Realistic Attitude Furthers Sino-Indian Cooperation

From the flattering words of the Fortune 500 chief executive upon visiting India to the rocketing ranking of India in indices like “Ease of Doing Business” or “Global Competitiveness,” optimism about India is on the rise like never before. As China’s economic growth somewhat flags, especially among the shocks caused by the Sino-U.S. tariff disputes, India is not only seen as the other poster child for the emerging market on an equal footing with China, but also depicted as the successor apparent to China as the next economic powerhouse.

However, a closer examination ruthlessly reveals that India’s economic performance still lags significantly behind China. So, instead of indulging in rosy anecdotal evidence and highsounding albeit distorted indices concerning itself, it is more helpful for India’s growth prospects and bilateral economic relations to focus on what it can do to improve its industrialization level.

Gap between China and India likely widening

The disparity between China and India can be best illustrated by their respective economic trajectories. Although they were of similar economic volume for most of the time before the 1990s, China’s economy has strikingly grown to be almost five times bigger than that of India. So, even if India occasionally registers a growth rate close to or exceeding that of China, the difference in their absolute size is actually widening. Given this, if India really wants to catch up with China, it not only needs to achieve a much faster growth rate, but also needs to maintain such a rate for at least a few decades. So, the real question is, how can India maintain such a rate of growth for such a long period of time?

If there is any secret behind China’s extraordinary growth record in the past 40 years, it is China’s booming manufacturing sector. Since the reform and opening up in the late 1970s, a huge part of the agricultural labor force has been continuously reallocated into the more productive manufacturing sector. China successfully harvests great productivity growth in this process of massive industrialization. So, in comparison to India, China boasts a much stronger manufacturing sector hiring a lot more (29.3 percent) and contributing a lot more (39.5 percent). Thanks to a strong manufacturing base, the Chinese economy has consolidated its economic modernization and pioneered its way into innovation-driven development.   

It is the labour allocation pattern that largely explains the diverging economic growth trajectories between the two countries. India, in spite of its decent growth record, lagged far behind in industrialization. Agricultural sector makes up 15.4 percent of India’s GDP, but hires as much as 47 percent of its labour force, while its industrial sector contributing 23 percent of GDP only employs 22 percent of workers. India’s service sector stands out as it contributes 61.5 percent to the economic output by using only 31 percent of the labour inputs. India thus presents an odd economic landscape – even though it shows characteristics of a post-industrialized economy with the service industry assuming a dominant position like that of the U.S. or the U.K., its low level of productivity exposes its awkward reality of underdevelopment.

The unsatisfactory industrialization record is the cause of many issues that India is facing today. The absence of a robust manufacturing sector prevents India from achieving a massive improvement in its labour productivity and hence, per capita income. While China created tens of millions of middle-class jobs as it became the workshop to the world, most of workforce in India could only toil in woefully unproductive jobs in the informal and unregulated economy.

Moreover, almost all major financial and macroeconomic risks that haunt the Indian economy today—overreliance on foreign capital inflows, fragile foreign exchange rate, vulnerability to oil price hikes as well as susceptibility to a fickle monsoon—are either caused by its underdeveloped or uncompetitive manufacturing sector, and can be greatly relieved by materializing its huge manufacturing potential. It’s time for New Delhi to ponder long-term solutions to these issues by strengthening its economic competitiveness, rather than resorting to ad hoc fire-fighting policies like capital controls, non-essential import restrictions, and interest rate hikes. As a foreign exchange expert insightfully puts, “nobody can live forever on somebody else’s money,” the long run solution for India lies in industrialization.

Different path to industrialization 

Fortunately, Indian decision-makers have highlighted the role of industrialization, especially since Modi rose to premiership in 2014 and “Make in India” was made a national strategy. However, India so far has yet to present a clear roadmap for its odyssey into industrialization. In this regard, a close examination of India’s and China’s different paths to industrialization can be very helpful.

As the world’s only two members of the “one billion-population club,” China and India share three important advantages: a large and low-cost labor force, a huge domestic consumption market, and a great supply of high-quality human capital known for professional services and science-engineering talents. However, it is the two countries’ opposite approaches to these advantages that have determined their contrasting performance.

