Will India overtake China?

Counter Point: No, it won't

After prime minister A.B. Vajpayee's visit to Beijing last month, a friend who was part of his media entourage shared this vignette with me. She said when the journalists drove through Jianguomenwai, the gleaming heart of modern Beijing, everyone was in sullen awe of China's newfound wealth and progress. But when they turned into some of the city's derelict hutongs, or traditional courtyard house neighbourhoods, there was much excitement all around. "See, see," one of the journalists said. "The moment you go away from the main areas, everything is a mess."

Pride often prejudices India's judgment of China. In the run-up to Vajpayee's visit, countless articles argued that China's development is hollow while India is on the real path to progress. (The Chinese press did not run any such articles. It was too busy benchmarking China against the US.)

Tarun Khanna and Yasheng Huang hinge their case for India around the idea that India has more world-class firms and more effective financial markets than China. They argue this stems from India's pursuit of organic growth via private businesses as against China's reliance on FDI and its public sector.

Generally, analysts judge a nation's success by different criteria:

Human development. The most meaningful measure of a nation's progress. UNDP figures reveal China is far ahead of India in per capita income, literacy, life expectancy and quality of life.

Adaptability. Self-criticism and a willingness to change have brought China great social and economic progress. Even politically, where China is weakest, it has travelled further than India given where it was in 1979 when Deng Xiaoping began reforms.

Current achievements and forward orientation. China is the world's third-largest economy and it is using its newfound wealth to build world-class public infrastructure. President Hu Jintao plans to bring a renewed emphasis to social equality and political reform.

Even if one limits the discussion to Khanna and Huang's microeconomic parameters, a fuller consideration of the facts reveals a different picture.

India relies almost as much on FDI as China. India's method of measuring FDI does not conform to global standards for it excludes foreign commercial loans, reinvested earnings and subordinated debt. In China's case, one has to eliminate 'round tripping' (the process by which domestic firms route money into China from overseas). According to the International Finance Corporation, if figures were 'normalised', India's FDI would increase from $2 billion a year to $8 billion (1.7% of GDP) and China's would drop to $20 billion (2% of GDP). Not a lot of difference - which means China's growth is as organic as India's.

And if one excuses India's poor macroeconomic performance because it began reforms six years after China, then one must see that China started building its private sector and financial markets a century after India. China's first stock exchange opened in 1986, 112 years after the Bombay Stock Exchange. (And China's current market capitalisation is, at least, equal to India's.)

Raising capital is difficult for Chinese firms, but the pressure to manage with internally generated funds forges them into lean enterprises. Also, China's officials are as corrupt as and more controlling than India's, yet they have not turned China into a high-cost economy.

This combination of revenue-driven R&D and low production costs is turning many Chinese companies into global players in industries like consumer durables, electronics, construction, hardware, textiles, alternate energy and is even making a play in software. India is globally competitive only in software and pharmaceuticals.

The 'Made in China' label is also giving way to the 'Made by China' brand. In 1980 China had almost no domestic brands. Today, its Top 5 brands are worth $13 billion. Brands like Haier appliances, Tsingtao beer, Flying Pigeon bicycles, TCL and Legend Computers (the world's third-largest PC manufacturer) are entering the global markets. Fiona Gilmore, the co-author of Brand Warriors China, says that in 10 years, at least one of the world's Top 10 brands will be Chinese. In contrast, there is not a single Indian global consumer brand.

Of course, China's state enterprises are bloated and inefficient and its banks are in worse shape. But despite India's deeper financial markets, most Indian companies are undercapitalised, inefficient and reluctant to invest in R&D.

The blame for this may lie in something Khanna and Huang celebrate - the cult of the Indian industrialist. Indian business leaders rarely take their companies 'really public'; and there is little pressure on them to do so. Hence, most major companies remain family-controlled, which seriously limits their growth and professionalism.

Perhaps this is why it took India 112 years to have 13 of its 10,000 public firms on Forbes' list of the world's best small companies. It has taken China only 17 years to have four firms on the same list despite the hurdles before private entrepreneurs. With the Communist Party now accepting entrepreneurs as members, these hurdles may be removed, giving a fillip to private enterprise.

Even today, China has more 'world-class companies' than India if you count its private manufacturers - which Forbes does not. If Sundram Fasteners is considered one of India's best companies when it is simply a manufacturer of parts for General Motors, Chinese manufacturers making products to global needs should also make celebrity lists.

Like the small, innovative Shanling, a maker of high-end audio equipment. Or the Shenzhen-based Byd Co., a small-time watch battery maker and now one of the world's largest suppliers of cellphone batteries. Indian firms are so outclassed by such firms that Delhi shops stock 'Varanasi' saris from China and Kashmiri carpet shops sell more Chinese carpets than local ones.

True, China's system of government lets it act more decisively than India. But more than systemic differences, it's attitudinal differences that explains the 'development delta' between the two.

There is little doubt it is committed to development. Every year China sends hundreds of bureaucrats abroad for training - 22 at Harvard's Kennedy School in the year I studied. That year, only two were Indian officials of the elite IAS cadre and both had arranged their own funding.

As a result, Chinese ministry officials are more competent and clued in than their Indian counterparts. This is also a reflection of history. India has always been ruled by what academics politely call 'an extractive elite'; China has had authoritarian rulers who justify their rule by performance - what Sinologists poetically call the 'mandate of heaven'.

The plain fact is China manages its foreign and domestic issues more pragmatically than India. Strategically, it has encircled India via military ties with Burma, Bangladesh - and Pakistan.

Domestically, China faces separatist movements (in the western Tibet and Xinjiang regions), and its problems with Taiwan are every bit as emotional as India's conflict with Pakistan. Yet China has focussed on economically developing its 'wild west' and nurturing strong trading ties with Taiwan, which has invested over $30 billion in the mainland.

If only the Indian diaspora proffered such investment! But it does not, both because it doesn't have the money and because it does not see India as a wise investment. Indians abroad seem more interested in lobbying their governments to support India over Pakistan.

This jingoistic obsession with Pakistan worries investors. China's pragmatism reassures them. The World Business Environment Survey says China is seen as a safer place to invest. After all, the last time extreme politics killed 2,000 people was at Tiananmen Square in 1989; in India, it was in Gujarat in 2002.

The sad truth is India has not tended to its great institutions of secular democracy and an impartial legal system. Every day columnists and citizens decry the decay in its polity and judiciary. And while its constitution enshrines access to justice and power, millions of Indians live under a local tyranny at least as bad as China's. Perhaps this is because India's political set-up is a British imposition, not fully in sync with Indian ethos.

China is less free than India, but its overall direction has been towards more freedom. Government intervention in personal lives has sharply reduced. Villages in China elect their own leaders. Civil protests, once unthinkable, are common.

Sure, political instability could wreak this. But I doubt it will happen - unlike in India, in China, most people feel they have a stake in their nation. They are chary of fighting for the freedoms they believe they could soon get anyway.

India has the desire to be great, and the potential. But its isolation from the great wars and revolutions of the 20th century meant that much of the thinking that ossified Indian society in earlier centuries exists even in this one. India knows what it has to do; but not how to overcome the age-old obstacles to do it.

Perhaps India can take a page out of China's book - enact land reform, invest in primary education and R&D, give people basic human dignities and then more real economic and political freedoms. If it cannot, even if it develops 13 more world-class firms, as a nation, it will be an apology of what it could be.

Jehangir S. Pocha is the China correspondent for in These Times magazine. He also contributes to several international publications such as the Boston Globe, the Philadelphia Inquirer and the San Francisco Chronicle. He is based in Beijing and travels around the sub-continent