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Monday, Sep. 5, 2011

Forecasts of robust middle-class growth are reason enough for Chinese, Indian optimism


Special to The Japan Times

CANBERRA — Prime Minister Manmohan Singh noted recently that if present trends continue, India will become the world's third largest economy by 2025.

Most major global corporations have a presence there with substantial expansion plans, and many Indian corporations are expanding their footprints abroad through investment, mergers and acquisitions. India's growing economic weight is being translated into increased political clout.

All the major indicators are trending in the right direction: gross domestic product, literacy, life expectancy, infrastructure, etc.

India's GDP has quadrupled since economic reforms in 1991 and per capita income has doubled. With GDP growing at 8 to 9 percent annually and population increasing at 1.7 percent, real GDP/capita will double every decade.

The doubling of the middle class to between 600 million and 700 million will have profound political consequences for India's quality of governance, determining the fate of governments and domestic and foreign policy parameters.

The economic and foreign policy implications for Japan and the West are largely positive.

Like China, India was able to ride out the global financial crisis with the help of substantial currency reserves, limited leverage and low debt levels.

The economic performance of both countries changed dramatically when they abandoned socialist dogmas, liberalized and deregulated economies by adopting market principles, and embraced and engaged with the international economy. China managed to do this earlier, and its growth has been the longer and its share of world trade is the bigger.

India's reforms followed 12 to 13 years later, and its deepening engagement with the world economy still lags behind China by a decade. But for all of China's vaunted advantages — allowing for the 12-year lag — India's performance is comparable.

Therefore, assuming the same trajectory, India's growth over the next decade will have the same stunning impact as China's in reshaping economic and geopolitical maps.

In a followup article I will note the qualifications and hence the need for cautious optimism rather than triumphalism. Just-released figures show that India's GDP grew at an annualized rate of 7.7 percent in the April-June quarter, down from 9 percent for the same period last year. The industrial sector performed particularly badly.

For now let me note six drivers of the destiny of nations that will work to India's comparative advantage over China: demography, domestic demand, the private sector, democracy, rule of law and civil society.

While China's population profile matches the graying phenomenon of most Western countries, half of India's population is under 25. This demographic dividend will give India a tremendous advantage with a far bigger cohort of workers and consumers who will also anchor the economic prospects of many Western countries.

Compared with China, India's economic performance is rooted in indigenous funds and enterprise, and is therefore likely to prove more resilient and self-sustaining. India's success is built primarily on domestic rather than export market demand, domestic savings rather than foreign investment, high-tech services more than low-skilled industry, and rising productivity more than increased labor, land and capital inputs.

Most important, at the heart of Indian success is the private entrepreneur, not the state. Domestic entrepreneurs have been pushing at the bureaucratic and political gatekeepers in New Delhi to step aside and let a thousand flowers of commerce bloom.

Decades of communist rule have left a legacy of constraints on China's domestic entrepreneurs and checked their ability to compete with state enterprises. India's private sector fares more efficiently in the utilization of capital. Hence the belief that India's economy grows mainly at night, when the government is sleeping.

The Indian entrepreneur is backed by a thriving stock market, a disciplined financial sector, and more efficient and transparent capital markets and legal system. While markets ensure efficiency, democracy ensures that reforms have a human face.

India's two main parties, Congress and the BJP, differ on the pace, sequencing and social safety nets, but agree on the goal of rapid and sustained growth by unleashing the productive genius and energy of the Indian businessman through reforming the tax structure and lowering tax and tariff schedules, dismantling state controls and monopolies, promoting and investing in infrastructure, softening labor market rigidity, curtailing subsidies, and generally adopting business-friendly policies.

The existence and growing role and impact of an active civil society, which has just flexed its muscle and forced the government to confront the menace of corruption, also puts limits on governments' ability to ignore citizens and damage consumers.

Finally, as India changes its attitudes toward its own sprawling diaspora, it might further reinforce the country's comparative advantages in professional, managerial and entrepreneurial skills.

China's diaspora has helped to make it the world's factory. India could become the world's technology lab with the help of overseas Indians.

A word of warning: Some of India's long-standing advantages over China are eroding or becoming less relevant. For example, as part of their longer-term strategic vision, Chinese leaders have been promoting English-language and information-technology skills, backed by the necessary telecommunications and power infrastructure.

There are vigorous shoots of civil society in China from the bottom up alongside the continuing control of the single political party at the peak national level.

The police can be as brutal and corrupt in one country as in the other. China may lack democracy, but it also lacks India's dynastic and imported leadership.

Most critically, while China is closing the education gap with the West, India is falling further behind. In the 2011 university rankings, India has only one in the world's top 500 universities compared with mainland China's 23. Thus China will pull rapidly ahead on science and technology.

More positively, robust and sustained growth in China and India is likely to be mutually reinforcing. Who would have foreseen the time when the annual increase in bilateral China-India trade would be equal to or bigger than the total trade between Japan and India?

Both China and India are sizable enough that the rise of large and affluent middle classes in the two will provide almost unlimited growth potential for the rest of the world.

Ramesh Thakur is a professor of International Relations at Australian National University and adjunct professor in the Institute of Ethics, Governance and Law at Griffith University.



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