India the Superpower? Think again

The same goes with China where the vast majority of people live in absolute poverty.

Exactly.

The difference being if India continues as a basically free country with a capitalistic society and the rule of law it will continue to grow.

China will not because it does not.

This begs the question: what is a superpower?

If it requires both hard and soft power the article is correct.

If it requires just a lot of one or the other than there is a better argument for India being a potential super-power than China.

India soft-power is rapidly expanding and Bollywood is already much more than China can even hope for.

It's true that there is extreme poverty in India.

It's also true that there are 1 Billion people living there and that India is the Land of extremes.

It's not as if illitaracy and all the other symptoms of poverty apply to most of the people while there's only a small elite living in incredible wealth.

They have a large and increasing number of very well educated and therefore comparably well situated people - and that will make them - if the ongoing process keeps running - a more powerful nation.

But Super Power - what's that more then a Buzzword.

or with the USA

Cait Murphy thinks that the Times of India & such sensationalist crap represent the majority of Indians & their views.Nothing is further from the truth.Most of their readership is in a few big cities & their surveys obviously focus on a niche clientele.The vast majority of Indians are still rooted in reality as far as their ambitions go & are more than aware of their problems.Comparing tiny nations like Singapore & Malaysia where people live like machines with a bustling,chaotic & diverse democracy does not exactly highlight the author's grasp of the subject.

So then, why is it that so much capital and infrastructure has flowed into China rather than into India? India is our ally. India speaks English. Why has the capital flowed to China?

Simple. In China, they can raze down an entire town to build factories. They couldn't care less about what thepeople who used to live there are to do.

Not so in India.

This feature is very attractive to companies that want to make things happen fast. But it only tightens the spring of internal strife ever-so-slightly. It build, and builds, and then shouts for a release.

I wonder what the statistics of the US looked like, say 1936. I wouldn't be surprised in school enrollement was dropping or that 1/5 people where chronically hungry that a good amount lived on less than a dollar a day. Within 10 years of all that we were a superpower. Sure it's not an exact parallel and the world is a lot different now but if a large-scale world conflict erupts that threatens India directly, I wouldn't bet against them rising up and meeting the challenge.

China does not have much of the following-Entrenched,ossified bureaucracy which kills initiative & enterprise,a democratic system where popular passions can be whipped up & any form of protection for workers in most sectors.

http://www.hvk.org/articles/0703/6.html

Can India Overtake China?
Author: Yasheng Huang and Tarun Khanna
Publication: Foreign Policy
Date: July-August 2003
URL: http://www.foreignpolicy.com/story/story.php?storyID=13774

What's the fastest route to economic development? Welcome foreign direct investment (FDI), says China, and most policy experts agree. But a comparison with long-time laggard India suggests that FDI is not the only path to prosperity. Indeed, India's homegrown entrepreneurs may give it a long-term advantage over a China hamstrung by inefficient banks and capital markets.

Walk into any Wal-Mart and you won't be surprised to see the shelves sagging with Chinese-made goods-everything from shoes and garments to toys and electronics. But the ubiquitous "Made in China" label obscures an important point: Few of these products are made by indigenous Chinese companies. In fact, you would be hard-pressed to find a single homegrown Chinese firm that operates on a global scale and markets its own products abroad.

That is because China's export-led manufacturing boom is largely a creation of foreign direct investment (FDI), which effectively serves as a substitute for domestic entrepreneurship. During the last 20 years, the Chinese economy has taken off, but few local firms have followed, leaving the country's private sector with no world-class companies to rival the big multinationals.

India has not attracted anywhere near the amount of FDI that China has. In part, this disparity reflects the confidence international investors have in China's prospects and their skepticism about India's commitment to free-market reforms. But the FDI gap is also a tale of two diasporas. China has a large and wealthy diaspora that has long been eager to help the motherland, and its money has been warmly received. By contrast, the Indian diaspora was, at least until recently, resented for its success and much less willing to invest back home. New Delhi took a dim view of Indians who had gone abroad, and of foreign investment generally, and instead provided a more nurturing environment for domestic entrepreneurs.

