Watching Jim Rogers(the Legendary Investor) so bouyant about the 2 emerging markets in Asia:

What sets China apart from India and is there more to it than meets the eye when it comes to China's growth figures?

This was topic of discussion at ISB sometime back. Some excerpts alognwith my comments embedded in the same. I have a better report with graphs and all on the same. But, that’s at home in Mumbai.

The emerging markets of Asia hold the promise for the world's corporation. India and China are the two key markets in Asia. But China today leads India significantly. It gets ten times as much foreign direct investment(FDI) as India does and its economic growth rate is much faster than that of India. India has been showing a gross domestic product growth of an average of 5 per cent for the last five years. In contrast, China has averaged at least 9 per cent growth.

With China threatening now to become a force to reckon with even in information technology services, Indian corporate leaders are examining why China ranks better than India and what are its (India's) weaknesses.

Ten reasons why China is ahead of India.

#1. An authoritarian government

25 years ago, India was richer….!
Not that we were "rich in absolute terms".
However, we were richer than many nations which are richer than us today.

"Once committed to a focus on economic growth, some good policy decisions were implemented quickly and efficiently. From the time Deng (Xiaoping) set the direction 25 years ago, it has not been altered by party politics, ideology or leadership changes," says Kenneth J Dewoskin, Senior Consultant, PricewaterhouseCoopers (China).



While India's corporate leaders agree that this could be true, they are emphatic that India's vibrant democracy is the only way for the country to ensure that growth and development reaches all.



"There is chaos in it and sometimes policy decisions tend to be reversed. But ultimately India's democracy is essential for the country's welfare," says Lalita Gupte, Managing Director, ICICI Bank.



#2. High savings rate



According to Dewoskin who has been involved with China (for investments) for the last 40 years, China has a high savings rate, which is recycled and concentrates wages paid to workers into four large state banks.



This capital is in turn directed by the leadership, which concentrates this available capital into key projects.
After all, for the manufacturing and the infrastructure are going to need money……..where does it come from…?
It comes from such savings.

US has only 2% savings rate…these Chinese have about 32% savings rate.
This capital has consistently financed more than 85 per cent of China's infrastructure investment.



#3. Investment in models and showcases….FDI



China's leadership has always focused on investment in models and showcases. All this has helped canalize foreign direct investment into the country and helped create local economic development.



For instance, Shenzhen and Zhangjiagang were developed into fantastic models that could help sell not only the region, but also China as a whole to investors.



China created awe-inspiring gateways for visiting foreign investors: the Beijing and Shanghai airports, Pudong Development Zone, and Beijing's Financial Street are just a few examples.



How India and China compare





China India
Population (2002)
1.28 billion 1.05 billion
Population growth rate (%) 2002 0.87 1.51
Average real GDP growth rate % (1990-2000): 9.6 5.5
Foreign direct investment (2001) $44.2 billion $3.4 billion
Population in poverty (2002) 10% 25%
Size of Diaspora: 55 million 20 million
Computer penetration per 1000 14 7
Infant mortality per 1,000 live births (2002) 27 61



That model has helped many companies who were tentative about China make up their minds about setting up a centre there.

Ganesh Natrajan, CEO of Zensar Technologies recalls how his company was wooed to set up a centre in China.
Zensar was wooed by Zhuhai, a tiny city in South China's Guangdong province. The city's mayor rolled out the red carpet for the company, laying perfect roads, building the software park and putting all the facilities in place even before company officials could visit the city for the first time.

The result was that when Zensar officials made the trip to Zhuhai they were greeted with impressive facilities that convinced them immediately to set up a centre there.

Now when was the last time India pursued any investment so aggressively?



#4. A consistent and thoughtful marketing effort

China has sold itself on a single point: the size of its market.

Every businessperson of any size anywhere in the world knows what the number 1.3 billion means: China's big market. How many know the population of India? Chinese leaders discarded their Mao suits immediately and
put on coats and ties,
talked the language of commerce,
organised thousands of delegations,
hosted endless conferences and exhibitions, and
laboured to convince foreign investors that China was pro-business, stable, and committed to reform and an open-door policy.

Leaders like Zhu Rongji mounted the world stage as a leader who was all about business and nothing else.

In contrast, India's corporate leaders agree that the country's politicians have never sold the country.
Much of the investment flowing into the country today is on the back of India's reputation as a place for skilled people who have proven themselves in the information technology services sector.



#5. Creation of zones and infrastructure for businesses



China has created many flexible investment zones, export processing zones, free trade zones, high tech zones, complete with tax incentives and good infrastructure.

India has tried to replicate this with its creation of export processing zones and software technology parks.
But, I can see many of them being used as vehicles for Hawala rackets…alongwith software hawala

But the difference lies in some key areas like creation of infrastructure and quick approval of investment proposals.



#6. The business-above-all attitude



"China has had the good fortune of having Hong Kong and Taiwan outside its political control for decades or centuries but within China's ethnic and investment family," says Dewoskin.

