India vs China: Startling

economic facts
Author: Rajeev Srinivasan
Publication: Rediff on Net
Date: July 26, 2002
URL: http://www.rediff.com/news/2002/jul/26rajeev.htm

Is China totally leaving India in the dust? The usual impartial

Martian would believe so after a quick look at the world's
media. Pundits pontificate about how China is the obvious
superpower and hegemon in Asia, the world's future center of
all manufacturing, the largest economy in the world in 25
years. In short, the greatest economic miracle of all time. I
have never quite believed all this self- serving drivel; I am one
of the very few in the Indian media who thinks India stands a
decent chance against China.

I have been skeptical about China partly because of

circumstantial evidence: migrant Chinese men stuff
themselves into cargo containers and arrive asphyxiated after
a Pacific crossing; mainland Chinese prostitutes flood into
Southeast Asia (The South China Morning Post carried a story
recently). These are not indications of a nation where all is
well.

But there is also a lot of hard data that suggests China's

'miracle' looks more like a 'debacle.' I have been reading quite
a few pieces recently about the hollowness of their
propaganda. This means the US State Department wishes to
put a little pressure on the Chinese these days: the US media
(unlike its Indian counterpart) entirely toes the government line
on foreign affairs. This sentiment is cropping up all over:

* a surprisingly negative survey in The Economist (June 15)

titled A dragon out of puff (the magazine is the unofficial voice
of NATO, and they generally like totalitarian states, so the tone
is quite amazing)
* an article in the San Jose Mercury News (March 25) titled
China's 'growth' is not what it seems several articles in Time
(June 17), for example Workers' Wasteland

* a story in Newsweek (April 8 International Edition) titled 'How

Much Is China Cooking Its Numbers?'

* a story in the Singapore Straits Times (March 27) titled 'Is

China's Economic Growth Just a Charade?'

* an opinion piece in The Asian Wall Street Journal (February

26) titled India and China: Asia's Tortoise and Hare

* an opinion piece in The International Herald Tribune (April 2)

titled 'China: the Big Four banks head towards collapse'

* an article in The Economist (March 14) titled China: How

cooked are the books?

* an article in The New York Times (March 19) titled 'Factories,

Fewer Workers Bring More

Labor Unrest To China.'

I have also read excerpts from Gordon Chang's relentlessly

pessimistic book, The Coming Collapse of China (Random
House, 2001). To balance this, I read Keniichi Ohmae's Profits
and Perils in China, Inc relentlessly optimistic (thanks to reader
Jerome).

Chang is an American lawyer who worked in Shanghai for 20

years, and Ohmae is the well- respected former Asia-Pacific
head of management consultants McKinsey. Both make their
points well, but on average, Chang's contrarian perspective
appeals more to me. Ohmae's perspective seems a little out-of-
date, and his numbers, eg. from the Economist Intelligence
Unit on FDI, needs updating.

Chang's testimony to the US China Commission is compelling.

Chang predicts that the Communist Party in China will collapse
within the next five years. Says he: 'China is not prepared for
accession to the WTO. Its state-owned enterprises and banks
are not ready for increased competition. The economy, in
reality, is stalling, not growing fast enough. The result is worker
and peasant unrest. The central government's finances are in
bad shape, and one day the People's Republic could run out of
money. But before that happens, the rulers of China will run out
of something even more precious: time.'

As I have consistently suggested in previous columns, for

instance Two strikes, I am not surprised by all this bad news: I
generally do not buy all the irrational exuberance about China,
although I am disappointed at India's failures as well. I mourn
the fact that India has not exactly distinguished itself in
comparison. 40 per cent of the world's hungry are in the Indian
subcontinent, according to the Food and Agriculture
Organisation. This signal failure can be laid at the door of
India's misguided leftist policies, pretty much the same as in
China.

If you look at the odious comparisons between India and China,

most people seem to pinpoint the following:

a. the gap in total gross domestic product and per capita GDP
between the two
b. the gap in foreign direct investment between the two
c. the difference between the sparkling new skyscrapers in
Shanghai and the endless shantytowns of Mumbai's Dharavi.