In the process, India has managed to spawn a number of companies that now compete internationally with the best that Europe and the United States have to offer. Moreover, many of these firms are in the most cutting-edge, knowledge-based industries-software giants Infosys and Wipro and pharmaceutical and biotechnology powerhouses Ranbaxy and Dr. Reddy's Labs, to name just a few. Last year, the Forbes 200, an annual ranking of the world's best small companies, included 13 Indian firms but just four from mainland China.

India has also developed much stronger infrastructure to support private enterprise. Its capital markets operate with greater efficiency and transparency than do China's. Its legal system, while not without substantial flaws, is considerably more advanced.

China and India are the world's next major powers. They also offer competing models of development. It has long been an article of faith that China is on the faster track, and the economic data bear this out. The "Hindu rate of growth"-a pejorative phrase referring to India's inability to match its economic growth with its population growth-may be a thing of the past, but when it comes to gross domestic product (GDP) figures and other headline numbers, India is still no match for China.

However, the statistics tell only part of the story-the macroeconomic story. At the micro level, things look quite different. There, India displays every bit as much dynamism as China. Indeed, by relying primarily on organic growth, India is making fuller use of its resources and has chosen a path that may well deliver more sustainable progress than China's FDI-driven approach. "Can India surpass China?" is no longer a silly question, and, if it turns out that India has indeed made the wiser bet, the implications-for China's future growth and for how policy experts think about economic development generally-could be enormous.

THE STIFLING STATE

The fact that India is increasingly building from the ground up while China is still pursuing a top-down approach reflects their contrasting political systems: India is a democracy, and China is not. But the different strategies are also a function of history. China's Communist Party came to power in 1949 intent on eradicating private ownership, which it quickly did. Although the country is now in its third decade of free-market reforms, it continues to struggle with the legacy of that period-witness the controversy surrounding the recent decision to officially allow capitalists to join the Communist Party.

India, on the other hand, developed a softer brand of socialism, Fabian socialism, which aimed not to destroy capitalism but merely to mitigate the social ills it caused. It was considered essential that the public sector occupy the economy's "commanding heights," to use a phrase coined by Russian revolutionary Vladimir Lenin but popularized by India's first prime minister, Jawaharlal Nehru. However, that did not prevent entrepreneurship from flourishing where the long arm of the state could not reach.

COMPETING GIANTS

Population (2002): China 1.28 billion; India 1.05 billion

Population Growth Rate percent (2002): China 0.87; India 1.51

Infant Mortality per 1,000 live births (2002): China 27; India 61

Average Annual Real GDP Growth Rate percent (1990-2000): China 9.6 : India 5.5

Foreign Direct Investment (2001): China $44.2 billion; India $3.4 billion

Population in Poverty (2002): China 10 percent; India 25 percent

Labor Force (1999): China 706 million; India 406 million

Fixed Lines and Mobile Phones per 1,000 people (2001): China 247.7; India 43.8

Size of Diaspora: China 55 million; India 20 million

Sources: CIA World Factbook 2002; The Economist Pocket World in Figures; World Development Indicators CD-ROM; Financial Times

Developments at the microeconomic level in China reflect these historical and ideological differences. China has been far bolder with external reforms but has imposed substantial legal and regulatory constraints on indigenous, private firms. In fact, only four years ago, domestic companies were finally granted the same constitutional protections that foreign businesses have enjoyed since the early 1980s. As of the late 1990s, according to the International Finance Corporation, more than two dozen industries, including some of the most important and lucrative sectors of the economy-banking, telecommunications, highways, and railroads-were still off-limits to private local companies.

These restrictions were designed not to keep Chinese entrepreneurs from competing with foreigners but to prevent private domestic businesses from challenging China's state-owned enterprises (SOEs). Some progress has been made in reforming the bloated, inefficient SOEs during the last 20 years, but Beijing is still not willing to relinquish its control over the largest ones, such as China Telecom.

