, but can keep it that way?