Although both nations started at relatively similar economic standings, China rapidly outpaced India, transforming itself into a global economic powerhouse.
Today, as China's economy shows signs of deceleration and Western companies seek alternative manufacturing hubs, a crucial question arises: Is it now India's turn to replicate China's economic miracle?
A Tale of Two Economies: The Initial Divergence
To understand the present, we must first examine why China's economy surged ahead in the 1980s and 1990s while India lagged behind. The liberalization of China's economy in the late 1970s and early 1980s was a decisive factor in its growth.
This reform allowed private entrepreneurship to flourish and foreign companies to invest in China, turning it into the manufacturing hub of the world. However, the story is more complex than just liberalization.
According to Professor Raghuram Rajan, China's workforce had a superior level of basic education compared to India’s.
This educational advantage was crucial for China's transition from an agrarian society to a manufacturing giant.
Educated workers could follow instructions, work in factories, and eventually start their own businesses, contributing to the economy's growth. In contrast, India's workforce lagged in basic education, which hindered its ability to attract foreign factories and develop a strong manufacturing base.
Beyond Liberalization: The Chinese Growth Miracle
While liberalization was necessary, it wasn't the sole reason for China's rapid growth. Many other economies that liberalized, including India, did not achieve the same level of success.
The reasons for China's extraordinary growth can be attributed to two other key factors: investment-led growth and the attraction of Foreign Direct Investment (FDI).
Investment-Led Growth: China adopted an investment-led growth model, similar to the United States, Germany, and Japan during their periods of rapid growth. This model focuses on massive investments in infrastructure, machinery, and other productive assets.
The Chinese government directed its state-owned banks to lend extensively to infrastructure projects and manufacturing, fueling economic growth. India, on the other hand, also attempted to follow this model but with less success.
While India's state-owned banks lent generously to businesses, many of these loans were not used productively, leading to a banking crisis in the early 2010s.
Attracting FDI: China's ability to attract FDI was another critical factor in its economic success. FDI brought not only capital but also knowledge and technology, which were essential for building an efficient manufacturing sector.
In contrast, India struggled to attract the same level of FDI. The reasons for this are multifaceted, but one significant factor was the difference in how local governments in China and India operated.
The Role of Local Governments
Local governments played a pivotal role in China's economic growth. Chinese local officials were incentivized to grow their local economies, as promotions within the Communist Party were often based on economic performance.
This led local governments to actively facilitate investments, both domestic and foreign. For example, when an Indian businessman wanted to invest in China, he was met by local officials at the airport, taken to potential sites, and provided with all the necessary paperwork on the same day.
This level of efficiency and support from local governments was a key driver of China's rapid economic development.
In contrast, India's local governments were often a hindrance to investment. While the central government encouraged FDI, local governments frequently enforced stringent regulations, making it difficult for foreign firms to set up operations.
This bureaucratic red tape discouraged many potential investors, contributing to India's slower economic growth.
The Unique Challenges of India's Local Governments
India's local governments face unique challenges that have hindered the country's economic progress. Professor Devesh Kapur identifies three key reasons for this: understaffing, the caste system, and the nature of Indian democracy.
Understaffing: Unlike China, where local governments have significant staffing and resources, India's local governments are severely understaffed.
This lack of capacity prevents them from effectively implementing economic policies or supporting investments. Even when funds are available, many local governments struggle to utilize them efficiently due to the lack of personnel.
The Caste System: India's caste system, though officially abolished, still influences the functioning of local governments.
The caste system creates divisions that can impede the implementation of policies, especially at the local level. For example, educational programs aimed at improving opportunities for girls may fail because local officials prioritize the interests of their caste over broader social goals.
In some cases, government positions remain unfilled because qualified candidates belong to higher castes, and local leaders from lower castes refuse to appoint them.
The Nature of Indian Democracy: India's democracy, while a source of pride, also poses challenges to economic development.
Professor Kapur describes India as a "precocious democracy," meaning that the country became democratic before it had fully developed the institutions necessary to support a functional democracy.
This has led to a vicious cycle where poor public services drive wealthier citizens to rely on private alternatives, reducing the tax base and further weakening public services.
Moreover, in a democracy, local politicians often focus on short-term, visible projects that will win them votes, rather than long-term investments in education or infrastructure.
This emphasis on immediate electoral gains over sustainable development has hindered India's ability to replicate China's growth model.
The Future: Can India Catch Up?
Given these challenges, can India still hope to replicate China's economic miracle? The answer is complicated. On one hand, India's central government has made significant strides in recent years, with initiatives to improve infrastructure and attract more FDI.
The Modi administration, for example, has prioritized infrastructure development and taken steps to make India more business-friendly.
However, without substantial reforms at the local government level, India is unlikely to achieve the same level of success as China.
The country's unique political structure, deeply rooted in its history and social fabric, means that it cannot simply copy China's model. Instead, India will need to develop its own path to growth, one that takes into account its democratic nature, social diversity, and the need for more effective local governance.
The Economic Trajectories of China and India
The economic trajectories of China and India over the past few decades offer valuable lessons in development and governance.
China's success was not just due to liberalization but also to its ability to mobilize local governments, attract FDI, and implement an investment-led growth model. India, despite its efforts, has struggled to keep pace due to the challenges posed by its local governments, social structure, and democratic system.
As the global economic landscape shifts, with China slowing down and companies looking for new manufacturing hubs, India has an opportunity to position itself as a major player.
However, to do so, it will need to address the deep-rooted issues within its local governance and find a growth model that suits its unique circumstances.
Only then can India hope to replicate, in its own way, the economic miracle that propelled China to global prominence.