Chinese miracle: Lessons for India

The situation of India being a marginal factor in China's external trade is unlikely to continue in the years to come, says R. Gopalakrishnan.

FOR A foreign investor to "enter the Dragon'', he should bring a minimum investment of 25 per cent of the equity capital, and there is no fuss about the maximum - it could well be 100 per cent.

Not "voluntary retirement schemes'' but emphasis on retraining up to five million workers in 2,700 special centres and freedom for employers to dismiss workers on one month's notice if they are not found competent even after retraining are the primary methods China adopts in manpower rationalisation in the transition to a modern industrial economy.

These are among some features of the "Chinese miracle'' that present a stark contrast to India, which, however, shares some common characteristics with China, like a large domestic market, comparable wage levels, high level of bad debts of financial institutions and increasing strains on unfunded pension systems.

Understanding China

Amidst the series of ongoing exercises in various forums and by several pundits to understand China with respect to its global competitiveness and the challenges and opportunities posed by China's imminent entry into the World Trade Organisation (WTO), some interesting perspectives were given by Mr. R. Gopalan, Joint Secretary (East Asia) in the Commerce Ministry, at a seminar on "China Means Business'' organised recently in Chennai by the Confederation of Indian Industry (CII).

What lessons can India learn from the Chinese experience of implementing economic reform, even if in an incremental fashion, since 1978, a whole 13 years before India took to similar market- oriented reform? According to the presentation made by Mr. Gopalan, among important factors behind the Chinese track record, India could look at delegation of regulatory powers to the provinces in the matter of investment approvals, a high level of flexibility in the labour market and low costs of raw materials as relevant issues.

Other lessons the "crouching Tiger'' could learn from the "hidden Dragon'' were focus on development of small and medium enterprises (SMES) and stability in decision-making.

China, according to Mr. Gopalan, is set to become the world leader in light manufactures, electronics and appliances, besides strengthening its position in chemicals, leather and computer hardware, while it is likely to face loss of market share in agricultural and textile products.

The myths

He sought to clear "myths'' about China using prison or slave labour having no rights. Its wages (average $1,000 per year or 38 cents per hour were comparable with those in India but wage costs in China were low as a percentage of the value of production as a result of high labour productivity and capital intensity.

Mr. Gopalan, several of whose findings were echoed by representatives of Ernst and Young, international consultants, and four Indian and foreign firms doing business in China, said substantial outlays on retraining of workers who had lost jobs and the scope for dismissal of workers if found incompetent after retraining imparted flexibility to the labour market and offered an attraction for investors. While thousands of State-owned enterprises were being closed, several others were being allowed to be run by workers who had only to earn the variable costs and did not have to pay for the plants and other assets.

In cases where management executives took over enterprises, some amount of equity investment by them was insisted upon.

While the sharp depreciation of Rinminbi, the national currency of China, vis-a-vis the dollar to nearly one-fourth of its value since 1981 was an advantage to some extent in export competitiveness compared to 50 per cent depreciation of the Indian rupee since 1991, China's basic strengths lay in low costs of raw materials and infrastructure. Export subsidy in China was most likely to be in the region of 7 to 10 per cent, though this figure was often exaggerated by outside experts, Mr. Gopalan said.

China, he emphasised, had substantial overcapacity as a result of capacity built specially for export production in special zones, particularly in eastern provinces. Hence export of several products (example: cycles, tyres and shoes) accounted for 60 to 95 per cent of production but a much lower percentage of total capacity. Interestingly, value addition in exports of foreign- funded enterprises was much lower than those of domestic enterprises.

Some figures of contrast between China and India (respectively) cited by him were: savings rate 45 per cent of the GDP/23 per cent; annual FDI flow $40 billion/$2.16 billion; power generating capacity 2.6 lakh MW/90,000 MW; transmission and distribution loss in power 6.8 per cent/23.4 per cent; power cost per 100 kWh $4.3/$7.53; per capita consumption of power 1,000 kWh/350 kWh; China has recently overtaken the U.S. in the number of cell phones in use.

Farm productivity in most leading crops was also much higher in China. Productivity (per hectare) in paddy cultivation in China and India, respectively, was: paddy 6,331 kg and 2,915 kg; maize 4,481 kg and 1,594 kg; groundnut 2,574 kg and 988 kg; and cotton 943 kg and 321 kg. However, the Chinese lead was lower in wheat (54 per cent) and sugarcane (10 per cent).

India scores in software

Computer software export is one sector where India had unbeatable advantage over China. But, even in the case of software, package software sales in the domestic market (which would have contributed to raising the productivity of China's domestic industry) were $2.1 billion, compared to $360 million in India. Chinese exports of software totalled only $130 million, compared to $3.9 billion in the case of India.

In computer hardware, China is way ahead of India. Sales of hardware in China totalled $9.6 billion, compared to $800 million in India. Annual sale of personal computers in China and India, respectively, were 7.2 million and 1.7 million.

Mr. Gopalan said since China's reforms had led to widening of regional disparities with its eastern regions prospering more, Beijing was now focussing on the western parts which were closer to India and was building a massive railway line in that region. This could pose a threat by way of smuggling of low-cost Chinese goods into India via Nepal. Hence the Indian government was trying to build into the India-Nepal trade treaty a tougher regime on enforcement of rules of origin.

According to a study made by Ernst and Young and presented at the seminar, half of the foreign investment in the manufacturing sector in China went into labour-intensive manufacturing such as food, textiles, furniture, toys and plastics. (This finding tallies with the recommendation made by a study on China by Accenture and presented at a convention of the All India Management Association a few days later in Chennai. Accenture suggested looking at labour-intensive production by India as a major component of its strategy to speed up economic growth, pointing out that China allowed town and village enterprises making simple products to acquire huge economies of scale).

The study says one of the key cost advantages in China is domestic availability of petroleum products to the extent of 70 per cent of demand. However, the single biggest advantage is the feasibility of targeting domestic and export markets from one manufacturing base, ensuring economies of scale. A single VAT (refundable in the case of exports) and availability of credit at 7 to 9 per cent for capital investment and 6 to 7 per cent for working capital are other advantages investors in China enjoy, besides access to worldclass infrastructure.

On the relative economic strengths of India and China, one index could be the Chinese response to anti-dumping duties that India has imposed on a wide range of products from China in the last couple of years. According to official sources, Chinese exporters have not responded in almost all the cases to notices issued by the Indian authorities and thus Indian decisions have been handed down ex-parte.

Is India then a marginal factor for China? It could be. For, India's trade with China constitutes 2.3 per cent of India's total external trade, while the figure for China with respect to India is just 0.4 per cent.

But the moot question is whether this position will continue in the years ahead, when India will progress with its reform and when China would have freer access in the Indian market (where it has already been enjoying MFN (most favoured nation) status right from 1984, without even being a member of the WTO).

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