Comparing Economic Reforms in India and China

Economic reform has been the key instrument to elevate growth performance, but it always carries larger development ramifications in both India and China. However, their reform measures, strategies and implementation vary widely.
by Mahendra P. Lama
November 26, 2012: The second China-India Strategic Economic Dialogue is held in New Delhi. by Li Yigang/Xinhua

Economic reform has been the key instrument to elevate growth performance, but it always carries larger development ramifications in both India and China. The respective political economic backdrops that prevailed in each of the countries as they sought to undertake massive economic reform varied sharply. In India, the economic crisis of 1991 coupled with political instability and a historically low growth regime dubbed the “Hindu growth rate” eventually pushed the incumbent government to undertake structural adjustment programmes mostly prescribed by Washington Consensus. As China emerged from prolonged dislocation and disruption caused by the “cultural revolution” coupled with isolation from the global economic and financial system, the country had to pursue a recovery path based on drastic and yet steady structural and policy changes. 

Reform measures and implementation have varied widely in both countries in terms of scheduling, sectoral coverage, intensity and sustainability, political commitment and public acceptance. Each country is now in different phase of economic reform. The respective impacts of economic reform have been varied in terms of visibility, nature and extent. Remarkably visible structural shifts have occurred in both countries. The share of the primary sector led by agriculture has steadily dropped to less than 25 percent with a side-by-side increase in the tertiary sector. Other indicators like the savings and investment rate, trade-GDP ratio, foreign direct investment and foreign exchange reserves have also shown unprecedented changes. 

A striking similarity shared by these two countries has been the slow speed of the implementation of reforms in particular regions of the country. In China, reform that was effectively implemented in the coastal zones like Shanghai, Guangdong and Fujian created fortunes. The introduction of the “Westem Development” policy in 2000 evidenced that for almost two decades, reforms and the accompanying fruits rarely reach the southwestern landlocked provinces and autonomous regions such as Sichuan, Yunnan, Tibet and Qinghai. In India, southern and western states recorded strident progress and reeled out second-generation reforms while backward states like Uttar Pradesh, Bihar, Chhattisgarh, Madhya Pradesh and mountainous states like Himachal Pradesh, Jammu and Kashmir, and Uttarakhand lagged for many years. However, over the last decade, many of these passedover places in both countries have made exemplary development strides. 

Poverty and Inequality

The driving forces of poverty reduction have been economic growth, increased productivity and greater consumption, which have been conspicuous in both countries. The nature of poverty is characterized by symptoms such as socioeconomic deprivation, politico-cultural alienation and a lack of access to state resources, technology and spatial distribution. India has recorded a significant decline in poverty from 45.3 percent in 1994 to 21.9 percent by 2012. Despite this drastic improvement, over 270 million people continue to live in abject poverty. Similarly, Gini Coeffcient-based inequality in India was estimated to be 36.8 in 2011. India’s flagship projects like the National Rural Employment Guarantee, Right to Education and Right to Food have made a huge difference. 

When President Xi mentioned in his address to the 19th National Congress of the Communist Party of China (CPC) in October 2017 that more than 60 million people had been lifted out of poverty in the last five years, no one was really surprised. The results of such an incredible feat were already noticeable in China. A decade earlier when the World Bank was re-examining its “dollar a day” global poverty standard, it concluded that “some 407 million Chinese citizens rose out of poverty” during the 14-year period from 1990- 2004. Clear vision, specific structural interventions and design of sound trickledown mechanisms for a higher growth regime were in broad strokes credited for this success. The National Development and Reform Commission (NDRC) set the deadline of the end of the 13th Five-year Plan (2016-2020) to achieve Deng Xiaoping’s goal of establishing “a society in which people lead a fairly comfortable life.” This goal was envisioned and reiterated by the 16th CPC National Congress in 2002. 

Shift in Production

In India, public sector units were once close to the chopping block when the leadership required massive structural changes. A range of interventions have been made from disinvestment to foreign direct investment participation. The country has embraced visible upward shifts in manufacturing sectors like automobiles and domestic consumer items such as food and textiles. However, compared to China, India’s allocation of funds for research and development activities in both private and public sectors has been minuscule. 