It turns out all these comparisons are specious: if you look at

the facts carefully, the Indian tortoise compares quite well to
the Chinese hare.

Let us consider these in turn. It is true that China's GDP is more

than twice India's, and so is the per capita GDP both in nominal
terms and at PPP (purchasing power parity), namely the value
of a comparable basket of goods and services. This, of course,
is partly a function of the fact that China liberalised its
economy quite some time ago, whereas India continued under
the Nehruvian straitjacket for at least a decade longer.

China has successfully sold the world the mantra of 'a billion-
people market' whereas the set of actual consumers with
disposable income is far smaller. To give credit where it is due,
China is indeed a market leader in manufacturing many low-
end products at low cost, although they have severely
understated the cost of labour and especially of capital, which
is why accession to the WTO is likely to be truly painful.
Genuine as some of their achievements may be, there is
enormous propaganda puffery too.

For instance, it is widely believed that China enjoyed growth

rates in the double figures for several years, and that it
continues to grow at the rate of over 7 per cent a year.
However, I have previously quoted authoritative sources (see
my column China doesn't matter) that suggest that at least 2
to 3 per cent of GDP growth is simply made up. A rigorous and
detailed study by Thomas Rawski of the University of
Pittsburgh based on publicly available information casts even
more doubt on these numbers.

According to Rawski, the numbers are significantly inflated.

Rawski compares China's figures with those of many other
developing economies, and asks pertinent questions: if the
Chinese economy is doing so well, why is energy consumption
actually falling (it fell by 12.8 per cent in 1997-2000 while GDP
allegedly grew 24.7 per cent)? Why is unemployment rising?
Why are retail sales sluggish? Why are incomes falling sharply
in rural areas?

In "China's 'growth' is not what it seems", in the SJ Mercury

News, Arthur Waldron, director of Asian Studies at the New
Enterprise Institute (thanks to reader Sudarshan), quotes
Rawski's suggestion that the Chinese economy is in fact in
recession, and has been contracting on and off since 1998. Not
stratospheric 7+ per cent percent growth, but a shrinkage of 2
per cent in 1998 and 1999, and growth of about 3 to 4 per cent
in 2000-2001! Waldron quotes Chinese strongman Zhu Rongji,
who told a Chinese television audience that his economy would
have 'collapsed' in 1998 without the state stimulus spending
currently taking Beijing's government debt to record levels. We
will come back to government debt later.
Waldron, in the above article, asks a relevant question: why are
so many people so willing to suspend disbelief and accept this
economic fantasy? His answer: 'Because of the chronic
pathologies of China watchers: groupthink (in the academy and
government), fear of Chinese reaction, job pressure (in the
intelligence community and the media) and greed and wishful
thinking (in the case of business). Once again, we look like
gullible fools to the Chinese.' He is absolutely right. This
syndrome of mindless servility to the Chinese is especially
acute in Indian 'intellectual' circles, alas!

Says Bruce Gilley in The Asian Wall Street Journal article 'Asia's
Tortoise and Hare:' 'North Asia's colossus appears to be a
paragon of efficient government and high growth. Its South
Asia counterpart seems mired in political stasis and sluggish
growth. That view is propagated most forcefully by Western
investment banks and multinationals, and eagerly embraced
by Chinese nationalists and disaffected Indian intellectuals. Yet
it is a gross misreading of the comparative achievements of
the two countries. A closer reading shows that, in the last two
decades, India has done better than China both in social and
economic progress and in the expansion of rights and
freedoms.' [Emphasis mine]

Gilley has correctly identified craven Indian 'intellectuals' --

India's greatest liability -- as those most eager to embrace the
views of Chinese nationalists. In other words, 'secular,'
'progressives,' Nehruvian Stalinists, JNU-ites and Marxists.
Unfortunately for them, they are wrong, as Gilley goes on to
demonstrate in the rest of his article.

