Who's Really Ahead In The Economic Race, China or India?

As one of India's most famous and successful entrepreneurs Raghav Bahl is constantly bombarded withquestions from people who are bewitched and bewildered by India.

Why, they ask, "are Indian business regulations so weak and confusing? Why is your foreign investment policy so restrictive? How come your hotels are world-class, when the roads leading to them are full of pot holes?" Oh, and here's a goodie, "How is it that you speak such good English?"

India is the largest English speaking country in the world by the way—some 350-million residents speak and understand English. Theirs is the largest democracy and their economy is booming: more than half of its GDP is consumed by its billion plus residents. India is witnessing unprecedented levels of economic expansion ... and yet, it is always - always - compared to that other economic powerhorse, China.

In his new book, SUPERPOWER? The Amazing Race Between China’s Hare and India’s Tortoise Bahl examines the difficulties that both outside corporations and homegrown companies have in doing business in both India and China.

He offers a twist on the classic tale asking, Who will get to the finish line first - China who is moving at warp speed or slower paced India?

There is no country that can match China when it comes to its massive investments made in infrastructure, health, education and rural technology. But Bahl says the race is far from over.

He cautions the victor might not be the one who is investing more and growing faster today - but rather the country that has superior innovative skills and is more entrepreneurial savvy.

In the end, it might come down to just one deciding factor: Can India fix its governance before China changes its politics?

Bahl is the founder, controlling shareholder and managing director of Network 18, India’s largest television news and business network, which broadcasts content from CNBC and other US-based networks addresses that question and more in this Guest Author Blog - click ahead to read it and check out the excerpt from SUPERPOWER? The Amazing Race Between China’s Hare and India’s Tortoise

LESSONS FOR INDIA

Guest Author Blog: Why India Should Not Be Daunted By China’s Growth by Raghav Bahl’s author of SUPERPOWER? The Amazing Race Between China’s Hare and India’s Tortoise

Guest Author Blog

I began thinking about writing this book in April 2009 when the world was getting back on its feet after the economic recession that had crippled it.

When looking for themes, one story that fascinated me both as an entrepreneur and as a business journalist was the relentless rise of China. I was intrigued that when Deng Xiaoping put China on the path of reform, its economy was smaller than India’s. Even more critically, the decade-long Cultural Revolution that ended 34 years ago had virtually decimated China’s economic institutions. So the odds seemed to overwhelmingly favor India in 1978; China seemed such a hopeless case!

Yet today, China is four times India’s size.

Unwittingly or by design, China seems to have picked up some of the most effective economic policies of the two “miracle economies” that preceded it. Note that I use the word effective and not efficient. From the Soviet Union, which was touted in the 1970s to overtake America in a couple of decades, China seems to have learned the art of extracting massive surpluses from peasants and accumulating them in the hands of the State. China also extracted surpluses from its workers by keeping wages extremely low. It did the same with consumers and trading partners by keeping the price of its currency artificially devalued against the American dollar.

The trick it learned from Japan, another “miracle economy”, was to dramatically engage with the western world. This was at sharp variance with the insular economy that the Soviets tried to build, leading to their miserable failure. But China boldly opened itself to a flood of foreign direct investment. This brought in a cascade of dollars, technology and management practices. It created a huge amount of foreign equity in the economy and laid the base for technological progress in the coastal areas.

What China did with the surpluses is even more dramatic.

It invested massively in the economy – close to 50 percent of GDP in infrastructure, farm productivity and soft areas like education and healthcare. No other country, at no other point in history, has invested capital at this astonishing scale. In the book I have called this the “escape velocity” model of capital investing that India must examine very carefully. I have often wondered why India is so reticent about making huge investments in its economy. I know there are constraints but there are options as well.

Of course, such hyper investment has led to terrifying dualities; no one is saying that this has been an easy ride for China. Today it is grappling with major imbalances: between investment and consumption, in the massive bad debts that its banks are saddled with, and in a ravaged environment. But equally, it cannot be denied that no other nation in history has pulled more people out of poverty in as short a time.

I think the lessons for India are very clear. It should be investing in infrastructure far ahead of the curve. It should be much bolder in taking entrepreneurial policy risks. The Indian State should shed its incremental attitude towards change and growth. If the State focuses on a few areas – education, healthcare and agriculture - and allows a properly regulated private sector to take off in every other sector, a lot of the problems can be solved.

The India State needs to now think in terms of quantum changes. Very often these arguments, put out by people like me, are dismissed as being “elitist.” They are not. There is nothing elitist about getting a land acquisition law that is fair to farmers. This is also not about the government versus the private sector. It is about getting the Indian State to be far more energized into taking quicker policy action. For instance, barring the Communist parties in India, no one is opposed to allowing 49 percent FDI in insurance. But for a decade now, we have been unable to amend the law to make this happen. We have not been able to get a good companies law enacted, even though we have been at it since economic reforms were initiated.