Instead, the government has ferociously protected them from competition. In the 1990s, numerous Chinese entrepreneurs tried, and failed, to circumvent the restrictions placed on their activities. Some registered their firms as nominal SOEs (all the capital came from private sources, and the companies were privately managed), only to find themselves ensnared in title disputes when financially strapped government agencies sought to seize their assets. More than a few promising businesses have been destroyed this way.

This bias against homegrown firms is widely acknowledged. A report issued in 2000 by the Chinese Academy of Social Sciences concluded that, "Because of long-standing prejudices and mistaken beliefs, private and individual enterprises have a lower political status and are discriminated against in numerous policies and regulations. The legal, policy, and market environment is unfair and inconsistent."

Foreign investors have been among the biggest beneficiaries of the constraints placed on local private businesses. One indication of the large payoff they have reaped on the back of China's phenomenal growth: In 1992, the income accruing to foreign investors with equity stakes in Chinese firms was only $5.3 billion; today it totals more than $22 billion. (This money does not necessarily leave the country; it is often reinvested in China.)

THE MOGUL IS HERO

For democratic, postcolonial India, allowing foreign investors huge profits at the expense of indigenous firms is simply unfeasible. Recall, for instance, the controversy that erupted a decade ago when the Enron Corporation made a deal with the state of Maharashtra to build a $2.9 billion power plant there. The project proceeded, but only after several years of acrimonious debate over foreign investment and its role in India's development.

While China has created obstacles for its entrepreneurs, India has been making life easier for local businesses. During the last decade, New Delhi has backed away from micromanaging the economy. True, privatization is proceeding at a glacial pace, but the government has ceded its monopoly over long-distance phone service; some tariffs have been cut; bureaucracy has been trimmed a bit; and a number of industries have been opened to private investment, including investment from abroad.

As a consequence, entrepreneurship and free enterprise are flourishing. A measure of the progress: In a recent survey of leading Asian companies by the Far Eastern Economic Review (FEER), India registered a higher average score than any other country in the region, including China (the survey polled over 2,500 executives and professionals in a dozen countries; respondents were asked to rate companies on a scale of one to seven for overall leadership performance). Indeed, only two Chinese firms had scores high enough to qualify for India's top 10 list. Tellingly, all of the Indian firms were wholly private initiatives, while most of the Chinese companies had significant state involvement.

Some of the leading Indian firms are true start-ups, notably Infosys, which topped FEER's survey. Others are offshoots of old-line companies. Sundaram Motors, for instance, a leading manufacturer of automotive components and a principal supplier to General Motors, is part of the T.V. Sundaram group, a century-old south Indian business group.

Not only is entrepreneurship thriving in India; entrepreneurs there have become folk heroes. Nehru would surely be appalled at the adulation the Indian public now showers on captains of industry. For instance, Narayana Murthy, the 56-year-old founder of Infosys, is often compared to Microsoft's Bill Gates and has become a revered figure.

These success stories never would have happened if India lacked the infrastructure needed to support Murthy and other would-be moguls. But democracy, a tradition of entrepreneurship, and a decent legal system have given India the underpinnings necessary for free enterprise to flourish. Although India's courts are notoriously inefficient, they at least comprise a functioning independent judiciary. Property rights are not fully secure, but the protection of private ownership is certainly far stronger than in China. The rule of law, a legacy of British rule, generally prevails.

These traditions and institutions have proved an excellent springboard for the emergence and evolution of India's capital markets. Distortions are still commonplace, but the stock and bond markets generally allow firms with solid prospects and reputations to obtain the capital they need to grow. In a World Bank study published last year, only 52 percent of the Indian firms surveyed reported problems obtaining capital, versus 80 percent of the Chinese companies polled. As a result, the Indian firms relied much less on internally generated finances: Only 27 percent of their funding came through operating profits, versus 57 percent for the Chinese firms.

Corporate governance has improved dramatically, thanks in no small part to Murthy, who has made Infosys a paragon of honest accounting and an example for other firms. In a survey of 25 emerging market economies conducted in 2000 by Credit Lyonnais Securities Asia, India ranked sixth in corporate governance, China 19th. The advent of an investor class, coupled with the fact that capital providers, such as development banks, are themselves increasingly subject to market forces, has only bolstered the efficiency and credibility of India's markets. Apart from providing the regulatory framework, the Indian government has taken a back seat to the private sector.