These self-same 'intellectuals' committed economic crimes

against India's poor through perpetuating the Nehruvian Rate
of Growth of 2 to 3 per cent in GDP per annum. Once
liberalisation began in 1991, this accelerated toward the Hindu
Rate of Growth of 8 to 12 per cent: harkening back to the
natural growth that made India perhaps the richest nation in
the world in centuries past. India needs a decade or two of the
Hindu Rate of Growth before poverty can be eradicated.
I don't know if reported GDP growth rates for India are
particularly accurate, but I am certain that such entities as the
Center for Monitoring the Indian Economy do not err on the
side of puffing up the numbers. If anything, given the general
tendency in India to play down every positive accomplishment,
I would imagine that the rates are under-reported, and that
India is actually doing reasonably well.

This factor of underestimating India's results is seen in the

second issue as well: that of the famous FDI. I keep hearing
about China's $40 billion in FDI, and India's pathetic $3 billion.
But it is a fact that, discouraged by the dismal rate of return,
hardly any Americans or other foreigners have been making
significant investments in China lately. So where does all this
money come from?

It turns out that about 50 per cent of this alleged FDI is in fact
flight capital, also known as black money, returning through a
process known as 'round-tripping' (see an editorial, in the
Financial Express of June 5). Chinese businessmen take capital
out of the country through under-invoicing exports and over-
invoicing imports, and park this flight capital offshore. Then
they send it back as 'foreign direct investment' to take
advantage of preferential tax treatment. I suppose it is true
that if resident Chinese are investing their money back in
China, even through bizarre means, it shows some confidence
in the economy. They may, however, be deluding themselves
that their investments are safe, much like the average Chinese
saver who puts his money into state banks that are perilously
close to default, but we'll come to that later.

And what is the case with India? True to form, India under-
reports its FDI! It is general IMF- approved practice to include
various other inflows such as reinvested earnings, overseas
corporate borrowings, and subordinated debt in FDI. But India
does not. Therefore, the reported FDI for India is considerably
less than the reality: thus, in fact, on an apples to apples
comparison, India's FDI goes up to $8 billion or so and China's
comes down to $20 billion or so: roughly proportional to their
nominal GDPs. So it is not the case that India has done
frightfully badly in FDI.
And some of the FDI in India results in spectacular return on
investment: I read somewhere that General Electric's Jack
Welch research center in Bangalore has filed for 160 US
patents in the first year of its existence. Real intellectual
property development fueled by Indian engineers and
scientists. I am sure GE is investing millions more to take
advantage of this productivity. Whereas a fair amount of the
actual FDI in China is for buying real estate!

Furthermore, in May 2002 alone, FDI flows into India (despite

war fears and communal riots) went up by 87 per cent (to
$501m from $268m in May 2001); and for the period January to
May, by 60 per cent from $1.18 billion in 2001 to $1.89 billion
in 2002. And this does not include GDR/ADR (global/American
depository receipts) floated by Indian companies in overseas
capital markets. So the picture in Indian FDI is certainly not all
that grim.

Also, out of the $20 billion or so real FDI in China, indications

are that roughly 80 per cent comes from overseas Chinese
entrepreneurs -- in Taiwan, ASEAN, North America, etc -- who
are looking to use a bit of good old guanxi, connections. The
idea is to use the mainland as a sweatshop with slave wages:
leading to instances of death from overwork. Whereas in India's
case, the overseas Indian, usually a manager or technical
person, urges his company to invest in R&D or BPO in India.

Then there is the third odious comparison, the sparkling, fancy

new Bund in Shanghai and the ghettoes of Mumbai.
Admittedly, anybody flying into Mumbai has to traverse terrible
slums en route into the city. These will make anyone believe
that India has totally failed its citizens. It is almost
inconceivable that human beings choose to live like this. Why
don't they go back to wherever they come from?

But that very question signals a deep difference in the way

India and China function. There are practically no restrictions
on the free movement of Indians, and so they go wherever
they believe their economic prospects are best. If China
allowed for similar freedoms, their glittering showcase city
centers would instantly be overtaken by millions of rural
squatters fleeing the poverty of their villages.

The Economist says: 'Ultimately China's surplus rural workers

will need to move into urban areas. But the government,
fearful of creating its own versions of Mumbai with endless
shanty-town sprawls, is hesitant to open the doors to peasant
migration. The booming cities of skyscrapers and glittering
shopping malls that so impress foreign visitors to China will,
over time, begin to look more like cities in other developing
countries as country dwellers move in. The shanty-towns will
spread.'

