A Tale of Two Neighbors
A look at key reforms, successes and some failures in China and India
By Mahendra P. Lama  ·  2019-02-25  ·   Source: NO.9 FEBRUARY 28, 2019
Indian businessmen try out an electronic board at the Yiwu International Trade City in Yiwu, famous for selling small goods in east China's Zhejiang Province, on October 21, 2018 (XINHUA)

In both China and India, economic reform has been key to growth. However, it has ramifications as well.

The two countries' politico-economic backdrops as they sought to undertake massive economic reform varied sharply.

In India, an economic crisis in 1991 coupled with political instability and a historically low growth rate pushed the government to undertake structural adjustment programs. These mostly followed the recommendations of the Washington Consensus, a set of economic programs promoted by Washington, D.C.-based organizations like the World Bank and the International Monetary Fund (IMF).

China, as it emerged from prolonged dislocation and disruption caused by the "cultural revolution" (1966-76) coupled with isolation from the global economic and financial system, pursued a recovery path based on drastic, yet steady, structural and policy changes.

Reform measures and implementation have varied widely in both countries in terms of scheduling, sectoral coverage, intensity and sustainability, political commitment and public acceptance.

Each country is now in different phases of economic reform. The impact of economic reform have varied in terms of visibility, nature and extent. Both have witnessed remarkably visible structural shifts with the share of the primary sector in the GDP led by agriculture steadily dropping to less than 25 percent with a side-by-side increase in the tertiary sector.

Other indicators like the savings and investment rate, trade-GDP ratio, foreign direct investment (FDI) and foreign exchange reserves have also shown unprecedented changes.

A striking similarity has been the slow speed of implementation of reforms in the two countries' particular regions.

In China, effectively implemented reform in coastal zones like Shanghai, Guangdong and Fujian created fortunes. The introduction of the policy to develop the western regions in 2000 showed that for almost two decades, reforms and their accompanying fruits rarely reached the southwestern landlocked provinces and autonomous regions such as Sichuan, Yunnan, Tibet and Qinghai.

In India, the southern and western states recorded progress and reeled out second-generation reforms while backward states in the north, east and central regions as well as mountainous states lagged for many years. However, over the last decade, many of these passed-over places in both countries have made exemplary development strides.

Poverty and inequality

Economic growth, increased productivity and greater consumption have been the conspicuous driving forces of poverty reduction in both countries. According to the 2018 Multidimensional Poverty Index released by the United Nations Development Program, India almost halved its poverty in the decade since 2005-06, from 55 percent to 28 percent. Flagship projects like the national rural employment guarantee, and right to education and food schemes have made a huge difference.

In his address to the 19th National Congress of the Communist Party of China (CPC) in October 2017, President Xi Jinping said that more than 60 million people had been lifted out of poverty in China in the preceding five years. Earlier, the World Bank assessed that "some 407 million Chinese citizens rose out of poverty" from 1990 to 2004.

A clear vision, specific structural interventions and sound trickle-down mechanisms for higher growth are the broad strokes credited for this success. The National Development and Reform Commission set the 13th Five-Year Plan (2016-20) as the deadline to achieve late Chinese leader Deng Xiaoping's goal of establishing "a society in which people lead a fairly better-off life." This goal was reiterated by the 16th CPC National Congress in 2002.

Shift in production

In India, a range of interventions have been made from disinvestment to FDI participation. There are visible upward shifts in manufacturing sectors like automobiles and domestic consumer items such as food and textiles. However, compared to China, India's allocation of funds for research and development activities in both private and public sectors has been minuscule.

Unlike India, China's economy boomed first due to staggering investment from Chinese living abroad and further when major Japanese and U.S. companies began shifting their production bases to China. Soon, it was producing Sony cameras, Toshiba laptops, HP machines and other popular international electronic items. All these China-made brands flooded the international market under the liberal provisions of the World Trade Organization. Today China has emerged as a major foreign investor.

India recognizes China as a pivot in global financing. The Economic Survey 2014-15 tabled by the Indian Ministry of Finance stated, "Today, China has de facto become one of the lenders of last resort to governments experiencing financial troubles... assuming the roles of both an IMF and a World Bank as a result of its reserves."

In India, energy is dominated by the public sector, which unbundled services into three separate generation, transmission and distribution agencies in each state. These are broadly monitored by electricity regulatory commissions at national and provincial levels.

This change led to drastic cuts in subsidies, the introduction of many private players, a quantum leap in installed capacity and steady improvement in the quality and reliability of electricity supply. However, the consequential tariff was much higher.

In contrast, in China, giant public sector units like the China National Petroleum Corporation have crisscrossed Asia, Europe and Africa in search of cheaper and sustainable sources of energy.

Infrastructure leaps

After reforms were adopted, China became a model in infrastructure like roads, railways, airports, sea ports, communication and even social infrastructure involving education, healthcare and drinking water. Japan and the U.S. have been China's model to transform its infrastructure including in trendsetting economic zones like Shenzhen. The Belt and Road Initiative is a vehicle to transmit the infrastructure development to other regions.

India, however, relatively lags in terms of physical infrastructure. According to the 2018 World Bank Logistics Performance Index, India ranked 44th out of 167 countries in infrastructure development and requires at least $777 billion in investment by 2022 for sustainable development. While presenting the annual 2016-17 budget to parliament, Indian Finance Minister Arun Jaitley declared infrastructure and investment to be the fifth pillar to "transform India." The budget allocated an unprecedented outlay of roughly $33 billion for two critical infrastructure road and railway projects for 2016 and 2017.

Water crisis solutions

Water is critical for China's massive public health policies, unparalleled urbanization and repositioned renewable energy. It is also essential for wider and decentralized industrialization, targeted food security and poverty alleviation, and huge environmental projects.

The South-to-North Water Diversion Project, the world's largest, channels the waters of the Yangtze River to dry areas in the north through eastern, middle and western routes. The first phase of the eastern route carries water from the river at Jiangsu Province to Shandong Province along the Beijing-Hangzhou Grand Canal. Since the project went into operation in December 2014, it has transferred over 15 billion cubic meters of water, according to a report by Xinhua News Agency. By May 2017, pumped water reached cities like Beijing and Tianjin as well as parts of Hebei and Henan provinces.

In India, however, water diversion plans to help deficit areas have remained a pipe dream due in large part to environmental and sustainability concerns.

The author is a professor of South Asian economies at the Jawaharlal Nehru University. This is an edited article first published in China-India Dialogue

Copyedited by Sudeshna Sarkar

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