| Building blocks
Comparisons of India's economic growth with China's have become the order of the day. Even the prime minister, Manmohan Singh, recently compared the state of India's economy, especially banking, with that of China's, pointing out that India's financial system has been better in some respects. What matters, however, are the actual results in respect of growth. Manufacturing in China has definitely outpaced that in India in the recent period. It is instructive to look into aspects of the growth of manufacturing in China versus that in India. R. Nagraj, an economist of considerable standing, has contributed yet another piece on this subject in the May 21 issue of the Economic and Political Weekly. The paper was presented at a conference in China held by the China Development Institute.
He points out that China's manufacturing has grown faster than India's, not only recently but even earlier. For the period 1950-1997, Chinese manufacturing grew at the rate of 8.9 per cent while India's grew by 5.7 per cent. This is a large difference. Over a long period, it adds up to a substantial econometric superiority. Nagraj quotes Bardhan, the economist, saying that China was a better socialist during the planning era and a better market capitalist during the reforms era than India in both periods. His namesake Bardhan, leader of the Communist Party of India, may consider this in his saner moments, even while carrying on the fight against essential reforms.
China's manufacturing industry has been more oriented towards capital goods industry, including metals, compared to that of India. Interestingly, Nagraj shows that the share of beverages and tobacco in manufacturing was 4.3 per cent in both China and India. Obviously, as consumption patterns go, there is not much difference between China and India. But, government policy has made the ratio of the manufacture of metals rise to 7.6 per cent in China, while it is 4 per cent in India. Similarly, the share of machinery industry is significantly higher in China compared to India.
While China and India have followed similar growth paths, they differ in material aspects of detail. This reflects the impact of China's policy of encouraging infrastructural investment, which demands, in turn, large imports from local capital goods industries. This means that China's macroeconomic policy of encouraging infrastructural investment during both the pre-reform and post-reform periods has contributed a great deal to manufacturing growth.
We need to look no farther than India's own experience in the Eighties when infrastructural investment in the public sector, such as in railways and power, was significant. This had enabled India to achieve a higher rate of manufacturing growth. It has suffered in the recent period of reform because of two reasons: the slowdown in public investment and import liberalization. Nagraj has not touched on details of how China has solved the recent problems of import liberalization to the extent that it impinges on its domestic capital goods industry. Maybe the Chinese were more pragmatic in issuing 'planning' orders to public sector utilities dominant in infrastructure to buy from Chinese manufacturers. Some more light on this would have been welcome.
Nagraj also touches on the liberal financing policies followed by China's banks, as an explanation of the higher rate of growth of Chinese manufacturing units. China's state-owned banks went out of the way to finance manufacturing. In particular, they liberally helped units in the town and village industries sector, which were mostly small and medium industries. Such liberal financing ' credit growth ' was the catalysis for China's manufacturing growth.
But, as a consequence, the Chinese banking system has a large burden of non-performing loans, sometimes estimated at 50 per cent of the gross domestic product. This may be exaggerated, but the fact remains that China's manufacturing sector grew partly as a result of credit extended by China's banks. The burden of NPAs is obviously borne ultimately by China's exchequer since most of the bad loans that underpinned China's launch of industrial expansion had to be written off and banks recapitalized.
It is often argued by enthusiastic fiscal reformers in India that India's reduction in public investment as a percentage of GDP in the reforms era was more than made up for by increase in private sector investment. This misses an important qualitative difference between public and private investments. Public investments, such as those on railways, roads, irrigation and power, involve a geographically widely distributed building effort involving steel, cement and other materials besides capital goods. This also gives rise to widespread job creation. Private sector investment is not that widespread and mostly involves imported equipment.
Anyway, the lesson from China's experience in manufacturing is clear. Industrial expansion is also linked to the government's policy of encouraging infrastructural investment, provided it is coupled with encouragement of local capital goods manufacturers.
Nagraj does discuss the oft-expressed doubts about Chinese statistics. He cites reputed scholars in order to strengthen our level of confidence about China's statistics in recent years. One general point about China's pattern of industrialization stated by Nagraj deserves mention. The highly decentralized pattern of decision-making had its advantages and disadvantages. One of the disadvantages was that regional entities tended to duplicate capacities built up elsewhere. In this context, Nagraj cites an Organization of Economic Cooperation and Development study to highlight the disadvantages implicit in this method:
'Despite the country's [China's] integration into international markets, domestic markets remain highly segmented and fragmented. Industrial growth has been concentrated in pockets of regions, sectors and firms while the rest has lagged. Although some highly efficient and internationally competitive Chinese firms have emerged, most Chinese firms are relatively small, under-capitalised and poorly managed. Over-capacity and inefficiency that characterize many industrial sectors of China have been shielded from competition.'
While this is a valid criticism of China's industrialization, it is relevant to point out that in the process China has also achieved records in productivity. How else can one explain its continuing competitive strength' Its steel plant sizes as well as electronic plants are world class. But Nagraj's article raises some doubts about the cost-effectiveness of China's strategy. The emphasis of Chinese policymakers on physical targets has apparently continued, leading to a neglect of cost factors, as in the steel industry for example.
In some other industries too China has ignored the profit content. It may be a hangover from the earlier stabilized mode of production planning which emphasized physical targets. India's model too has strengths. But where does it show, either in domestic or international competitiveness' China seems the winner through its superior trading tactics, partly aided by its currency value, which it has succeeded in keeping at 7.8 yuans per dollar for nearly a decade.
China has made a forceful entry into the world manufacturing stage. There is over-capacity in Chinese industry in some sectors, but that is inevitable in a country taking great leaps forward in economic growth. It is obviously no coincidence that China has positioned itself as a manufacturing hub of the world. It also helps that it has a tremendous inflow of foreign direct investment, which has made its goods marketable in the world, giving it access to both technology and management excellence. But, above all, the Chinese model shows the advantages of a liberal financing system combined with a bold public policy of encouraging investments in infrastructure linked to a broad decentralized distribution of power.
Undeniably, the Indian model, with its emphasis on intellectual property rights, private entrepreneurship and capital markets, has a long-term sustainability. In the medium-term China does score. It is important to learn the right lessons from the China experience. India should adapt the Chinese lessons to its own needs and circumstances.