The bright lights of China's cities remind me of the facades put

up by the Tsar's kulaks: 'Shanghai' must mean 'Potemkin
village' in Chinese!

Thus, on all three of these most common and superficial

comparisons, India is not doing as badly as people think, and
China is doing worse than people think. But Indians have no
reason to pat themselves on the back -- indeed, India has done
outstandingly badly. In comparison to real potential, China has
done badly, India has done even worse. But Indians also have
no reason to be overawed by a mythical Chinese success story.
That is the intent of this essay, to urge Indians to not blindly
follow China's example. This is a real danger, because India's
'intellectuals' are uncritically starry-eyed over China. In the
next part of this analysis, I look at what really ails China, and
the lessons India can learn from their mistakes.

Back Top

18/06/200
Date
5
India versus China Member
4/5
rating
A case of the tortoise and the hare? Here's a follow up to Ray's earlier article looking at the
race of the emerging superpowers.
By Ray Block Email / Print

My interest in this update was to check more recent

progress. I particularly wanted to contemplate
whether in the competition of India versus China,
can the world’s largest democracy, with an uneasy
15 party United Progressive Alliance government
and a painfully slow bureaucracy still grow at a fast
rate, as the politically controlled Chinese, allowing
for the pain and dislocation involved in restructuring.

Two very different viewpoints on India and China, in

the race of these two future superpowers comes
from Morgan Stanley, which concludes that there is
no race as India is so far behind. And on the other
side of the ledger, India has a lot of staying power
and may eventually win out. The latter view comes
from the Investment U E-Letter site
(www.investmentu.com).

Is this a case of the hare (China) and the tortoise (India), where the hare is so far in front that it
rests, while the tortoise slowly and surely keeps going and eventually wins the race?

Andy Xie, Morgan Stanley’s Asia Pacific chief economist sees China as 13 years ahead of India in per
capita GDP terms, and when the Indian economy catches up to this level, the Chinese economy will
be nearly three times larger again. The Chinese are also well ahead in infrastructure, particularly
roads and electricity, where they spend eight times more than India on physical infrastructure, so
that the cost of these services in India is said to be 50-100 per cent higher than in China.

Apart from exports where the Chinese export nearly six times as much, the Chinese domestic
market for products is much bigger than in India. “Penetration rates and per capita consumption are
higher in China for most broad based manufactured consumption items, with India needing 10-15
years to reach China’s market size.”

India is also far behind China in attracting foreign direct investment, which has been the catalyst for
the much faster growth rate. Says Xie:“China has received a cumulative FDI inflow of US$480 billion
since 1990 (to 2004) compared with just US$33.1 billion in India.”

Despite this seemingly one sided race with the Chinese far ahead in physical asset terms, there are
a growing number of investors favouring investment opportunities in India over China. Steve
Sjuggerud, President of Investment U in a two part discussion in May-June 2005 with Rahul Saraogi
of Atyant Capital, which runs an Indian focussed investment vehicle set out the Indian case.
• Compared with China’s history of central and local government directed investment, which has led
to surplus capacity in many industries, India has limited state owned industry relying instead on
private sector allocation of capital.
• While China is all about physical assets and commodities, India is “miles ahead of China in the
 18/06/200
Date
5
India versus China Member
4/5
rating
A case of the tortoise and the hare? Here's a follow up to Ray's earlier article looking at the
race of the emerging superpowers.
By Ray Block Email / Print

My interest in this update was to check more recent

progress. I particularly wanted to contemplate
whether in the competition of India versus China,
can the world’s largest democracy, with an uneasy
15 party United Progressive Alliance government
and a painfully slow bureaucracy still grow at a fast
rate, as the politically controlled Chinese, allowing
for the pain and dislocation involved in restructuring.

Two very different viewpoints on India and China, in

the race of these two future superpowers comes
from Morgan Stanley, which concludes that there is
no race as India is so far behind. And on the other
side of the ledger, India has a lot of staying power
and may eventually win out. The latter view comes
from the Investment U E-Letter site
(www.investmentu.com).

