Ahead of the Curve – India’s Growth to Outpace China’s

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Op-Ed Commentary: Chris Devonshire-Ellis

Oct. 13 – It’s always nice when a subject you have firsthand and long standing involvement in finally makes the mainstream media, and so it proved last week with The Economist’s cover story stipulating how India’s growth will outpace that of China. We’ve been pointing this out for some time both last month here on China Briefing in the piece “Why China Demographics Dictate India as a Global Manufacturing Hub” and regularly over the past few years on our 2point6billion.com and India Briefing sites.

The Economist’s articles essentially state what we’ve already said, that India will soon start to outpace China thanks to a young and growing workforce. It also goes on to point out that India’s “much-derided democracy” is finally proving fruitful rather than a hindrance, and attributes “India’s surprising economic miracle” as largely due to its private sector.

“The country’s state may be weak, but its private companies are strong,” the magazine said. That’s very true, and is a major part of where China and India, and the quality of senior management and innovation, differ.

While the vast majority of China’s largest companies are state-owned and subsidized, a matter that is leading to calls of “unfair competition” from the EU in particular, the vast majority of India’s businesses are private sector run and managed and have to generate their own income to survive and prosper. That is leading to a growing difference in decision making and executive talent within the two countries, and while Chinese executives are hitting a glass ceiling due to political considerations and government involvement, Indian executives are not. In short, Chinese executives are being denied the right to develop talents as entrepreneurs within China’s largest companies. I do not believe that to be a healthy system of management training and development.

But why does this matter to China-based businesses? Why are we discussing this on China Briefing?

Well first, let’s go back to what The Economist had to say and had observed. They said that, despite the poor headlines generated in the run up to the Commonwealth Games, India is doing rather well, and its economy is expected to expand by 8.5 percent this year. It has a long way to go before it is as rich as China (the Chinese economy is four times bigger), but its growth rate could overtake China’s by 2013, if not before. Some economists think India will grow faster than any other large country over the next 25 years. Rapid growth in a country of 1.2 billion people is exciting, to put it mildly.

The Economist is right. It is exciting. Although China’s economy is four times larger than India’s, it is also the second largest in the world. India tends to get overshadowed by all the China hyperbole. India is, in its own right, the world’s eleventh largest economy (nominal GDP) and the fourth by purchasing power parity. With predictions for that to grow at 10 percent per annum for the next two decades, the opportunities to succeed in India, just as China slows down, are overwhelming. It is also important to note that while much is made of the Chinese and their savings, they lag behind India. India has the highest savings rate in the world at 36 percent.

Much was made in the media also about the Commonwealth Games, and the “shit and crap” that preceded it, but we can note the games are proceeding nicely now, once a few heads got knocked together, and also once a few “never been to India before” media hacks started to realize that no, India is not like London or Silicon Valley, and that one has to adjust. Stupid, yet widely publicized comments of Delhi being a “cesspool” are just totally wide of the mark. In fact the city, built by Edwin Lutyens, was designed to show off the splendors of the British Empire and was built with large boulevards to rival Paris, magnificent buildings, and was “greened” with trees from all over the empire. Visitors familiar with it will know what I am talking about.

The Games are a one off, and nothing really to do with China. What is to do with China though, and The Economist echoed our own earlier words, was that they noted “China’s workforce will shortly start ageing; in a few years’ time, it will start shrinking.” India, meanwhile, is now blessed with a young and growing workforce. Its dependency ratio – the proportion of children and old people to working-age adults – is one of the best in the world and will remain so for a generation. India’s economy will benefit from this “demographic dividend,” which has powered many of Asia’s economic miracles.

“The second reason for optimism is India’s much-derided democracy,” The Economist continued, noting that “Indian capitalism is driven by millions of entrepreneurs all furiously doing their own thing.” Since the early 1990s, when India dismantled the “license raja” and opened up to foreign trade, Indian business has boomed. Ideas flow easily around India since it lacks China’s culture of secrecy and censorship. That, plus China’s rampant piracy, is why knowledge-based industries such as software love India but shun China. Given the choice between doing business in China or India, most foreign investors would probably pick China, according The Economist, “but as the global economy becomes more knowledge-intensive, India’s advantage will grow.”

“Picking China” is an issue that is related to a familiarity with the country and also the fact that in international news, the country is main stream in ways that India is not. It wasn’t so long ago when I was just starting Dezan Shira & Associates that I was advised by a successful Australian businessman, who had been educated at Peking University in the late 1980s, not to go to China. The reasons: “It’s horrible, dirty, and communist.” Another highly prominent Hong Kong businessman told me bluntly that “the Chinese will steal your money.” Yet that didn’t stop me, and the more I learned the more I grew to adapt, belong, and begin to make progress.

