Tuesday, February 08, 2005

ANALYSIS:Will the Indian Tortoise Catch the Chinese Hare?

+ India's democracy and Western-leaning institutions are also attractive for the West, Lian said in a report. Fast-expanding China, by contrast, is viewed as a rival. "If the West sees India as a natural strategic partner and views China as a geopolitical contender, then India could assume a much bigger role in this Pacific Century as it can better leverage capital and technology from the West and pursue a higher value-added development model that could allow it to eventually outgrow China" .+

Will the Indian Tortoise Catch the Chinese Hare?


By Alan Wheatley, Asian Economics Correspondent

SINGAPORE (Reuters) - Intoxicated by the buzz of Shanghai, a visitor is tempted to conclude that, like the city's skyscrapers, China's economy will keep growing to the skies.

By contrast, teeming Bombay more readily conjures up India's faded past than a glorious tomorrow.

Yet as the finance ministers of Asia's two billion-strong giants attend this weekend's Group of Seven meeting for the first time, some economists are making the case that India can boast better long-term prospects than its neighbor.

In the early 1980s, India and China both churned out annual output per head of about $500. Today, China is more than twice as rich, with gross national income of $1,100 in 2003 dwarfing India's figure of $530, according to the World Bank.

While India notched up average annual GDP growth of 5.9 percent from 1993-2003, China raced ahead at a 9.0 percent clip.

But a more favorable demographic profile, a stronger capacity for technological innovation and Western-style democratic institutions provide the potential for India to raise its game and catch up with its neighbor.

"It will be much easier for China to go from $500 to $1,000 than from $1,000 to $5,000," said Dominique Dwor-Frecaut of Barclays Capital in Singapore.

China has boomed since embarking on market reforms in 1979 by getting its macroeconomic policies right and opening up to foreign direct investment. Now running at $60 billion a year, FDI has brought China "pre-packed technology," Dwor-Frecaut argued.

"But to get to the next stage means you have to have more productivity growth. There's a lot of scope for that, but it's not clear that the political dynamics of China will allow this to happen," she said.

NATURAL PARTNER

Unlike China, India has spawned a number of world-class firms with a strong innovative capacity underpinned by enforceable property rights and an independent, if lumbering, judiciary.

"It has a political culture and civic society that is a lot more conducive to the development of technology and strong domestic global champions," Dwor-Frecaut said.

Daniel Lian of Morgan Stanley in Singapore agreed that the protection India affords to intellectual property rights would be crucial in luring Western capital. Allied to low wages, that could make it a better bargain than China for global investors.

India's democracy and Western-leaning institutions are also attractive for the West, Lian said in a report. Fast-expanding China, by contrast, is viewed as a rival.

"If the West sees India as a natural strategic partner and views China as a geopolitical contender, then India could assume a much bigger role in this Pacific Century as it can better leverage capital and technology from the West and pursue a higher value-added development model that could allow it to eventually outgrow China," Lian said.

Among the many reasons why China has outperformed India is that its working population is larger. But this will be reversed before 2030 because China will turn gray sooner: the median age is around 32.4 years against 24.5 for India.

"The economy is therefore in line for a major demographic bonus owing to rising incomes and consumption, and a declining dependency ratio," said Rajeev Malik of JP Morgan in Singapore.

Indeed, in its GDP projections to 2050, Goldman Sachs expects India to overtake China in the growth race as soon as the 2011-2020 decade and to steadily widen its lead.

Even so, China would still be much the bigger economy in 2050. In Goldman's scenario, it would account for 24.1 percent of world GDP versus 15.8 percent for India. Sandwiched between them would be the United States with a 20.3 percent share.

LITMUS TEST

To fulfill its potential, of course, India's fractious, complex democracy will need to execute pro-growth policies as single-mindedly as China's Communist Party rulers have done.

Dwor-Frecaut at Barclays applauded Prime Minister Manmohan Singh and Finance Minister Palaniappan Chidambaram for forcing the pace of change despite objections from left-wing parties.

This week alone, India raised the cap on foreign investment in telecommunications companies to 74 percent from 49 percent and approved a policy to turn around the ailing power sector.

Malik at JP Morgan is hoping the federal budget, due to be unveiled on Feb. 28, will represent a further bold commitment to reform and improving the domestic business environment.

He expects Chidambaram to cut corporate taxes, slash tariffs and reaffirm the April 1 launch of a nationwide value-added tax.

For Dwor-Frecaut the budget litmus test will be whether Chidambaram sticks to plans to balance the central government's books by 2009 and resists pressure to spend part of India's reserves on improving its crumbling infrastructure.

"If they don't, it will be devastating," she said.