Tuesday, 14 July 2015

Comparison between the Indian economy and China's economy

Ah, how I have been waiting to answer such a question! I'd skip the numbers since they are already available on the internet. 

After independence, the average Indian was slightly better off than an average Chinese financially. Though, the destinies of the two nations changed the picture completely a few decades after independence. 

Apart from the different economic policies that the two nations followed, a major reason for China's economy to outgrow India was because India had a huge diversity to deal with, with different religions in a democratic state. However, China's government enabled it to focus on a single goal. 

China had a more successful resource allocation and mobilisation strategy than India's. China also managed its agrarian policies better than India. Higher growth in Chinese labour productivity along with capital deepening improved its economy. China pushed the economic reforms way back in 1978 and we did that more than a decade later. 

Reforms in China are based on the principle of "each according to his work" than "each according to his need". Deng Xiapong transformed the agriculture first followed by the industries, which was opened to foreign investment. The Nehruvian socialism believed that an improved industrial sector will automatically transform the primary sector. Sadly, that didn't turn exactly the way it was expected. 

Large FDI inflows developed China rapidly. India failed to exploit foreign knowledge and funds and the private sector for its benefit at the right time. India should have taken up selective subsidy regime to avoid unnecessarily huge subsidy bills which could have been put to other uses. 

Though India is still better than China in the services sector, computer knowledge and agricultural research. I actually support Raghuram Rajan's claim to Make "for" India, and not simply replicate the Chinese growth model. Ours is a democracy which keeps in mind the interests of a poor farmer too. Replicating a Chinese model of growth in India is not very feasible. On the flip side, we need a manufacturing base in India to provide employment to an ever increasing population of India, which is younger, as compared to China's aging demographics. It is a double edged sword. 

India needs to increase the labour force participation in India, including women. The average education level has to be increased. The government needs to put in place a skill development program to improve the productivity of the labor. Red Tape has to be decreased massively to increase FDI inflows. We have to promote an entrepreneurship culture and boost innovation. Most importantly, a reduction in corruption is the need of the hour. 

Another political problem we're facing is the incoherent approach to development in a noisy democracy. The recent LARR Ordinance is one example. We need to overcome such deadlocks in governance in order to follow a growth trajectory.

-Niharika Banerjee

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