I hear similar stories about India today: “It’s dirty,” “It’s bureaucratic,” “There’s no infrastructure.” They are all partially true, but as I write I am having to devote a considerable additional amount of my time and financial investment in our firm’s India practice just to keep up with business demand. Being dirty, administrative, or having to deal with a lack of infrastructure are not very good excuses for not wanting to do something creative. It’s hardly an entrepreneurial attitude, and the China guys who bang on about that as a difference, well they have their own choice to protect I guess and don’t want to admit to an alternative. In short, lazy consultants and lawyers grown too fat on the milk of China. Yet make no mistake – India is arriving, and it is impacting upon China, big time.

India matters to China businesses because it represents a second opportunity that has arisen. It is unprecedented in modern times for effectively 2.6 billion people (the combined size of the China and Indian populations, and hence the name for our web site dealing with the bilateral development issues) to walk into the global economy in the space of about 25 years. The opportunities are staggering.

India matters for China businesses because if you are not in India, you don’t have an alternative to offer your clients. India matters because it’s a global economy, and not a Chinese one. India matters because it has a wealthy and growing middle class of 200 million. India matters because it provides a secondary stream of very potent revenues. India matters because you can hedge your bets against anything going wrong in China.

India matters because, ultimately, being in China is not going to be enough in order to provide service, cost comparisons, alternatives, and market understandings, analysis and the dynamics of change that India will and is already bringing to China and the Global economy. I’ve been saying it now for the past five years. Now The Economist has just put it on their front cover. That doesn’t make it any more true, but it should act as a trigger for more China-focused executives to get out, research the potential, get over to India, and start to find out what and where the opportunities for their businesses are. Doing business in India is about to become a global mainstream dynamic. Are you preparing to be ahead of the curve?

Chris Devonshire-Ellis is the principal and founding partner of Dezan Shira & Associates, establishing the firm’s China practice in 1992. The firm now has 10 offices in China. For advice over China strategy, trade, investment, legal and tax matters please contact the firm at info@dezshira.com. The firm’s brochure may be downloaded here. Chris also contributes to India Briefing , Vietnam Briefing , Asia Briefing and 2point6billion

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12 thoughts on “Ahead of the Curve – India’s Growth to Outpace China’s

    paul Cunningham says:

    China Blogger of the year. Without question. Ahead of the curve. Ahead of the Economist by five years! Good job Mr. CDE.

    Hugo says:

    Actually Western businessmen need to search for a new market niche to settle, given that as China becomes more competitive and more assertive, the possibility of making easy money disappears because the Chinese are no longer so easily swayed by Western lecture.

    For sure India is the new Western target in the second half of this century and Africa will be the new Eldorado in 22nd century. And it would be useful to indoctrinate the Eskimos about the wonders of consumption – rather, the unbridled one.

    Chris Devonshire-Ellis says:

    Well the opportunities are there for sure for the consumer market. As China becomes more expensive, manufacturing will shift west to Vietnam, Cambodia, Laos, and even Bangladesh, but none have the large and wealthy consumer market that India does. Thanks for your comments – Chris

    Sean Wang says:

    Mr. Devonshire-Ellis, You have written an excellent commentary. To me, it is a foregone conclusion that India’s growth will outpace that of China if both economies progress at their current trajectories. India’s private sector driven growth will prove more balanced and sustainable while China’s government directed economy after an initial flash of brilliance is bound to be marred by inefficiencies and imbalance. This is in addition to the favorable demographics forecast for the two countries, with India’s population being more youthful and progressively better educated. The two economies are destined to diverge and rapidly at that. However, the Chinese government can do something to slow down this divergence. It can simplify its tax system and give more back to businesses and individuals; it can ease regulations in industries like financial services; it can level the playing field for foreign and non-government enterprises. It can be more, India-like. Foreign companies, on the other hand, need to recognize that China is no longer a low-cost manufacturing hub. And if the government helps instead of hinders its natural progress, China will transform into a giant modern services center and the fastest growing large consumer market. And that isn’t all bad for foreign companies in China.

