March 31, 2011
School of Business, Coimbatore
Who will win the race, the tortoise or the hare?
We all know Aesop’s famous fable The Tortoise and the Hare, wherein the speedy hare challenges the slow-moving tortoise to a race. Naturally, one assumes the hare will win…but he doesn’t.
Even though all odds were in the favor of the hare, the outcome of the race was ultimately dictated by unforeseen factors.
Applying a similar comparison to the economic race between China and India, Dr. G.K. Kalyanaram, Dean Amrita School of Business, discussed the economic growth and paradoxes of two emerging economies at the 2011 Madras Management Association Conference.
In his paper, China and India Growth Models and Approaches: Paradoxes, Insights and Outcomes, he noted, “India has grown 7 percent annually over the last 15 years, compared to China’s more impressive 10 percent average annual growth rate over the last 30 years. However, empirically, there is no economy that has sustained a 10 percent annual growth rate for more than 35 years.”
Kalyanaram added, “Although China is now considerably ahead of India in all economic and market metrics, based on the facts, China’s annual growth rate is projected to drop about 6 percent in the next 4-5 years.”
Emphasizing the differences in India and China’s growth models, he explained, “Domestic consumption composes more than two-thirds of the Indian economy. Whereas China’s “economic miracle” depends mostly on exports and state led fixed investment.”
He also noted an interesting phenomenon. “There has never been a large successful economy led by exports. All major large successful economies, such as the United States and Germany, are driven by domestic consumption.”
Presently, India’s consumer consumption is 64% as compared to China’s 42%. “If these empirics hold true, China’s transformation into a successful economy with mass prosperity will be very challenging, unlike India’s path to such transformation,” said Kalyanaram.
However, Kalyanaram warned, “In order for India to sustain its growth, it must absorb more citizens into a productive economy that includes low-skill, large-sized economic activities.”
Finally, Kalyanaram addressed Foreign Direct Investment (FDI). “Compared to India, China’s growth comes from almost 10 times higher FDI.”
“Studies show the relationship between economic growth and FDI is ambiguous and in the primary sector FDI appears to have a negative effect on growth.”
As Kalyanaram said, “There is little doubt that today China is significantly ahead of India.”
In fact, the evidence is overwhelmingly in favor of China maintaining its leading position. “For example, China’s infant mortality rate – a measure of society’s welfare – is 27 per 1000 live births. India’s rate is 61. Also, poverty is lower in China.”
Still, even with this solid evidence, when the unforeseen factors are considered, “The odds ultimately are in India’s favor for the next 20-30 years,” said Kalyanaram.
The sure and steady tortoise wins!