Some respected commentators, who I admire very much, have said that the race is over; China has comprehensively beaten us. But if you rewind to the end of the last century, China’s economy was just as big as India’s is today. For a moment, please suspend time and compare China-2000 with India-2010; you will find that while their GDPs are comparable, India’s institutional strength is incomparably superior to China’s. So in a real sense, India is less than a decade behind China – that’s all, that’s how little the gap can be between these non-identical Asian twins.

To my entrepreneurial mind, that’s how the opportunity should be tackled: China’s economy may be four times larger, but is less than 10 years ahead of India. That is not such a huge gap to bridge.

BOOK EXCERPT

Adapted from the book SUPERPOWER? The Amazing Race Between China’s Hare and India’s Tortoise by Raghav Bahl, on-sale this month by Portfolio, a member of Penguin Group (USA), Inc., Copyright © Raghav Bahl 2010.”

Will China Make A Bonfire Of Conventional Economic Theory?

China has consistently defied all such prophesies of doom. Too many smart people—for very cogent and rational reasons that are steeped in economic logic and theory—have been predicting that China’s bubble has to burst. But it’s not happened, and shows no real signs of happening, yet. Frankly, it’s not too bizarre to believe that China could be scripting a new economic logic. I would venture a 50 per cent wager on China actually trumping conventional theory. Why do I say that? Because by investing on a scale hitherto unknown and untested, China may have defined a new ‘escape velocity’ of capital spending.

Traditional theory says that investment should be ‘sustainable’, that is, it should be ‘matched’ by rising consumption.

But what if you pump so much capital into your economy—similar to putting extra fuel into a rocket—that you ‘escape’ the gravitational pull of low thresholds?

Especially if the bulk of your capital is spent on infrastructure (roads, railways, schools, hospitals, ports), as against factories which produce toys and televisions?

This could be the Chinese masterstroke, the single discontinuity which could defeat 200 years of economic wisdom. Perhaps big factories create waste, while big infrastructure, especially life-enhancing social assets, empowers people. By rapidly educating your workforce, by brilliantly executing immensely large projects, by importing expertise and dollars in a shrinking world, you could create a ‘shower of wealth and productivity’ such that consumption ‘trickles through’ quickly into the bubble. The sheer scale of your activities could end up swelling the tide in which everybody and everything rises together; a new model of ‘tidal wave investing’ could buoy the whole ocean to a much higher watermark.

India is a classical textbook case. Well above half its GDP—nearly 58 per cent—is consumed by over a billion people (another 11 per cent is consumed by the government), giving it the kind of organic strength that transformed the economies of the US, UK, Germany and Japan. Like China, India saves nearly 40 per cent of its GDP, but the bulk comes from households. India’s resource consumption has decreased for every incremental dollar of GDP since 1991 (as against China, which was using three times more resources per dollar of GDP than India).

India’s economy is healthily private, with state-owned corporations accounting for less than a tenth of the output. Its stock exchange was set up in 1875, the oldest in Asia—it is also perhaps the most digitized in the world. Indian banks had virtually zero exposure to the sub-prime paper that ravaged America and Europe. About 40 per cent of the economy is exposed to global trade (exports and imports)—low enough to escape world crises, yet high enough to remain an open, competitive economy. The Indian rupee largely floats against world currencies, in contrast to China’s yuan, which is globally pummelled for being artificially undervalued.

If 200 years of economic theory is sound, then India simply must succeed in creating an America and Japan-like miracle.

Continuing to infuse physics into economics, India’s growth is like the ‘wave theory’: closer to the epicenter, the waves are tiny, densely packed, and look really small. But as they spread outward, they pick up cascading strength, making larger and stronger concentric ripples. It starts as an undetectable wobble, but soon becomes a ring of thrusting circles, growing in size and strength with each outward lunge. That could be India’s model—dotted with micro changes, the atoms picking up energy from each other, pushing and jostling those around them to move faster, until all the particles begin whizzing around kinetically, pumping up a balloon of spreading prosperity. So, if China’s got the all-new, not-yet-fully-tested model of ‘escape velocity’ capital investments, India’s going with the rather established ‘wave theory’ of inaudibly permeating growth.

Adapted from the book SUPERPOWER? The Amazing Race Between China’s Hare and India’s Tortoise by Raghav Bahl, on-sale this month by Portfolio, a member of Penguin Group (USA), Inc., Copyright © Raghav Bahl 2010.”

Raghav Bahl

About the Author: Raghav Bahl is the founder, controlling shareholder, and managing director of Network 18, India’s largest television and news business network.

It broadcasts content from CNN and CNBC and also publishes Forbes India.

Among his many honors, Bahl was hailed as a Global Leader of Tomorrow by the World Economic Forum and selected by Ernst & Young as Entrepreneur of the Year for Business Transformation in 2007.

He is the author of SUPERPOWER? The Amazing Race Between China’s Hare and India’s Tortoise

Email me at [e-mail] — And follow me on Twitter @BullishonBooks