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Conference Reports |
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China's Growth - Myths vs Reality
Deepak Goel was involved in a nine month research conducted by Mc Kinsey & Co on India-China economies. The research has concluded that manufacturing sector has been the key differentiator in the GDP growth of the countries. During the past ten years, China moved 29 million people out of Agricultural sector to manufacturing sector while India added 6 million people to Agricultural sector. In 1982, GDP of India was greater than that of China. Today, the average Chinese is 60% richer than the average Indian. India's per capita GDP stands at USD 2407 while that of China stands at USD 3829.
Deepak Goel in his address dispelled some common myths on Chinese growth. In his view, the Chinese growth was based on strong fundamentals backed by economic reforms.
Myth #1: China's growth is fueled by investment and not by productivity.
However, the reality is growth is indeed fueled by productivity and the numbers speak for themselves. Between 1999-2000, China's productivity grew at about 8.9%, while during the same period; India's productivity grew at 3.2%
Myth #2: China's manufacturing is driven by exports
The truth is while exports contribute to significant increases in production, the growth is really fuelled by strong local consumption. Manufacturing per capita GDP of China stands at USD 1322, while that of India is USD 381. Also, the local consumption increase is caused by lower retail prices.
Myth #3: China's domestic prices are driven by marginal pricing and subsidies.
The lower prices are in fact are driven by strong fundamentals. On a price index of 100, where India stands at 100, Chinese price range is 67-72. 15 points difference is contributed by indirect taxes, 4-7 points by import duties, 3-4 points by labor productivity and interest cost accounts for another 2-5 points.
Myth #4: China's exports are driven by marginal pricing.
While, in fact the cost structure as detailed above provides a very competitive advantage, the bulk of exports are driven by FDI. (Motorola, GE are notable examples). India's FDI stands at USD 2 billion while China's FDI is at USD 20 billion.
Myth #5: Chinese products are always of poor quality
China has products that fit various price points. Some of the best GE products are produced in China.
How did China do this??!!!
China has achieved growth rate of about 35% in manufacturing sector that is comparable to any other economy such as Japan during their growth phase. It has been possible only by carrying out reforms in a systematic manner. The key reforms that ware carried out by China:
1979-- Creation of SEZs
1984--- Labor Reforms
1992-Lowered Interest Rates and lowered Import Duties
1994-Reduced Indirect Taxes
So what does it mean to India? Can India carry out such reforms??
India cannot leapfrog to services economy from an agrarian economy by ignoring manufacturing sector. Some of the reforms suggested by him in his speech are:
1. Replace Indirect Taxes with VAT
2. Reduce Import duties to 10%
3. Reform labor law
4. Kick-Start growth of SEZs
5. Institute Power reforms
6. Eliminate small scale Industry reservations
7. Enable lower interest rate through fiscal reforms
He concluded his talk by stating that it is not about India and China competing with each other but with the rest of the world!
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