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ECONOMY Sleeping Tiger Leaping Dragon A recent GoI-report concludes that China's competitiveness is not a myth built on cheap labour, but the result of far-sighted planning. India can now choose to see this as a threat or an opportunity. By Ashish Gupta
That China, for that is the first country, got something right is indubitable. It took the United Kingdom most of the 19th century to raise its per capita income 2.5 times; the United States, 60 years (1870-1930), to up it 3.5 times; and Japan, 25 years (1950-75) to increase it six times. In the 23 years since it emerged from economic isolation in 1978, China has managed to increase its per capita income by a multiple of 7, and its GDP, four times. Better still, it proposes to double its GDP, which has averaged a 9.6 per cent growth over the past 20 years and is now the seventh highest in the world, in the first ten years of this century. China already ranks first in the world in the production of corn, cotton, rape seed, meat, charcoal, chemical fibre, yarn, cloth, cement, steel, colour TVs, and digital control panels. For good measure, it ranks second in power generation, and the production of fertilisers. That's an impressive spectrum; little wonder, then, urban-incomes in China have increased by 360 per cent over the past 20 years; rural-incomes by 480 per cent. And that India got something wrong is now certain. Economic necessities forced the country down the path of reform a full 13 years after Deng Xiaoping announced China's 'Open Door Policy' to the world at the 11th People's Congress in 1978. Murphy must have surely been Indian, for everything that could go wrong did. ''The haphazard manner in which reforms were carried out ensured that the process could never be brought to its logical denouement,'' rues Subir V. Gokarn, the Chief Economist at the National Council of Applied Economic Research.
Things did look good for a euphoric two year-period in the exact middle of the 1990s, and the economy grew by over 7 per cent in both years, but they soon returned to where they had been. The Indian economy grew by an average of 6.4 per cent in the first decade after reforms (1991-2000). Today, the most cheerful estimates put growth at 6 per cent, and both the agricultural- and the industrial-sectors are on a downward spiral. In the first quarter of 2001 (April-June), India's GDP grew by 5.8 per cent as compared to the same quarter in 2000; its industrial production by 5.4 per cent. The comparable figures for China were 8 per cent and 11.3 per cent. It is evident that it will take a while before India can even think in terms of catching up with China. It is equally evident that China-some economists believe it will displace the US as the world's first economy by 2030-poses, at once, the best opportunity and the most significant threat India has faced since 1991. Indian grey-matter and Chinese industry could have been a killing combination, but our neighbour to the North has grey matter aspirations of its own. Outsourcing much of India's production to China is a great idea, but only if the former discovers a non-manufacturing and non-cost-related competitive peg to stand on in the global economy. But do something India must: teary refrains about how Chinese companies are competitive because of the country's better infrastructure and cheaper labour may buy space in newspapers; they accomplish little else.
The Bull In The Asian Ring Everyone, not just India, needs to think long and hard about China. According to a report put out by the Beijing-based Chinese Centre for Economic Research, the country's productivity-a critical indicator of its competitiveness-has been growing by 5 per cent a year for the past two years. Its exports were an impressive $250 billion in 2000-01, and its imports touched $225 billion the same year. China has little to worry about on the external trade front: its forex reserves are a comfortable $165 billion. With FDI inflows of $45 billion a year (India's is $3 billion), there's every reason to celebrate China as the economic heavyweight of this century. Global slowdown or not, China's inexorable march to that end will go on. Its sustained growth rate, competitive exports, and enormous domestic market make it a formidable trading partner. And estimates of consumer spending, based on the quantum of savings (41 per cent of GNP), and population (1.3 billion) make China a market no company can afford to ignore. ''For MNCs everywhere, the writing on the wall is clear: not participating in China's economy is tantamount to not participating in the world's economy in the future,'' says B. Bhattacharyya, Dean, Indian Institute of Foreign Trade. Several transnationals have already realised this. From GE to Cisco, Motorola to Intel, and IBM to Kodak, close to 700 companies have put down roots in China, not just to tap the huge domestic market, but also to leverage the benefits-cheap power, freedom to hire-and-fire, and virtually no bureaucratic interference, to name three-on offer. A senior functionary in the GoI's Commerce Ministry lists China's many attractions: ''With relatively low taxes, flexible labour laws, higher labour productivity, low-priced power (50 per cent cheaper