In China, by contrast, bureaucrats remain the gatekeepers, tightly controlling capital allocation and severely restricting the ability of private companies to obtain stock market listings and access the money they need to grow. Indeed, Beijing has used the financial markets mainly as a way of keeping the soes afloat. These policies have produced enormous distortions while preventing China's markets from gaining depth and maturity. (It is widely claimed that China's stock markets have a total capitalization in excess of $400 billion, but factoring out non-tradeable shares owned by the government or by government-owned companies reduces the valuation to just around $150 billion.) Compounding the problem are poor corporate governance and the absence of an independent judiciary.

DOLLARS AND DIASPORAS

If India has so clearly surpassed China at the grass-roots level, why isn't India's superiority reflected in the numbers? Why is the gap in GDP and other benchmarks still so wide? It is worth recalling that India's economic reforms only began in earnest in 1991, more than a decade after China began liberalizing. In addition to the late start, India has had to make do with a national savings rate half that of China's and 90 percent less FDI. Moreover, India is a sprawling, messy democracy riven by ethnic and religious tensions, and it has also had a longstanding, volatile dispute with Pakistan over Kashmir. China, on the other hand, has enjoyed two decades of relative tranquility; apart from Tiananmen Square, it has been able to focus almost exclusively on economic development.

That India's annual growth rate is only around 20 percent lower than China's is, then, a remarkable achievement. And, of course, whether the data for China are accurate is an open question. The speed with which India is catching up is due to its own efficient deployment of capital and China's inefficiency, symbolized by all the money that has been frittered away on SOEs. And China's misallocation of resources is likely to become a big drag on the economy in the years ahead.

In the early 1990s, when China was registering double-digit growth rates, Beijing invested massively in the state sector. Most of the investments were not commercially viable, leaving the banking sector with a huge number of nonperforming loans-possibly totaling as much as 50 percent of bank assets. At some point, the capitalization costs of these loans will have to be absorbed, either through write-downs (which means depositors bear the cost) or recapitalization of the banks by the government, which diverts money from other, more productive uses. This could well limit China's future growth trajectory.

India's banks may not be models of financial probity, but they have not made mistakes on nearly the same scale. According to a recent study by the management consulting firm Ernst & Young, about 15 percent of banking assets in India were nonperforming as of 2001. India's economy is thus anchored on more solid footing.

The real issue, of course, isn't where China and India are today but where they will be tomorrow. The answer will be determined in large measure by how well both countries utilize their resources, and on this score, India is doing a superior job. Is it pursuing a better road to development than China? We won't know the answer for many years. However, some evidence indicates that India's ground-up approach may indeed be wiser-and the evidence, ironically, comes from within China itself.

Consider the contrasting strategies of Jiangsu and Zhejiang, two coastal provinces that were at similar levels of economic development when China's reforms began. Jiangsu has relied largely on FDI to fuel its growth. Zhejiang, by contrast, has placed heavier emphasis on indigenous entrepreneurs and organic development. During the last two decades, Zhejiang's economy has grown at an annual rate of about 1 percent faster than Jiangsu's. Twenty years ago, Zhejiang was the poorer of the two provinces; now it is unquestionably more prosperous. India may soon have the best of both worlds: It looks poised to reap significantly more FDI in the coming years than it has attracted to date. After decades of keeping the Indian diaspora at arm's length, New Delhi is now embracing it. In some circles, it used to be jokingly said that nri, an acronym applied to members of the diaspora, stood for "not required Indians." Now, the term is back to meaning just "nonresident Indian." The change in attitude was officially signaled earlier this year when the government held a conference on the diaspora that a number of prominent nris attended.

China's success in attracting FDI is partly a historical accident-it has a wealthy diaspora. During the 1990s, more than half of China's FDI came from overseas Chinese sources. The money appears to have had at least one unintended consequence: The billions of dollars that came from Hong Kong, Macao, and Taiwan may have inadvertently helped Beijing postpone politically difficult internal reforms. For instance, because foreign investors were acquiring assets from loss-making soes, the government was able to drag its feet on privatization.

