China & India: The Widening Gap (Part I)

The Early Years

China and India are entwined in thousands of years of history with significant cultural exchanges over centuries. Both have been populous nations for hundreds of years and both achieved nationhood at similar times, India through independence from the British and China through Communist regime post the war with Japan and the 12 year civil war.

Communist China under Mao had a strong authoritarian leadership, while India chose a democratic set up.However the bias towards socialism, and fascination with the Russian model of a Central planned economy,was core to both countries in their initial years of development. India chose the socialist democratic path while China opted for one party Communism. In the mid 1950s, Chinese government assumed control over most of the country’s agricultural land and transformed individual farming into a cooperative or collective scheme with the state taxing the farm produce and also buying a significant portion of it at fixed price from the farmers. The grain purchased was either exported or sold in urban areas at higher prices giving the state surpluses to invest in Industrialisation. State intervention in agriculture sowing, seed selection meant that the system became dictatorial but managed to improve productivity. The collective farming meant economies of scale in terms of larger farm lands and faster mechanisation but had other ramifications like famines and oppression in rural areas. India also had the minimum support price program and large scale farm purchases through the FCI and other state agencies. However the purchased grains were sold through PDS and ration card system which led to leakages, losses and shortages.

Both countries were also influenced by the Soviet focus on developing heavy industries, but China could afford to implement rapid industrialization ruthlessly. During the Great Leap (1958–62), Mao decentralized steel production to the extent that thousands of small furnaces were set up in rural areas and people almost forced to work on them to meet central planned targets for steel production. A democratic India had to balance its people and development and its pace of industrialization was much slower. China also benefited from closer Soviet support (given the common Marxist ideologies) and even after Stalin was ousted, Soviet Union continued strong support of China including building industrial parks, heavy industries and also provided long term debt. Over 60 percent of Chinas exports in 1950s were to Soviet Union.

The first divergence in the destinies of India and China began with Mao’s fall out with Russia , post Stalin when Russian leadership of Kruschev denounced the Stalin legacy. China led by Mao disassociated with Soviet Union as Maos own Marxism was based on Stalinism. This promoted Mao to adopt a Marxisim suited for an agrarian economy like China and he initiated the rapid industrialization policy through “The Great Leap “ experiment. The Great Leap and the subsequent “Cultural revolution”in the 1960s was a painful period for Chinese people especially in rural areas. While it led to rampant industrialization and some material improvement in rural health care and progress on epidemics and communicable diseases , the policies and its “target based implementation caused immense hardships with large scale deaths caused by famine, suppression and violence by the Communist Partys cadres especially in rural China. While China industrialised and generated FX and retired its debts to USSR, the people were the biggest casualty. India didn’t experience such large scale persecution, however, personality dominance (first by Nehru and then Indira Gandhi) led India on a parallel path of stifling socialist policies, controls, license raj system, shortages , inefficiency in the public sector and wide spread corruption.

Post Maos death in 1976, Deng Xiaoping moved away from Mao’s state driven economy to a mixed economy and embarked on liberalization whereas India continued its socialist planned inward looking approach like import substitution, nationalization of oil companies and banks among others. India grew at the Hindu growth rate (3–4 perc) till the 90s while China’s staggering growth placed it atleast 3 decades ahead of India on the development matrix. In several spheres including Human Development, Infrastructure development, per capita income, sovereign rating , sovereign financials and even International sports, China surged ahead of India within a decade of Deng’s reforms. The divergence between India and China can be analysed on 4 major parameters

  • Liberalisation, reforms and Economic Growth
  • Human Development Index
  • Exports and Foreign Exchange Reserves
  • Performance in International Sports

Following is a comparative analysis with rationale for the divergence on each of these parameters and how India can adapt some of their path breaking initiatives. In the first part we will deal with comparative progress on Liberalisation& Economic Growth and Human Development and analyse probable reasons.

Liberalisation& Economic growth

In its first phase from 1978–84, China started with de-collectivisation of agriculture in which the collective farming ,forced on rural china by Mao, was disbanded. It was replaced by household responsibility model where land was privatized and each household of peasants could control their own farm provided they sold 25% of their produce to the government. This led to a significant increase in agriculture production in the next decade. This was followed by a policy which allowed rural households to invest their savings in local businesses, manufacturing and transport, which gave rise to the so-called “town and village enterprises”. This has enabled to channel savings into capital formation for china and make its SME sector competitive. In the same period, China opened its economy to foreign investments through SEZs, freeing bureaucratic hurdles. It also focused on infrastructure and heavy industries growth through state owned entreprises (SOEs) much like India’s PSUs.However, unlike India, Chinese SOEs grew into global sized enterprises with significant capacity additions through profit generation and state support.

