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Contn Sleeping Tiger Leaping Dragon What China Did Right
India and China had fairly similar problems when they set out on the path of reform. What, then, explains the disparity between the two today? The answer, according to a report prepared by India's Ministry of Commerce and Industry, is that the Chinese government, was willing to take unpopular steps-not having to pander to political compulsions may have helped. Since 1995, China has laid off 5 million workers, a fallout of its decision to shut loss-making SOEs. ''That is a lot of people to dismiss, especially with China's urban workforce set to swell by 40 million in the next four years,'' says Bhattacharyya. But Red China's pink-slip movement will continue for the next three to five years: the Chinese government is sticking to its 1998 policy of ''grasping the large and releasing the small''. Thus, it will help large and profitable SOEs turn into conglomerates. And it will either sell or lease the smaller ones to the private sector, encourage them to merge with others of their ilk in an effort to turn viable, or allow them go bankrupt.
China didn't rush into the reforms process headlong. It first introduced a set of measures that would reduce the ill-effects of a long-term approach to liberalisation. For instance, well before the process of privatising SOEs started in 1995, the Chinese government provided workers with a safety net. It also permitted provincial governments to take micro-level economic initiatives like framing the requisite legislation, fixing tax rates, and conducting foreign trade. ''This flexibility in the policy environment enabled China to manoeuvre FDI into equipments (sic) and technology,'' says the GoI report. Unlike India, which is still waiting for foreign investment to fund infrastructure projects, China began work on this critical sector using resources mobilised locally. Almost 80 per cent of the investments in the telecom sector in China, for instance, have come from domestic sources. The country has also played the currency-card to the hilt. Citing the impact on exporters, half of whose inputs need to be imported, and on the repayment of $150 billion in foreign debt, China has not devalued its currency even once since 1994. And while it will take the Chinese government many years to achieve its articulated objective of listing major banks on foreign bourses, the banking sector continues to remain at the centre of the country's reforms initiative. Since 1998, more than 1,000 branches of unprofitable banks have been closed down, and four asset management companies, one for each of the four large banks-Bank of China, Agricultural Bank of China, The Industrial and Commercial Bank of China, and China Construction Bank-have been created to take bad loans off their books. Analysts estimate the quantum of loans thus shifted at $100 billion, although that figure represents less than a third of total non-performing loans. The privatisation of welfare is another Chinese initiative India has been loath to emulate. Education, housing, healthcare, and unemployment benefits, once delivered to the populace through the now decaying SOEs, are being privatised. A housing-reform programme allows Chinese to buy their own homes, and has created a thriving mortgage market. A house-proud middle class has emerged, creating, in turn, demand in areas like design, furniture, and small-scale construction. What distinguishes the Chinese economic model from the Indian one is that it began with reforms in the agricultural sector. By encouraging farmers to get into manufacturing and trading activities, the Chinese government not only improved their lot, but also checked the migration of erstwhile agricultural labour to urban areas. Then, there is the country's style of governance. Consensus-style decision making is virtually unknown in China, and the country's population is used to taking orders and following them. The less said about India in this context, the better. The Ideal Indian Response The Indian government's response to the strides China has been making have been restricted to levying anti-dumping duties on imports from that country and, more recently, bringing out a report on how China managed to write a better reforms script than India. The industry, though, has been quick to spy an opportunity and capitalise on it. This has taken the form of outsourcing from China. ''We may begin outsourcing our Peter England (brand of) shirts from China as it is so much cheaper,'' says Vikram Rao, Group Executive President (Fabrics and Apparels), Grasim Industries. Even smaller companies have rushed into outsourcing from China. The Delhi-based Bhartiya International, a small leather garments exporter has signed a contract manufacturing agreement with two factories in Shanghai, and is in the process of setting up an office in Hangzhou. Explains Snehdeep Aggarwal, the company's managing director: ''It costs us $10 to cut, trim, and make a garment in India; I can get this done for $5 in China.'' Maharaja Appliances is sourcing electric irons and toasters from three factories in Shenzen at 40 per cent the cost of manufacturing these products locally, and Bajaj Auto and TVS-Suzuki are exploring component-sourcing opportunities in China. Even software majors like Infosys and Wipro are looking at China closely. Says Venugopal Dhoot, the chairman and managing director of Videocon International: ''We plan to set up a manufacturing base for Internet tvs in Shanghai by the first week of August.
China is no minnow in the hardware business. Legends Holdings, a Beijing-based computer manufacturer began life as an assembler of foreign brands. Today, it holds a 30 per cent share of the local pc market; IBM does 4.8 per cent. But, the country's objective of outdoing India in the software services business will take some doing. Partha Iyengar, the country manager of the Gartner Group in India, sees language as a major impediment to China realising this goal anytime soon. ''The evolution of being able to think in English will take some time to achieve, and this provides Indian software companies sufficient breathing space. The challenge is to use the time to move up the value chain and acquire the reputation of being an innovative producer of software.'' A few success stories in software apart, Indian industry has little to show for its efforts at globalisation. In contrast, Chinese consumer durable manufacturers like Haier, Galantz, TCL, and Konka are holding their own against imports from Korea and Japan in the domestic market, and beginning to make inroads into parts of Asia and Europe. And even as Indian software companies are toying with the idea of setting up a development centre in China, Huawei Technologies, one of the world's largest telecom equipment manufacturers and network solutions providers, has set up shop in Bangalore.
Indian policymakers have thus far been found wanting in their response to the dragon's fiery exhalations. The country can choose one of three paths. It could try and forge a NAFTA-like alliance with China. The Chinese, given their competitiveness over India in almost all industry-segments, wouldn't be averse to this. Together, the countries can literally dictate terms to the world's economies. A combined market of 2.4 billion people is a great asset at the negotiating table. The second approach is to ally with the US, which is unlikely to be keen to surrender its status as the economic heavyweight of the world to China. Preying on these fears may seem a vulturine kind of thing to do for a country that has steadfastly adhered to the middle path, but, hey, this is business. If India's policymakers eschew both these approaches-and they probably will-they could still try and imitate China's approach to reforms. That's a tall order, and it certainly won't be as much fun as the other two. 1
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