Unlike India, China’s economy boomed frst from staggering investment from Chinese people living abroad and further when major Japanese and US companies began shifting their production bases to China. Soon, China was producing Sony cameras, Toshiba laptops, HP machines and other popular international electronics. All these Chinamade brands flooded the international market under the liberal provisions of the WTO. Today China has emerged as a major foreign investor. India unambiguously recognizes China as a key pivot in global financing. Its Economic Survey 2014-15 states, “today, China has de-facto become one of the lenders of last resort to governments experiencing financial troubles...(it) is assuming the roles of both an International Monetary Fund and a World Bank as a result of its reserves.” 

In India, energy is dominated by the public sector, which unbundled services into three separate generation, transmission and distribution agencies in each province. These are broadly monitored by electricity regulatory commissions at national and provincial levels. This change led to drastic cut in subsidies, the introduction of many private players, a quantum leap in installed capacity and steady improvement in the quality and reliability of the electricity supply. And it all happened amid a much higher consequential tariff. Contrasting such practices, in China, giant public sector units like China National Petroleum Corporation (CNPC) have criss-crossed continents of Asia, Europe and Africa in search of cheaper and sustainable sources of energy. 

Infrastructure Leaps Forward

An area where China became a model after reforms were adopted has been physical infrastructure like roads, rails, airports, sea ports, communication, banking and even social infrastructure involving education, healthcare and drinking water. Japan and the U.S. have been the model for China to transform its infrastructure including in trendsetting economic zones like Shenzhen. China’s widely discussed Belt and Road Initiative is a vehicle to transmit its domestic paradigm of infrastructure development to other regions including the China-Pakistan Economic Corridor. 

India is relatively lagging in terms of physical infrastructure. India needs at least US$1 trillion (US$750 billion is required as debt financing) for a critical minimum level of infrastructure. Today, India ranks 87th out of 144 countries in infrastructure, and if demand was met, it would boost India’s economy to a higher growth of nine percent. Although India launched “India Infrastructure Finance” way back in 2006, Finance Minister Arun Jaitley declared infrastructure and investment the ffth pillar to “transform India.” He made a “decisive departure” by allocating an unprecedented total outlay of roughly US$33 billion for two critical infrastructure road and railway projects for 2016 and 2017. 

Water Insecurity Solutions

Water is critical for China’s massive public health policies, unparalleled urbanization, repositioned renewable energy, wider and decentralized industrialization, targeted food security and poverty alleviation and huge green environment projects. A report titled “Towards a Water & Energy Secure China” published by the China Water Risk in 2015 states that 11 provinces in China (“Dry 11”) fall below the World Bank Water Poverty Mark of 1,000 cubic meter including economic powerhouses Jiangsu and Shandong and municipalities of Beijing, Shanghai and Tianjin. Nearly half of China’s GDP comes from these Dry 11 provinces. It goes on to state that eight provinces suffer from extreme water scarcity below 500 cubic meters. 

The South-to-North Water Diversion Project, considered the world’s largest of its kind, is estimated to cost US$81.4 billion. Credited with easing water shortages and improving water quality, this first diversion route running through 1,432 kilometers is mainly composed of open air canals. The first phase of the east route carries water from the Yangtze River at Jiangsu Province’s Jiangdu to Shandong Province along the Beijing-Hangzhou Grand Canal. 

Some 53.1 million people in northern China have benefited from this project. The project went into operation in late 2014 and has since transferred almost 10 billion cubic meters of water from the south to the draught-prone north. Pumped water now reaches cities like Beijing and Tianjin. In addition, residents of seven cities in Hebei as well as 11 cities and 37 counties in Henan, now have access to diverted water. 

Despite the Indian Supreme Court’s order to the government to complete planned projects like the KenBetwa river linking project, India’s water diversion plans to help deficit areas remain a pipe dream due in large part to serious environmental and sustainability concerns. 

The author, a noted development economist, is professor of South Asian Economies, Jawaharlal Nehru University, New Delhi and former member of National Security Advisory Board, Government of India.