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India v China

July 7th, 2003 · No Comments

Foreign Policy asks if India can overtake China: “Whats the fastest route to economic development? Welcome foreign direct investment (FDI), says China, and most policy experts agree. But a comparison with long-time laggard India suggests that FDI is not the only path to prosperity. Indeed, Indias homegrown entrepreneurs may give it a long-term advantage over a China hamstrung by inefficient banks and capital markets.”

Write Yasheng Huang (of MIT) and Tarun Khanna (of HBS):

China and India are the worlds next major powers. They also offer competing models of development. It has long been an article of faith that China is on the faster track, and the economic data bear this out. The Hindu rate of growtha pejorative phrase referring to Indias inability to match its economic growth with its population growthmay be a thing of the past, but when it comes to gross domestic product (GDP) figures and other headline numbers, India is still no match for China.

However, the statistics tell only part of the storythe macroeconomic story. At the micro level, things look quite different. There, India displays every bit as much dynamism as China. Indeed, by relying primarily on organic growth, India is making fuller use of its resources and has chosen a path that may well deliver more sustainable progress than Chinas FDI-driven approach. Can India surpass China? is no longer a silly question, and, if it turns out that India has indeed made the wiser bet, the implicationsfor Chinas future growth and for how policy experts think about economic development generallycould be enormous.

The authors point out how NRIs could play a role in shaping India’s future:

Until now, the Indian diaspora has accounted for less than 10 percent of the foreign money flowing to India. With the welcome mat now laid out, direct investment from nonresident Indians is likely to increase. And while the Indian diaspora may not be able to match the Chinese diaspora as hard capital goes, Indians abroad have substantially more intellectual capital to contribute, which could prove even more valuable.

The Indian diaspora has famously distinguished itself in knowledge-based industries, nowhere more so than in Silicon Valley. Now, Indias brightening prospects, as well as the changing attitude vis–vis those who have gone abroad, are luring many nonresident Indian engineers and scientists home and are enticing many expatriate business people to open their wallets. With the help of its diaspora, China has won the race to be the worlds factory. With the help of its diaspora, India could become the worlds technology lab.

One India-China battlefront front is Software. Business Week writes about how “Indians are realizing that their big edge in English skills and multinational investment should hold off China’s software threat.”

Why the confidence? One reason is the severe acute respiratory syndrome (SARS) outbreak showed that China isn’t all powerful. Yes, the virus now seems to be under control. And yes, the Chinese economy, having defied predictions of a SARS-induced collapse, is surging again. Yet for several crucial weeks, the world shunned China.

India, on the other hand, was SARS-free. The outbreak in China provided vital psychological support for Indians who previously had heard little but glowing reports of China’s stupendous economic progress, which makes India’s steady but slow growth seem pathetic.

Another reason for Indian confidence is the continued migration of jobs to India. Back in 2001, the boom in business-process outsourcing hadn’t started. Now, hardly a week goes by without another multinational announcing that it’s opening or expanding an office in India so that low-salaried, high-skilled Indians can provide all sorts of back-office support. Companies are hiring thousands of Indians to work in call centers, answering questions from customers a half a world away.

India’s big advantages — the base of English-speaking talent, the size of local players like Wipro and Infosys, and the critical mass of investment by multinationals in Bangalore and other areas — give Indians good reason to feel secure that they’ll be able to withstand China’s challenge better than just about anybody else.


India China+T

Tags: Emerging Markets

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