Is this a case of the hare (China) and the tortoise (India), where the hare is so far in front that it
rests, while the tortoise slowly and surely keeps going and eventually wins the race?

Andy Xie, Morgan Stanley’s Asia Pacific chief economist sees China as 13 years ahead of India in per
capita GDP terms, and when the Indian economy catches up to this level, the Chinese economy will
be nearly three times larger again. The Chinese are also well ahead in infrastructure, particularly
roads and electricity, where they spend eight times more than India on physical infrastructure, so
that the cost of these services in India is said to be 50-100 per cent higher than in China.

Apart from exports where the Chinese export nearly six times as much, the Chinese domestic
market for products is much bigger than in India. “Penetration rates and per capita consumption are
higher in China for most broad based manufactured consumption items, with India needing 10-15
years to reach China’s market size.”

India is also far behind China in attracting foreign direct investment, which has been the catalyst for
the much faster growth rate. Says Xie:“China has received a cumulative FDI inflow of US$480 billion
since 1990 (to 2004) compared with just US$33.1 billion in India.”

Despite this seemingly one sided race with the Chinese far ahead in physical asset terms, there are
a growing number of investors favouring investment opportunities in India over China. Steve
Sjuggerud, President of Investment U in a two part discussion in May-June 2005 with Rahul Saraogi
of Atyant Capital, which runs an Indian focussed investment vehicle set out the Indian case.
• Compared with China’s history of central and local government directed investment, which has led
to surplus capacity in many industries, India has limited state owned industry relying instead on
private sector allocation of capital.
• While China is all about physical assets and commodities, India is “miles ahead of China in the
 18/06/200
Date
5
India versus China Member
4/5
rating
A case of the tortoise and the hare? Here's a follow up to Ray's earlier article looking at the
race of the emerging superpowers.
By Ray Block Email / Print

My interest in this update was to check more recent

progress. I particularly wanted to contemplate
whether in the competition of India versus China,
can the world’s largest democracy, with an uneasy
15 party United Progressive Alliance government
and a painfully slow bureaucracy still grow at a fast
rate, as the politically controlled Chinese, allowing
for the pain and dislocation involved in restructuring.

Two very different viewpoints on India and China, in

the race of these two future superpowers comes
from Morgan Stanley, which concludes that there is
no race as India is so far behind. And on the other
side of the ledger, India has a lot of staying power
and may eventually win out. The latter view comes
from the Investment U E-Letter site
(www.investmentu.com).

Is this a case of the hare (China) and the tortoise (India), where the hare is so far in front that it
rests, while the tortoise slowly and surely keeps going and eventually wins the race?

Andy Xie, Morgan Stanley’s Asia Pacific chief economist sees China as 13 years ahead of India in per
capita GDP terms, and when the Indian economy catches up to this level, the Chinese economy will
be nearly three times larger again. The Chinese are also well ahead in infrastructure, particularly
roads and electricity, where they spend eight times more than India on physical infrastructure, so
that the cost of these services in India is said to be 50-100 per cent higher than in China.

Apart from exports where the Chinese export nearly six times as much, the Chinese domestic
market for products is much bigger than in India. “Penetration rates and per capita consumption are
higher in China for most broad based manufactured consumption items, with India needing 10-15
years to reach China’s market size.”

India is also far behind China in attracting foreign direct investment, which has been the catalyst for
the much faster growth rate. Says Xie:“China has received a cumulative FDI inflow of US$480 billion
since 1990 (to 2004) compared with just US$33.1 billion in India.”

Despite this seemingly one sided race with the Chinese far ahead in physical asset terms, there are
a growing number of investors favouring investment opportunities in India over China. Steve
Sjuggerud, President of Investment U in a two part discussion in May-June 2005 with Rahul Saraogi
of Atyant Capital, which runs an Indian focussed investment vehicle set out the Indian case.
• Compared with China’s history of central and local government directed investment, which has led
to surplus capacity in many industries, India has limited state owned industry relying instead on
private sector allocation of capital.
• While China is all about physical assets and commodities, India is “miles ahead of China in the