    Deepak says:

    Hi Chris,

    It was really nice reading your article. As an Indian I am happy that the world is slowly but surely recognizing the potential of India. We would definitely like to be known for our knowledge base economy than just a manufacturing hub. I guess it will put India a few notch above than others. A few centuries ago India was the world’s wealthiest nation. There was no poverty, plenty to eat, trade was booming… riches abounded. Fittingly, it was called the “golden bird” by the rest of the world. India will be called “golden bird” again – Deepak

    Chris Devonshire-Ellis says:

    Thank you Sean, China is indeed (and does need) to move up the added value chain as you so rightly pointed out. I think you also touched on an important aspect that China and India are mutually compatible. I did comment on China’s new innovations here: https://www.china-briefing.com/news/2010/10/05/whats-china-good-for-investing-in-it%e2%80%99s-all-about-innovation.html and a further piece on China Cleantech is here: https://www.china-briefing.com/news/2010/10/06/chinas-emerging-cleantech-sector.html

    The rise of India is good news for China, while for business, the trick is to be in both markets. However, I suspect that China as you suggested will need to kick itself up the chain a bit, your suggestion of tax breaks in certain industry sectors aligned to hi-tech and innovation would be a logical and welcome addition to that. Many thanks for your time and effort in commenting.

    @Deepak – Your kind words are also appreciated. Yes, India is becoming a “Golden Bird” for investment again. The egg, so to speak, has been laid and is about to hatch. Thanks Guys – Chris

    Ravi says:

    Congratulations Chris,

    Although having read articles announcing this here and there, I was still stunned to see the front cover of The Economist, a magazine never considered as pro-Indian, but rather often biased against India. It really proves that things are changing and not always as per the wishes of many Westerners.

    The development of Indian IT industry without the help and in spite of the Gov of India (GOI), lead it to adopt its “Hand Off Policy” realizing that the least it interfered in Indians economic matters the more it unleashed their dynamism and potential.

    Worlwide, Indians have reached prominent positions (LN.Mittal, Vedanta’s Aggarwal,…) without India’s help and in a country with a very big Chinese pop. like Malaysia, the richest man is of Indian origin (Mr.Krishnan). The founder of Air Asia (Mr. Fernandes) is a Goan.

    Another factor that will foster Indian economy is the “Democratic alternative”. With time and elections, people have been compelled to admit that India is a Democracy. China, more and more, projects its image of a despotic country and this also toward other nations. Anti-Chines sentiment is rising in the West and consumers would prefer buying competitive products from other origins. If companies do not want to lose markets they will have to sell non-Chinese origin items. Here India could play and promote the “democratic-origin” card by bringing companies to set-up alternative manufacturing plants here. Moreover it will help distribute wealth worlwide and not on one world supplier, which actually creates unbalances.
    Best regards. Ravi.

    Chris Devonshire-Ellis says:

    Thank you Ravi – totally agree. For other readers looking more at India – a piece here on a surge in investment levels: http://www.india-briefing.com/news/investment-levels-surge-india-4436.html/ They bring their own problems, such as inflationary issues, but the overall high growth trend is set – Chris

    Sam says:

    Chris:
    Good food for thought on what will prove to be an ongoing dialogue between the economies and political systems of these two re-emerging super powers. As to political systems suitability for growth both countries are far from “locked in” to their current political structures and given the stresses both face both countries are in for what will surely be a bumpy ride en route to their former glory.
    Just some of India’s current troubles, the Kashmir region described as the largest occupied territory in the world, a full blown insurgency in Central India wherein indigineous people are clashing with governments and mining companies over resources and some very serious religious divisions that play themselves out very messily in the political process will keep the country’s governing elites on their toes for some time.
    As to China foremost among its myriad (and better known) challenges will be whether the ruling Communist Party decides to evolve with its environment or seek to control that evolution.
    Major challenges for both these countries the outcomes of which will have an enormous impact on the rest of the planet.

    Chris Devonshire-Ellis says:

    Thanks, yes we’ve put a lot of effort into our investments in both China and India over the years. Both are paying off – just this month alone we have upgraded and relocated three offices to bigger premises, more staff – Hong Kong, Mumbai and Delhi. The India thing is taking off – I know because we’re there and we see it. Likewise China – it will slow down, the demographics say so and the Central Government themselves are now concentrating on other issues instead of pure growth. India will grow more quickly than China now, I think that’s a given. The best bit is we’re in both markets (and Vietnam) and it’s all been both very rewarding and a lot of fun. It’s the Asian Century, and both China and India are very much part of that. Thanks – Chris

    Ian Whiteside says:

    Chris,

    You describe India as a second opportunity for China to enter the global market. Exactly; economic cooperation, joint learning and joint venture projects would be the obvious solution to bilateral tensions.

    pranabkumarsen says:

    Inspite of competition & comparison between India & China, they are still at very starting point regarding two items, which determine their position in future economic scenario in more matue level:
    a)The quantity &quality of their inventions.
    b)Making recognizable brand names for their products &having international recognition for the same.
    Upto now, their record is very poor in these respects & they cannot really be anywhere near the leading position unless they show much more promise in these fields.

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