Then in second phase of the reforms in late 80s and 90s, the SOEs were privatized. The private sector growth resulted in that sector accounting for almost 70 percent of China’s GDP by 2005. The second phase of reforms also saw a decentralization of state control, with authority to provincial leaders to devise own strategies foreconomic growth and privatization.

As a result of its reforms and privatization of SOEs, China achieved global leadership in production of cement and steel, thebackbone of infrastructure growth. China’s cement production has increased from 75 mntonne in 1980 to 2.4bn tonnein 2017 (India: 270 mntones in 2017), china’s steel production grew from 37 mntonnes in 1980 to 832mntonne in 2017 (India: 102 mn tones in 2017).

China , like India is a net importer of crude oil . While China has higher proven reserves than India, its focus on growing crude oil discoveries and production in deep sea has yielded spectacular results. China’s crude oil production increased from 105 mntonne in 1980 to 192 mntonne in 2017 (India: 37 mntonnein 2017) ; India’s domestic crude oil production has stagnated between 35–40 m tonneswith no major discoveries in the last decade (except barmer , Rajastahn by Cairn).

The strong GDP growth in China (12–14% CAGR), propelled a high per capita GDP growth (9–10% CAGR) between 1975 to mid 90s. This was accompanied, more importantlyby a 15% per capita income growth in rural households. Rural income growth was made possible by improved agricultural productivity and increase in farm prices. Moreover, the core industrial and manufacturing sector growth led to increase in overall employment levels from 425 mn in 1980 to over 760 mn in 2010. This has enabled a significant improvement in income levels of Chinese households leading to a cascading impact on poverty reduction and sharp improvement in human development parameters.

In contrast, during the 70s till 90s , India’s per capita GDP growth was a meagre 2–3% or flat in some years as population growth negated any gains in GDP growth rates. Only after liberalization in 1991 did India’s per capital GDP start to grow at 4–5% and more. During the 70s to mid 90s, rural income growth in India continued to be low as farm prices were depressed and the benefits of productivity increase due to the green revolution was restricted to few states and large farm holding. The bulk of India’s farm land ownership is fragmented (under 2 hectares per farmer) and hence farm mechanization has been slower. Coupled with low levels of irrigation resulting in only 1 crop a year in many farms, farm incomes have grown at a slow pace leading to significant migration to the urban areas. India continued with the public sector involvement in core sectors and even post liberalization we have been slow to privatize. This has saddled PSUs with losses and inefficiencies causing drain our government resources.

Human Development

For China, the impact of economic growth on human development and achievement of millennium development goals (MDG)especially pertaining to health, mortality and poverty reduction have been spectacular. While India too has progressed a lot on parameters like child mortality and extreme poverty, it has not been able to reduce the absolute number of people in poverty much since the 70s. China’s literacy levels are comparable with OECD countries and the number of poor people in china is now less than 3% of their population ( compared to 20% for India). However, in Chinas case it’s not just per capita income growth, but state policies and programs with zealous execution which have contributed to overall improvement in quality of life and life expectancy.

Poverty

Chinas achievements under MDG arevery impressive. In universal primary education, safe drinking water, access to toilets/sanitation and eradication of extreme poverty China has excelled by achieving targets which place it alongside developed countries. Chinas population in extreme poverty has reduced from 85 mn in 1990 to under 20 mn in 2017. China embarked on the 7 year Priority Poverty Alleviation Program (1994–2000)in 1994 and the Development-oriented Poverty Reduction Program for Rural China in 2001. Along with these schemes, a major reform was devolvement of power to local governments in provinces and creating ownership of the schemes with them. However, the decentralized model works far bette, when the central leadership and local provincial administration is aligned, unlike India where different political parties are in power at Panchayat, district, state and central level in many cases. The Indian system probably creates checks and balances but cannot achieve out of turn results.

Chinese governments budget, supported by large surpluses and much larger GDP has also been a important contributor. Chinae.g. allotted over USD 10 bn in 5 years (2001–2006) for poverty alleviation programs. Moreover, they did focus targeting of about 600 high poverty counties and over 148,000 high poverty villages to be priority beneficiaries of the program. Strong support was also received in form of poverty loans from Agriculture Bank of China (ABC) — akin to our NABARD- of over USD 25 bn and also from rural credit cooperatives at subsidized rates.These funds have been mainly targeted towards income generation rather than subsidies and are over and above normal crop loans which farmers receive at the time of crop season. Moreover, unlike NABARD which is primarily a refinancing institution, ABC is a direct lender to retail and corporate clients in agri sector and has over 320 mn retail customers. A focused agriculture bank has helped rural lending in China with timely and subsidized credit flow. In India, the central bank and NABARDs , well intentioned eligibility norms for agri lending constrained banks and credit flow which has led to emergence of Micro finance Institutions and NBFCs.

