Economic Growth of China vs. India

Introduction

• China and India's economies were similar in the 1980s.
• China has since outpaced India, becoming five times its size.
• Current question: Is it India's turn for a growth miracle like China's?
• Focus on insights from economists Professor Raghuram Rajan and Professor Davesh Kapur.

Key Questions

• Why did China's economy accelerate while India's did not?
• Why can't India replicate China's growth model?
• Will India achieve its own growth miracle?

Factors Behind China's Growth

1. Education

   • Late 1970s: Chinese workers had better basic education than Indian counterparts.
   • Better education led to:
     • Attraction of foreign factories requiring basic skills.
     • Empowerment of workers to start their own companies.

2. Economic Liberalization

   • China liberalized its economy in the 1980s and 90s, allowing private entrepreneurs and foreign firms.
   • Despite liberalization, India’s growth did not match China's.
   • Both countries had similar economic freedom scores.

3. Investment-Led Growth Model

   • China employed an investment-led growth model, focusing on:
     • Infrastructure and productive assets to stimulate growth.
     • Local banks directed credit into productive investments.
   • India attempted similar investments but had issues with corruption and inefficiency.

4. Foreign Direct Investment (FDI)

   • China successfully attracted FDI, becoming the "factory of the world."
   • FDI contributed to local knowledge and provided foreign currency for imports.
   • India failed to attract similar levels of FDI due to local government inefficiencies.

Role of Local Governments

• China's Local Governments

  • Local officials incentivized to grow the economy.
  • Built infrastructure to attract investment and facilitate business.
  • Examples of successful foreign partnerships (e.g., Indian businessman met by deputy mayor).

• India's Local Governments

  • Often frustrated foreign investment due to strict regulations.
  • Lack of effective local government capacity and incentives.

Reasons for India's Local Government Dysfunction

1. Understaffing

   • Local governments in India are significantly understaffed compared to China.
   • Many positions remain unfilled despite high unemployment.

2. Caste System

   • Despite being outlawed, the caste system affects local governance.
   • Local governments may lack the right incentives and fail to implement policies effectively.
   • Example: Caste hierarchy affects recruitment and service delivery.

3. Democratic Challenges

   • India as a "precocious democracy":
     • Poor public services lead to wealthier citizens exiting public systems.
     • Local officials prioritize visible projects over long-term public services.
   • Divisive politics can hinder comprehensive economic planning.

Current Situation and Future Outlook

• While India's growth hasn’t matched China’s, it has improved in education and infrastructure.
• India may be positioned to attract foreign investment as companies seek alternatives to China.
• A new coalition government may encourage collaboration between central and local governments.
• Local government capabilities are gradually improving.
• Expecting a China-style miracle is unrealistic, but potential for steady growth exists.

Conclusion

• India cannot replicate China's growth model due to systemic issues in local governance.
• Optimism for India's future lies in improvements in education, infrastructure, and governance.