"China always set aside political, social, and ideological differences in the interest of getting investment, technology, and export channels," he adds.

However, in India, trade and economic growth have never been paramount.

India's economic growth has always given in to the sentiments of the local industry; like in cases where foreign investments have been curbed or restricted.



#7. A passionate Diaspora



Much of the 60 million Chinese who live outside the country are economic forces to reckon with. But they also give back heavily to their country in terms of remittances and investments.



China has recognized the importance of its Diaspora and has worked to cultivate it. The Chinese government has a special cabinet ministry to deal with the overseas Chinese matter.

Do we have NRI ministry here in India?

Incentives are offered to Non-Resident Chinese to come to China and participate in various socio-economic activities of the Mainland. The current economic boom in southern China, for example, is largely due to the capital investments made by overseas Chinese entrepreneurs.



In the case of India, there has been a lack of consistency in government policy towards NRI bandhus-bhaginis.
India thus needs to harness the knowledge and capital of the Diaspora and develop plans on how NRIs can contribute to the country's economic growth.



#8. A strong manufacturing base

China has become the world's manufacturing hub.

The shelves of giant store chains like Wal-Mart are testimony to the fact that msot of the low-cost products today are made in China because it offers the cheapest source of manufacturing.

In electronics and hardware, China is the manufacturing hub for companies like Siemens and Hitachi Global Systems.

China's success in manufacturing has attracted companies from other sectors too. Michelin, the world's biggest car tyre manufacturer, plans to make its Chinese operations its biggest global manufacturing base.

The strong manufacturing base means that China is able to offer employment to a larger section of its population, compared to India which has shown growth predominantly in the services segment.



#9. Ability to respond quickly



"China is very fast and efficient in the redirection of resources into higher education, economics, management, computer science, electronic and biotech engineering, and law," suggests Dewoskin.



"It has a permissive and supportive policy to study abroad, coupled with an aggressive marketing and incentive programme to bring stronger graduates back," says Dewoskin.



In contrast, India has yet to counter the problem of brain drain or promote itself as a destination for entrepreneurs who want to set up companies.



#10. Putting Chinese interests above everything else



China has had a stubborn set of investment policies that opened some doors, shut others, forced technology transfer and permitted liberal IPR (intellectual property rights) appropriation, says Dewoskin.



… and the relative shortcomings.

The Chinese development experience has been inspiring in its scope, but has not been without shortcomings. Here I highlight four key areas:

First, the traditional lack of hard budget constraints and the role of the state in resource allocation has meant relatively inefficient usage of capital, as evidenced by the sizeable layoffs of the late 1990s following the over-investment of the first half of the decade, as well as the historically low returns on capital (discussed further below).

Second, the fact that nearly half of the economy is made up of state or formerly state-owned enterprises has created a poor corporate governance environment. For most state-owned firms, formal ownership has yet to be firmly established, leaving managers without effective oversight. Retail investors, without a strong institutional presence, dominate the domestic stock market.

Third, the historical absence of a legal accountability framework meant that the "rules of the game" were often left to local and regional authorities, although China has made progress in this area in recent years.

Finally, the closed capital market left China without the market discipline of foreign portfolio capital flows.

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Bottomline:

Is India the next China in making?

India and China may look similar on a demographic basis, but their growth patterns to date could not be more different. China’s economy has developed

through a combination of aggressive rural reforms and extremely rapid capital accumulation in manufacturing, while India has depended on capital efficiency

and services-led growth .

Going forward, I agree that India needs to adopt “China-style” measures such as agricultural reforms, manufacturing liberalization and foreign opening, which

could potentially give India the kind of external dynamism we see in the mainland and the Asian “tigers”. However, we don’t expect India to be a carbon copy of other Asian economies. We note that the street runs both ways: many of China’s recent reforms are aimed at areas where India has taken the lead, such as corporate governance and accountability, and portfolio capital liberalization.



What are the risks to the India story?
The main risk to the India story is political, in my view. We believe the recent acceleration in economic reforms and efforts to stabilise the fiscal position is attributable to the stability of the government. National elections are coming up shortly and it is important that the new government is both reform minded and stable.

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A Proud Indian Canadian

That's true that India needs a consistant approach towards its foreign policy. I hope that we get a stable govt this time as well to persue the economic reforms. I hope they will reverse all the lolly pops they have given in the interim budget.

I hope India does get its prorities right. Countries like UAE (specially Dubai) has been able to design there infrastructure to attract lot of foreign investment. It would not be wrong to say if i say its 80 % foreign investment in dubai. But these guys have really good business mind.

I have seen similar approach in Andhera pradesh's CM Mr.Chandershakher Naidu. He is doing a real good work for doveloping his state. If all could do effort for there state, district, tehsil or village i am sure india can beat China soon.

I hope one day it happens that every body things about their communities rather than politics.

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Manjeet Singh