Until now, the Indian diaspora has accounted for less than 10 percent of the foreign money flowing to India. With the welcome mat now laid out, direct investment from nonresident Indians is likely to increase. And while the Indian diaspora may not be able to match the Chinese diaspora as "hard" capital goes, Indians abroad have substantially more intellectual capital to contribute, which could prove even more valuable.

The Indian diaspora has famously distinguished itself in knowledge-based industries, nowhere more so than in Silicon Valley. Now, India's brightening prospects, as well as the changing attitude vis-à-vis those who have gone abroad, are luring many nonresident Indian engineers and scientists home and are enticing many expatriate business people to open their wallets. With the help of its diaspora, China has won the race to be the world's factory. With the help of its diaspora, India could become the world's technology lab.

China and India have pursued radically different development strategies. India is not outperforming China overall, but it is doing better in certain key areas. That success may enable it to catch up with and perhaps even overtake China. Should that prove to be the case, it will not only demonstrate the importance of homegrown entrepreneurship to long-term economic development; it will also show the limits of the FDI-dependent approach China is pursuing.

Yasheng Huang is an associate professor at the Sloan School of Management at the Massachusetts Institute of Technology. Tarun Khanna is a professor at Harvard Business School.

Excuse me?! The USA has the best standards of living in the world. Better than EU or Japan or Canada or any othe industrial nation. For sure we have better standards of living than where you live in Germany.

I wouldnt say the same goes for China. The Chinese middle class is indeed very large and growing at an enormous rate, not only in wealth but population, the amount of capital that is growing in that country is having a trickle down effect creating a richer poor group...almost like America but not quite like America...yet.

Of course they do have 750 million in extreme poverty so it will take something like 40 years of continuos 10% growth to cover them, or something in that area.

Yikes....I think, or at least hope, that you didnt mean to say that.

Americas poverty rate is amongst the lowest in the free world. The extreme poverty rate is almost non-existant, or the standards are such that what we call extreme-poverty others may call middle class(China for example).

How large is the Chinese Middle class and how do their standards of livings compare to those in the United States? Do you know that in all of China there is less than 15 million cars? The problem with the Westerners is that they see few square miles in Shang Hi and Beijing where the vast majority of the wealth is concentrated and then you go outside these small zones and you see shocking poverty. The 750 million Chinese who live in extreme poverty make less than 1 dollar a day. In China they classify every person who makes above 1 dollar a day as above poverty line! So in addition to the 750 million extremely poor people that you mentioned there are several hundred million who are extremely poor but because they make more than a dollar a day the Chinese government classify “technically” them as above poverty line.

Americas poverty rate is amongst the lowest in the free world. The extreme poverty rate is almost non-existant, or the standards are such that what we call extreme-poverty others may call middle class(China for example).

I think our classification for poor individual is someone who make less than 12,000 dollars a year and I think a poor family when they make less than 19,000 a year.

Now those incomes of what we call poor in the US are higher than the so called "upper middle class" in the vast majority of the world.

Interesting. Many thanks.

Norway has the best standards of life as a nation.

And I wasn't talking about average but about differences - there are far more poor people in the US then there are in 'my area' (western germany in the area of the netherlands and belgium) but certainly the average income and the average life style in "the US" is much higher.

There are german regions in the east that you can only compare to africa though. Certainly the same is true for some Detroit Areas.

Norway has the best standards of life as a nation.

Not at all. Norway average individual income is similar to that of average individual income in the US around $ 40,000 and both nations are ranked second in the world in average individual income after the tiny little state of Luxemburg. However, in Norway and in Luxemburg for that matter, the taxes are higher than in the US and almost everything is more expansive than the US, so the purchasing power in the US is higher and hence this gives the US the “best standards of living” in the world.

PS: There are 4.6 million people who live in Norway and another 465000 people who live in Luxemburg, in the US there are 7.5 million individuals who are "Millionaires". :)