How India Can Match China and Why it Matters

SMITH BRAIN TRUST -- If India models China, it can similarly affect the global economy. India aims to increase its manufacturing contribution to its GDP from 17 percent to 25 percent within the next decade. The initiative, dubbed “Make India,” is the “only way India can create highly productive jobs for the 10 million-plus youngsters who join the country's labor force each year and the much larger number of farmers who need to move from working the soil to working on the factory floor,” says Anil K. Gupta, the Michael D. Dingman Chair in Strategy and Entrepreneurship at the University of Maryland's Robert H. Smith School of Business, in a recent CNBC op-ed coauthored by Haiyan Wang, '95.

By comparison, China’s manufacturing share grew rapidly from 2000 to 2013, from 7.1 percent to 24.9 percent. China subsequently surpassed the U.S. as the world’s largest economy, translating into geopolitical power and affecting business. Fortune Magazine recently elaborated: “Take, for instance, the global reaction to China launching the Asian Infrastructure Investment Bank with the support of staunch U.S. allies like Germany and the United Kingdom. Though these countries might be wary of legitimizing China’s economic power, they can’t afford to forgo membership in a bank that might give companies in their home country a chance to cash in on large development projects abroad.”

Gupta and Wang say India can model China through four strategies:

Building infrastructure ahead of time: “Over the last 35 years, China has been the world's most aggressive investor in domestic infrastructure -– roads, rail, waterways, power, ports, airports and telecom. Investing ahead of time eliminates supply-side constraints, boosting the availability of most factors of production while reducing their cost," the authors write. "Since India is also playing catch-up, it needs to start spending on infrastructure at 9 percent to 10 percent of GDP as quickly as possible."

Letting selected industries and regions take the lead: China's lead sectors have encompassed "export-oriented consumer goods (such as textiles, shoes and toys) and infrastructure and real estate-related industries (such as steel, cement, glass, construction equipment and ship building),” the authors write. And the east coast has taken the lead -– especially from Shanghai to Guangdong -- "historically home to some of the most entrepreneurial people in China." For India, "pioneering industries that can start boosting manufacturing's contribution to GDP include infrastructure-related industries, alternative energy (especially solar), automotive, consumer electronics and defense. Among large economies, India today is the world's fastest growing market for solar panels, cars as well as smartphones and the world's largest importer of defense equipment.”

Sharp reduction in barriers to inbound foreign direct investment: Starting in the early 1990s, China has dismantled such barriers by lowering policy-driven barriers and creating several special economic zones. The latter has provided rapid access to needed licenses and permits, easy availability of ancillary services, as well as many tax incentives. “Multinational enterprises bring valuable knowhow as well as links to global supply chains and markets,” the authors write. India is off to a promising start “by increasing the permitted level of foreign ownership in the defense and insurance sectors to 49 percent and in the rail sector to 100 percent.”

Investment in Skill Development: Until recent labor shortages, China's manufacturing sector has benefited from a growing pool of young workers -– 6 million to 7 million vocationally trained graduates, or 45 percent of all graduates, each year since 2001. China emulated Germany's dual-track training system to spur the growth. In contrast, less than 7 percent of India's youth receive vocational training. 

“The World Bank estimates that India's economy is currently growing at a faster pace than China's and forecasts it is likely to remain the world's fastest growing large economy for the foreseeable future,” Gupta and Wang write. “For these projections to materialize, it is critical that (Prime Minister Narendra) Modi succeed in realizing his goals for the ‘Make in India’ initiative.”

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