In India a large part of budgetary support to agriculture has been in the form of subsidy. If India has to emulate China in the next 20 years, we have to target extreme poverty reduction through a legislative framework (like GST , MNERGA , inflation targeting, FRBM ) so that the Centre and states work under a constitutional framework with penalties and incentives on bureaucracy linked to achievement. We need to target, monitor and single mindedly focus on rural income growth. NABARD has to function as a monitoring agency and needs to support development of rural cold chain owned by farmers through cooperative structure and funded by subsidized loans.

Education

China has achieved overall literacy levels of over 90% for last 2 decades which has provided them a significant demographic dividend. India has also achieved significant progress to reach 75% in 2017 from 50% in 1990. China has excelled in its goal of Universal Primary Education aided by its Compuslory Education Law where parents are mandated to provide education to children till Grade 9th. In China, school enrolment at primary level is above 99% and school drop outs during 9 year period of compulsory education is 6.5% — 12% for India. The challenge both countries face is drop outs at secondary to higher secondary and then college levels. For every 100 children who are studying in Grade 1–5 in India, less than 55% goto high school (11th& 12th) and less than 25% go to college. (corresponding figures for China are are 75% and 40% respectively). This is basis Gross Enrolment Ratio for these grades as per HRD Ministry statistics 2014–5. Rural drop out rates beyond class X are even higher. The Indian government should bring vocational training and skill development as well as practical agricultural degree / certification programmes in rural areas. This would help keep rural children in school longer, make them employable and also encourage them to pursue agriculture as a viable economic activity thereby reducing migration to urban areas.

Child Mortality& Primary Healthcare

In the 50s and early 60s, China’s Child mortality was almost at par with India but had reduced to less than half of India’s by 1980. By 2017, while India also has achieved a significant improvement (from 113 to 40 per 1000 births), china has brought it down to almost single digits at par with OECD countries. A World Health Organisation (WHO) report of 2015, tracking progress by countries on their MDGs in health, indicates that world under 5 child mortality has reduced from 90 in 1990 to 46 in 2013 (India is at world average). Key causes of under 5 child mortality as per the WHO 2015 report are, premature birth (15%), respiratory infections (15%), birth asphyxia (11%), malaria (7%), diarrhea (9%) and immunity to these diseases in small children is compromised in more than 50% cases due to low nutrition.China’s success in reducing child mortality was achieved by trying to target the root cause of these key mortality causes through prevention as well as access to cure approach. Following measures were adopted

  • target one of the root causes which is mal-nutrition throughfolic acid supplement program for expecting mothers .
  • increasedelivery of primary health care services (esp to mother and children under 6), improved local obstetric infrastructure, established a fast-channel referral mechanism for pregnant women at labour,tried to achieve almost universal child births in hospital
  • significantly expand the child vaccination program to make it universal
  • enhance the rural medical insurance program to cover 830 mn rural people by 2009 from 80 mn in 2003.

The above initiatives were supported by significantly improved access to safe drinking water with tap water reaching 90% of urban households and 70% of rural households. The contribution of the one child policy cannot be overlooked as parents (with only 1 child) have become more vigilant and have much to loose.India’s challenges have been similar to China’s but with budgetary constraints and lower GDP growth till the mid 90s, India continues to face challenges in improving rural and urban sanitation , access to clean drinking water and primary health service delivery in rural areas as well as nutrition. Chinas has created a hierarchical primary health care service delivery model esp in rural areas with over 37000 township health centres and one level below then 640,000 village clinics all largely public owned.

As of March 2017, India had about 156,000 sub centres at village level and 25,600 Primary Health centres at town or taluka level. As is obvious china’s health care system, for a population which is 10% higher than India, is 4 times that of India. Primary health centre infrastructure is the key investment which the Indian government has to make to improve public health. It can be through a PPP partnership model, with government subsidies reimbursed directly to beneficiaries linked to their Adhaar.

The statistics on safe drinking water and basic sanitation service also indicates a wide divergence. According to UN & WHO Report of 2017 on Progress of Drinking water, sanitation & Hygiene less than 50% of Indian population has access to sanitation whereas the number is >80% for China. On open defecation china has 2 % of population with open defecation whereas in India it was as high as 40% in 2015. Chinese households access to basic sanitation on premises has increased to 75% in 2015 as compared to 44% for India. On drinking water access, a large population of rural India relies on potable water but from a distant source (less than 30 mins round trip) whereas in China over 90% of rural and urban households get safe water at own premises.

Thus on Human Development Index as well, we have significant ground to cover to match Chinas progress. While in areas like literacy we have made steady progress through schemes like SarvaShikshaAbhiyaan, focus has to increase on improving nutrition and increasing primary health care infrastructure in rural India and universalizing vaccinations and medical insurance as well as improving access to tap water and eliminate open defecation.

— — SAURABH BHAT

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Saurabh Bhat is the Founder & CEO of smeniwas.com a NBFC focused on lending and advisory services to the SME and mid market segment.