India's China challenge

China: you only have to mention the name to attract two extremes of reactions in India: wistful admiration or cynical disbelief. Either way, it's fair to say that China has emerged both as a monster-sized bogey and a model factory to the world, more so after it chose to opt in to the world trading system.

Most Indian businessmen are well informed about China's miracle and what has contributed to it; it's clear that while entrepreneurs are willing to emulate the best practices of the Middle Kingdom, the keys still lie in the realm of public policy -- infrastructure, flexible labour laws, tariffs and so on.

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But with its own difficult and halting reforms programme, the recurrent question for India is where it will stand in world reckoning and what it needs to do to emerge as a competitor for global capital.

Some clues lie in the reservations that are currently being asked about whether China will be able to sustain its rapid growth rates over the next quarter-century. In the course of an excellent presentation to the students of the Indian School of Business in Hyderabad last week, Kenneth J DeWoskin, Partner, PriceWaterhouseCoopers, a veteran of over 35 years in China, pointed to two issues.

One was the fact that corporate ownership still lay overwhelmingly with the state, a fact that it recently emphasised when the government reasserted ownership over the country's top 200 corporations. "This may have been an advantage in the early low-tech stage of development," DeWoskin said, but it could prove a drawback for the future.

It manifests itself in such practices as preferential lending to state enterprises and, as crucially, in policy decisions. Since state security interests are not always separate from commercial interests, you get a situation where, for instance, the Chinese leadership is reluctant to license 3G telecom technology because it competes with state-owned telecom corporations that operate CDMA technology.

In that respect, India could gain major advantages if it ramped up its divestment programme -- which has consistently fallen short of target since 1992 and has kept the government a major player in oil, telecom, heavy engineering and civil aviation.

So far, the debate in divestment centres on the government's need to tackle the fiscal deficit. But other enduring gains can be starkly seen, for instance, in car maker Maruti, which has emerged as an R&D hub for Japanese parent Suzuki's 'Asian car project' a little over six months after it acquired majority control.

Another possible issue for China could lie in its biggest strength today: manufactured exports. DeWoskin points out that of the huge exports out of China, the value-addition by Chinese firms is relatively low -- fully-owned subsidiaries of foreign firms account for as much as 61 per cent of the value addition on exports out of China.

An opportunity for India? With the world's third-largest scientific manpower base available at roughly a third of the cost, everybody admits there is potential but the question is whether domestic industry has the wherewithal to absorb this in a meaningful way.

The recent hyper-growth in earnings on IT services and BPO (which show on the 'invisibles' account), suggest that it is more than possible if Indian corporations are ready to sink more money into indigenous R&D.

Later in conversation, DeWoskin suggested two 'non-commercial advantages' that China has reaped in its hyper growth. One is from its extremely flexible labour practices, which allows Chinese corporations to downsize at will or provide cheap labour for global corporations.

As DeWoskin points out, "China does have labour protection laws, they're just not enforced because the state often owns companies that practices these laws." Overall, poverty (though that is a relative term in the Indian context) and lack of recourse have made labour an extremely cheap input in China.

India, of course, suffers the opposite problem where rigid labour laws make it difficult for corporations with established organised workforces to downsize rapidly -- and crucial amendments to allow for this have inevitably fallen victim to realpolitik.

Finally, there is China's matchless 'advantage' of near-free capital. This is showing up in the enormous non-performing assets -- officially roughly 23 per cent, unofficially as much as 50 per cent of advances.

Either way, the figures are humungous compared to India's modest 5 to 7 per cent and suggest that the country can stand to gain substantially from its patient but deep-rooted financial sector reforms. HSBC's recent acquisition of a stake in UTI Bank points to the opportunities here.

Some businessmen suggest that less democracy would do India good. This is a tempting argument but doubtful at best. In post-medieval Europe, democracy emerged not because of the altruism of its rulers but because it was the most efficient form of government for the emerging capitalism of the time.

For those who point to China's example, it is worth considering that China has had authoritarian governments from the latter half of the last century -- and it faced desperate poverty under one (Mao) and moderate prosperity under the other (Deng and onwards). What distinguished the two was not form but quality of governance.

The irony about the current debate is that as much as Indians feverishly compare their country with China, it's doubtful whether the Chinese leadership or its people actually care to compare themselves with India -- indeed, the Chinese have progressed so much since 1977, that they don't feel the need to compare themselves with anyone at all.

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