China unfolded the three-step model in an optimized sequence. It first pioneered into labor-intensive and export-oriented industries like apparel, toys and furniture at the low end by tapping into its huge workforce. With initial capital and expertise accumulated, it then exploited the huge domestic demand to cultivate local industrial players, so they could navigate through the fierce global competition in intermediate industries like consumer electronics and machinery. After these, China is now climbing the value-chain by working on research and development based on its large talent reservoir. In this way, China expects to reap high added value from the cutting-edging industrials like integrated circuit, pharmacy and aviation industries.

It was through such a three-step model that China could allocate and mobilize its resources most efficiently according to its changing comparative advantages. By doing so, China has not only risen to have the largest industrial output in the world, but also marched towards the top of the global value chain. With exactly the same three advantages, however, India’s approach was totally different.

Instead of working from the low end, through the intermediate tier and then to high-end industries like China did, India has pursued a completely reversed sequence. For decades, India has been famous for its highly competitive technology- and capital-intensive industries like pharmaceaticals and IT services. While India’s intermediatetier industries–like mobile phone and automobile parts-manufacturing industries, have made major progress in recent years, they still lag behind in terms of international competitiveness and industrial ecosystem. Most counterintuitively, India’s labor-intensive industry is disproportionally underdeveloped, leaving its huge workforce largely untapped.

Such a distorted industrial development practice is taking a heavy toll on the Indian economy. It does not take care of India’s huge domestic demand for manufactured products, which means Indian consumers have to rely on imported goods. Neither does it provide enough employment opportunities for India’s ever-growing workforce, making job creation a haunting nightmare for successive Indian administrations.

A more realistic approach to Sino-Indian economic cooperation

More nuanced Sino-Indian economic cooperation can definitely make a difference. India’s emerging mobile phone industry perhaps is the best example. By 2017, India had bypassed Vietnam to be the world’s second-largest mobile phone producer by volume, occupying 11 percent global production. As late as the 2014-15 fiscal year, 78 percent of the mobile phones sold in India were still imported as completely made units, while only three years later, the percentage had been dramatically reduced to 18 percent in 2017-18. Such an amazing achievement was only made possible by Chinese mobile phone tycoons like Xiaomi, Vivo, Oppo and Huawei which dominate the Indian market with a combined market share of more than 60 percent.

To evade tariff barriers imposed on completely imported phones, Chinese companies first started to export components to India and assembly them locally. However, when India again raised customs duties on mobile phones and their components in April 2018, major Chinese companies began considering relocating the entire mobile phone ecosystem to India by encouraging their affiliated suppliers to follow in their investment footprints there. With vertical supply chains and horizontal industrial clusters burgeoning in India, a robust mobile phone ecosystem is in the making and will for sure cut local production costs dramatically. Once such an ecosystem is put in place, it in turn will attract more business, kicking off a self-reinforcing process. In this regard, India’s mobile phone industry has finally progressed onto the right track.

So far, such a pattern seems to fare best in intermediate-tier industries in India that are driven by local demand, such as consumer electronics, engineering equipment as well as automobile parts. This is largely because these industries’ huge local demand combined with Indian government’s protectionist tariffs as well as its industrial policies have made investing in local factories commercially viable.

Although these tech-savvy industries seem to be prospering, their ability to create jobs and generate exports is actually dwarfed by the low-end industries like apparel, stationery and household items. Given the experience of Japan, South Korea, China and even lately Vietnam, it was these seemingly primitive industries that led the industrialization boom by absorbing massive agricultural labour and quickly making a dent in the highly competitive global export market. In this regard, labor-intensive and export-oriented industries, which tap into India’s abundant labor endowment and bring about new market opportunities for fatigue Chinese capital, are the perfect candidates, if India can thoroughly reform itself in areas like labour regulation and land acquisition.

If India’s industrialization is inevitable in its journey towards becoming a real global economic powerhouse, China – as the only other member in the billion-people club and a forerunner in industrialization – must play a more important role. Bearing this in mind, instead of obsessing over the cliché of the dragon-elephant comparison, scholars from both countries need to be more realistic and see what they can best do to achieve shared prosperity between the two giants.  

The author is an associate researcher at the International Cooperation Centre of the National Development and Reform Commission of China.