India has a good chance to pick up from where China is leaving off

June 4, 2015

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

It has become popular to think of China and India as rivals – particularly when it comes to the race for GDP growth supremacy. Recent headlines have been full of Indian officials proclaiming that the country’s growth will overtake that of China. But we would argue that the focus on who is growing faster masks a more complex question: how can these two countries co-operate in a way that serves both their economic interests?

On paper, the synergies look compelling. With its “Made in China 2025” programme, China’s policymakers have reaffirmed their commitment to push China higher up the value chain by taking on manufacturing of higher quality, innovative goods such as aerospace equipment and biomedicines as opposed to plastic toys and fast fashion.

Prime Minister Narendra Modi was elected on a pro-business agenda and “Make in India” has in it all the elements needed to capture a big slice of low-cost manufacturing. Indian wages are well below those of other major economies in East Asia. In terms of size, it is really only India that has the depth and potential to pick up the baton from China as a mass producer of cheap exports.

So what could possibly go wrong? Government policy in India obviously plays an important role here. For example, pruning the regulatory burden on businesses – with respect to labour laws or administrative red tape, for instances – would help a great deal in boosting manufacturing. In addition, the manufacturing sector requires proportionally more and better physical infrastructure than the one needed by the services industry. Modi has promised plenty on those fronts; but it would be fair to say that his delivery so far has not met the elevated expectations.

The other key element is foreign direct investment. India needs foreign manufacturers to bring their know-how, capital and sales channels, set up shop, and let shipments soar. The presence of numerous multi-nationals underlines the fact that India has done well in terms of attracting FDI. But most of it is going to the domestic consumer sector, which doesn’t do much to lift exports. Funneling FDI to the manufacturing and infrastructure sectors would require strong commitment to key regulatory reforms.

By all appearances, Modi’s recent visit to China was fruitful, with a number of trade agreements signed and promises of greater co-operation. Hopefully, in their many friendly discussions, President Xi Jinping let Modi in on the secrets to becoming a superpower – cut red tape, drastically improve infrastructure, ensure the supply of energy and attract FDI. That is, after all, how China kicked off its growth miracle 30 years ago.

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