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Catching Up With China:NEED FOR CONSENSUS ON REFORMS, by Dr. Vinod Mehta, 24 April 2008 Print E-mail

Economic Highlights

New Delhi, 24 April 2008

 Catching Up With China


By Dr. Vinod Mehta

Former Director, Research, ICSSR

In an interview to a foreign financial daily, Finance Minister P Chidambaram recently observed that India needs to “catch up with China” in terms of economic growth to remain at the high growth trajectory. However, this requires greater political consensus, which unfortunately is lacking, but vital to realize our full economic potential.  Unfortunately, after a decade-and-a-half of economic reforms, political consensus on these has been elusive, unlike China, which had consensus from day one. In simple words, we need to work harder to create this consensus, so that the gap between our and their growth rates is narrowed.

In spite of a slowdown in the economic growth the world over thanks to a slowdown of the US economy among other factors, India and China are still the two fastest growing economies in the world. Chinese economy is growing at a 9 per cent, a rate faster than that of India, which is at 8 per cent. Apart from increasing the growth rate to match the Chinese, we must also implement economic decisions quickly like they do, or else the gap in economic terms will increase and we will find ourselves much behind China.

It is common knowledge that both India and China started their journey along the path of economic development almost at the same time and from almost the same economic level, however, one under the democratic system of governance and the other under a one-party rule. Interestingly, the Chinese took to economic reforms almost two decades before India and are still being pursued vigorously than by New Delhi. In China, the Communist party has become the catalyst for economic reforms, whereas here we still have political groups opposing some aspects of the economic reforms.

China has traversed a long way in its economic development since.  Before the introduction of the reforms, Beijing had wiped out illiteracy and assured minimum level of social security including health care to its citizens.  Till date we have not been able to either eradicate illiteracy or assure a minimum level of social security to the people.

Since the start of economic reforms and the opening up of its economy, the Chinese industrial sector has been enjoying a very high growth rate. According to data made available by the State Statistical Bureau of China, the industrial sector has been registering an annual average growth rate of 12 per cent. The Chinese attribute this remarkable growth to two factors: One, the reform in the industrial sector was initiated by enlarging the decision-making powers of the enterprises, relaxing controls on the functioning of industrial enterprises and privatization of the enterprises.

Two, the introduction of huge amounts of foreign capital and the opening up of the economy quickened the pace of China's industrialization.  To quote Chinese sources: “the establishment of large numbers of joint ventures and exclusively foreign-funded enterprises has brought in capital, advanced equipment and modern management expertise, greatly enhancing the technological and management level of China's industrial enterprises, enabling the production of China's manufactured goods to quickly catch up with or approach the world advanced level and increasing exports by several fold." 

At another place, the Chinese claim that the gap between it and advanced countries in terms of the overall industrial technological and equipment level has narrowed by 10 to 15 years.  As against this, the reforms in the industrial sector in India have considerably slowed down over the years.  The average annual growth rate of industrial sector is hovering between eight and 10 per cent. Still there are many constraints on the flow of foreign capital and technology in India.  The public sector reforms and disinvestment in some of the public sector units are floundering.  The technology level of Indian industries is still very low. Though no studies have been done to find out the technological gap between India and other advanced countries, one hunch is that it would be 30 to 40 years behind the advanced nations.

The agricultural sector of China too has witnessed a very robust growth in the past two decades.  It must be noted that unlike India where reforms in the agricultural sector are yet to be discussed, the rural reforms went hand in hand with industrial reforms in China.  The average annual growth of agricultural production in China has hovered around 6.7 per cent. Before the reforms, China was net importer of grain to meet its food requirements and after the reforms it has been continuously reaping good grain harvests with the output in 1996 topping 500 million tonnes.  Of interest is the fact that the land-mass of China is bigger than ours but the arable land available to the former is just half of that of India.

It is true that India is able to meet its food requirements from its own sources.  But the agricultural sector has not been growing at the rate it should.  That’s why agricultural experts’ fear that if India does not move now to raise its agricultural output it may face severe food shortages in 20 years from now.  The average annual rate of growth of agricultural sector has been hovering between three to four per cent for the past two decades and for certain years it has been a negative growth.

Far from having economic reforms in the agricultural sector, we till date do not have an agricultural policy. We are still dithering over foreign investment in this sector, while the Chinese are going in for foreign investment here in a big way.  And, the agricultural sector in China which was opened to foreign investment has attracted large foreign investments.

China is also investing heavily in the technology sector. It is feverishly developing and mastering ‘Gen Next’ technologies and has no financial crunch for its scientific researchers.

According to sources, nearly 60 per cent of foreign direct investment in Chinese agricultural sector so far has gone into the developed coastal region. Beijing is now encouraging foreign investors to invest in the agricultural sector in both West and Central China. The Chinese feel that in the next few years, they would be able to increase the output of grain by 50 million tones. To achieve this it needs to invest between $ 20 and 50 billion in the agricultural sector. And, it is precisely for this reason that it will encourage foreign investment.  In India it would be some achievement for the agricultural sector if we are able to remove all restrictions on movement of agricultural products within the country. 

There is very little information available on the agricultural technology being used in China.  But given the fact that China with half of the arable land as compared to India is able to produce five times more grain output, the productivity per hectare is much higher in China. This should be a challenge for us and afford us the opportunity to increase our agricultural output by devising appropriate strategies. 

This is not to say that everything is alright with the Chinese economy. It has its problems along with corruption, which is quite rampant.  The non performing assets (NPA’s) of the Chinese banks are reported to be much larger than that of the Indian banks and economists are expecting that the bubble may burst at any time.  Whether the Chinese banks go bust or not, the above observations should make our nation think seriously: how can we match their growth and emerge as an important economic power within the region.  There is an urgent need to push economic reforms in all the three sectors of the economy viz., agriculture, industry and service. 

Besides, there is one more thing: China does not lose time in implementing its economic decisions, whether they relate to development of infrastructure or of economic zones etc. Whereas in India we take a lot more time in implementing decision mainly because of opposition from various quarters. This single factor, and not the one per cent difference in growth rate, is what will put India far behind China in the decade.  ---INFA       

 (Copyright, India News and Feature Alliance)

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