The global economic pundits are univocal that China’s growth will plummet from high speed to medium speed in five to ten years. China herself lowered its growth at 7 percent in the coming three to five years to ease pressure on environment. India also languishes for lower growth of 6-7 percent. But that lower growth is ephemeral. It claims that its lower growth will persist only for one to two years. It hopes to rebound to higher growth trajectory in the longer term.
There are several factors which attribute to this ambivalence between the two countries’ growth. Among them, the important factors for India to edge out China are seven.
High labour costs due to rise in wages
Minimum wages sprung in many provinces in China. During 2010-2012, they increased by over 30 to 35 percent.
In Beijing the minimum monthly wages jumped from US$ 152 to 200, in Shenzhen it increased from US $174 to 238, in Guangzhou, the leap was from US$ 174 to 206, and in Shanghai, the increase was from US$ 177 to 230.
Salaries of skilled management positions are near to developed countries. Salary of an Engineer Supervisor varies in between US$ 25,000 to 40,000 a year, for a Marketing Director from US$ 100,000 to 130,000 a year and of a Regional Sales Manager from US$ 67,000 to 100,000 a year.
In contrast, in India the minimum wages increased by 10-15 percent. The minimum wages for semi-skilled workers in automobile sector in Haryana and Maharashtra hover in between US$ 120 to 150 per month.
Below a comparative analysis of wage structures in main industrial towns of two countries reveals India’s edge over China.
Monthly Wages ( 2011) (US Dollar)
Source: Survey of Investment Related Cost, JETRO
It is likely that Chinese wages will further escalate in US Dollar terms with Chinese currency Yuan being appreciated further by US pressure to delink it from US Dollar. The Chinese Yuan has appreciated by about 8 percent since the Chinese government partially succumbed to USA pressure and allowed to begin rising again in 2010. The pundits say Chinese Yuan is 40 percent devalued against US Dollar. It seems it will be the reminiscence of appreciation of Japanese Yen after Plaza Agreement in late eighties and China may face similar fate like Japan which is reeling under a prolonged recession. Japan lost its lead for export from its own land and was forced to invest in low cost countries to regain its export power. The consequence: Japan left its own country into a state of “hollow investment”. Similar situation in China is not far from speculation in near future.
Weak base to spur consumption oriented growth
Chinese economy turned vulnerable with excessive dependence on export and investment and low domestic consumption. In post Lehman crisis period, the downturn growth in Europe and USA led to a cascading impact on Chinese exports – the base for Chinese miracle growth in the economy. Apprehending loss of hope for revival in these economies in the near future, China contemplated to shift to consumption base model growth in 12 five Year Plan. But, it seems it can be no more than a leap service, according to Prof. Minxin Pei.
To stimulate domestic consumption, the Chinese government approved a package of US$ 4 trillion during 2009-12 and infusion of US $12 billion in Chinese banks to facilitate liberal credit to various sectors of the economy. Are these stimulants enough to overcome the vulnerability of Chinese economic factors which deter to generate more domestic demand? Infusion of cash in the economy can boost domestic demand only for short period.
The weak institutional set up dampens the hope for the success of consumption base growth, according to Prof. Minxin Pei. Excessive dependence on export and investment caused macroeconomic imbalances in the domestic economy. By doing so, it neglected domestic demand growth by splurging less in welfare activities for the middle class society. Being a low cost production base and middle income group country, China lacks the purchasing power to consume all the goods that it produces.
Institutional weakness to do business in domestic market
Over dependence on export reflects the hardship of doing business in domestic market. In other words, multiple complexities for doing business in domestic market compelled the entrepreneurs to export. Payment delay is one such important barrier which looms large in the domestic market. Customers and local governments are asking for 6-9 months payment terms, rather than 2-3 months earlier. Official corruption, widespread counterfeits, stifling regulatory measures, weak payment discipline , poor logistic system and the distribution network are enhancing the transaction cost and make it difficult for the entrepreneurs to thrive in the domestic market.
Against these domestic business hassles, the private firms and foreign entrepreneurs in China, who are exporting to multinationals and foreign firms, enjoy low transaction cost and go with sound sleep without worrying for their payment in time. This can avoid their mental tensions and encourage them more to invest more in export led business operation.
In order to overcome the high transaction cost , the Chinese Government has to offer a prudent legal system, counterfeit free market where the Chinese brands can survive and a better logistic and distribution system. But, China cannot create such friendly business environment in the domestic market quickly.
Drying up of working –age class
The China’s workforce is aging in a few years of time. The “Economist” survey revealed an the alarming situation of depletion of Chinese work-age population. Chinese dependency ratio on working – age class population (between 15 -64 age) has declined to 30 percent. With the one-child policy launched in 1979, only 5 million Chinese will enter in working age group of 34-54 in this decade, according to Mt Ruchir Sharma of Morgan Stanley.
In contrast, demographically India has more advantage than China. India pitched for higher score of 57 percent dependency on working age population. According to UN estimates, India will add 136 million people in the global population by 2020 and will account for 26 percent of the global population. In comparison, China will add only 23 million population. Thus, in demography for working class, India will edge China in next 10 years.
Weak SMEs after the global downturn
SMEs played a significant role in letting China making a strong footage in the global economy. It accounts for 58.5 percent of GDP and 68 percent of exports. With the US economy slipping into recession and EU being swamped by stagflation, SMEs plunged into a fragile health. Every fourth of SMEs is sinking into losses after the global downturn, according to China’s Industry and Information Ministry. SME is a significant generator of employment in China. The weak SMEs impacted seriously the employment opportunities in China. The only hope lies for their survival is the growth in domestic consumption. Hopes belie with the weak institutional set up and the weak health of SMEs which impede the growth of domestic demand.
Predominance of knowledge – intensive industry
India edges China in knowledge industry. This is an area where India scores one-up over China. While the global economy is transforming more into knowledge – intensive industry, more advantages accrue to India in the longer perspective for attractive foreign investment.
Democracy outpaces Communism in doing business in global environment
India has emerged a global linked developing economy. Even though, domestic investment and consumption predominate in driving India’s growth, foreign investment is also playing a major role in spurring India’s growth trajectory since mid- twenties. Democracy, which claims for a better legal environment and protection for doing business, less opportunities for counterfeiting the patent rights and offers better opportunities for free logistic and distribution, offer a better political system for doing business in a country.
In summing up, India has established a strong footage for doing fair business in a truly democratic society. Its large pool of knowledge base manpower and the vast domestic market should attract the foreign investor to have second thoughts in choosing between the two countries for investment.
(S. Majumder is the Adviser, Japan External Trade Organization, New Delhi and he can be contacted at [email protected] The views expressed are author’s own)
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