than in India), a world-class infrastructure, and little fear from strikes, China provides everything India doesn't. Most importantly, it has a political system committed to reforms.'' Building on these strengths, China has gone about systematically snatching export marketshare from the rest of Asia. For instance, it has displaced all of South East Asia put together, as the largest Asian exporter to the US. Today, it is the world's preferred workshop: the bulk of the toys, clothes, personal computers, and bicycles sold around the world are made in China. It is facts such as these that are giving Indian manufacturers sleepless nights and forcing them to run to the GoI squealing for protection. Ramu S. Deora, the chairman of the Basic Chemicals and Pharmaceuticals Export Promotion Council believes tax reforms hold the key. ''Unless the government changes the tax regime, 75 per cent of our small and medium enterprises (SMEs) will fold up before March 2002 out of sheer inability to compete with cheap Chinese products that will flood the country. The tragedy is that the SMEs accounted for 50 per cent of the $3.8 billion exports this sector registered last year.'' Deora's reasoning is flawless: China has a single excise duty rate of 17 per cent; and this rate is vatable (that means the duties paid on raw materials and intermediates are reimbursed and only the final product is taxed). Indian chemical manufacturers don't enjoy this benefit. Apart from the 16 per cent excise duty, they have to pay a clutch of local taxes. And interest rates in China are, at 4.5 per cent, almost a third of what they are in India. ''Sectors like chemicals, light engineering products, garments and toys are likely to be hurt by the legal import of Chinese products,'' says S. Madhavan, a partner with consulting firm Pricewaterhouse Coopers. Legal is the operative word: if Chinese products come in through the prescribed route paying all the prescribed duties, the GoI will not find it easy to initiate anti-dumping action against China, its typical response to cries for help from local industry. J.J. Irani, MD, Tata Steel, contends that the threat from China will come only when they start dumping. ''That is not the case now and is not likely to be so in the next few years,'' says Irani.
Foisted anti-dumping cases and tariff barriers can provide, at best, a temporary respite and most companies realise this. The government's decision to impose an average custom duty of Rs 90 on every shirt and Rs 165 on every trouser imported has only served to prolong the life of a terminally ill sector: Indian garment manufacturers are still reeling from the 16 per cent excise duty (levied in Budget 2001) and the 4-6 per cent reduction in the duty drawback (reimbursement of the duty paid on the import of inputs). ''India has already lost the edge as far as branded garments are concerned,'' says Kishore Biyani, CEO, Pantaloon Retail. ''Once this duty structure goes and is replaced by a more rational one, most Indian manufacturers will have to turn into traders.'' In a much-publicised move, the world's largest quartz clock maker Ajanta first considered shifting its entire manufacturing operations to China, then, gave up that idea, and is now flirting with the idea of getting out of the business altogether. ''We are losing around 30 per cent of the marketshare every year. In a couple of years we may have to close our Indian operations because we just can't cope,'' laments J.O. Patel, the MD and CEO of Ajanta, who proceeds to rattle off the many advantages China has over India. ''Raw materials are cheaper by about 20 to 25 per cent, electricity is cheaper by 50 per cent and because of the excellent infrastructure, there is very little need to maintain an inventory, which reduces the overhead costs. Moreover, since there is a hire and fire policy and workers are paid according to their productivity, the wage bill is much lower.'' Nor will China's anticipated accession to the WTO make much of a difference. Its entry will give it access to markets, bring in more FDI, and enable it increase its world-share in textiles and household appliances. However, in the short run, China's fortunes will be adversely affected because its policies will have to become more transparent. The major losses will be in the agricultural sector. A study by investment bank Salomon Smith Barney estimates that a total of about 40 million people will lose their jobs in agriculture, state-owned enterprises (SOEs, the equivalent of India's PSUs) and in the private sector in the first five years of the accession. However, the study also envisages an incremental improvement in the GDP growth rate by between 0.5 and 2 per cent annually. 1 2 |
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This
is the story of two Asian nations. Both have populations in excess of a
billion and the ability to become superpowers. Yet, theirs is a study in
contrasts: one has achieved the distinction of being the fastest-growing
economy of the twentieth, and twenty-first centuries, and perhaps, of
all-time. The other is still playing catch up with the tiger economies of
South-East Asia. This, despite the crippling currency crisis that these
countries suffered as recently as three years ago.
