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Saturday, September 20, 2003

What Is Holding India Back?

Comparisons between India and China seem to be fashionable these days, and not just at Bonobo Land. This week the economist has a shot at summarising the differences:

SOME comparisons are stark enough to generate a national inferiority complex. In 1980, India had about 687m people, 300m fewer than China. Living standards, as measured by purchasing power per head, were roughly the same. Then, as China embraced modernity with a sometimes ugly but burning passion, it left India behind. In the next 21 years, India outperformed its neighbour in almost nothing but population growth.

By 2001, India had 1,033m people against China’s 1,272m. But China’s national income per head, according to the World Bank, was $890, nearly double India’s $450. Adjusted for purchasing power, the Chinese were still 70% wealthier than Indians were. Some 5% of Chinese now live below the national poverty line, compared with 29% of Indians.Many Indians now often ask why the West is so obsessed with China’s economic success. But the obsession is India’s, too. Comparison with China has become a distorting mirror in which Indians see their country’s shortcomings grotesquely magnified. The same goes for India’s sense of geopolitical inferiority. An accident of history made China one of the five permanent, veto-wielding members of the United Nations Security Council, but that seat now seems to belong to it as of right. India, feeling it should have one too, is just one of a number of big countries with a claim, and laments its comparative geopolitical weakness.

For Indians, the “Chinese threat” comes in at least three forms: the geopolitical panic that rivalry with China may one day lead to another war between them; the economic nightmare of an India of underemployed farm labourers spending their meagre earnings on imported Chinese goods; and the ideological doubt that maybe India’s heroic experiment with democracy has exacted an even higher price than has China’s erratic dictatorship.............

Policy changes could do much to help India catch up: cutting import duties; simplifying and cutting indirect taxes; reducing the list of industries “reserved” for small companies; easing labour laws to make hiring and firing and the use of contract workers easier. Indeed some of these reforms are already, slowly, under way, or at least under consideration.

But almost all of them are politically difficult. The government has been loth to antagonise the many interest groups that have opposed reforms of one kind or another. Many Indians believe that a large part of the blame for their country’s inferior economic performance must be borne by the political system. China, the argument goes, is a dictatorship where the government and the businesses it favours can do what they want—change laws, build infrastructure, secure licences, fiddle their books—all without brooking any opposition. In India, however, not only does every step require dealing with an inept, corrupt and intrusive bureaucracy, but the democratic system itself also imposes extra costs and delays. For every important and helpful reform, there is a powerful lobby that will oppose it.

Such a political comparison, however, contains many misperceptions. First, as those who have done business in China know, decision-making there is far more erratic and far more prone to profiteering by rent-seeking officials than it appears to some envious Indians. Second, much that holds India’s economy and businesses back has little to do with democracy as such: corruption, fiscal mismanagement, a lack of international ambition and a history of over-protection at home. Where India overcomes these obstacles, and has a clear competitive advantage—as in software and other information-technology services—it can be a huge success.
Source: The Economist

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