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India and China as Exporters: not in the same league
With India now growing between 7% and 8%, a central question on the minds of many is whether it is now poised to match the accomplishments of China. The mood is generally optimistic
In view of the impending demographic transition that will substantially raise the proportion of the young in India's population in the coming years, entrepreneurial talent and the forces of competition already unleashed by the liberalisation to-date, some see the shift in India's growth rate to the Chinese level inevitable. n view of the impending demographic transition that will substantially raise the proportion of the young in India's population in the coming years, entrepreneurial talent and the forces of competition already unleashed by the liberalisation to-date, some see the shift in India's growth rate to the Chinese level inevitable.
More cautious observers say that catch-up in the growth rate with China is certainly possible provided India undertakes major labour-market reforms, trims overall fiscal deficit down to the 4-5% range, and substantially improves infrastructure, especially power.
Few observers rule out the near-double-digit growth altogether.Yet, in the important external sector, prospects that India's performance will come anywhere near China's are dim. Lest this gives the export pessimists a reason to celebrate, let me state clearly that my prediction is not derived from poor performance of the Indian external sector.
On the contrary, external trade and foreign investment in India have responded handsomely to changed incentives. Exports in current dollars have grown at double-digit rates since 1991 and foreign investment (direct plus portfolio) has gone up from less than $200 million in 1990-91 to more than $15 billion in 2004-05. What is also true, however, is that the Chinese external sector has grown manifold faster over the last two decades.
For starters, consider first the following fact: During each of 2002, 2003 and 2004, the latest three years for which I have comparable data, the increase in China's merchandise exports was larger than India's total exports.
Thus, for example, China's exports in 2004 increased by $155 billion over 2003. India's total merchandise exports in 2004 were just $80 billion. Alternatively, the share of India in the world exports of goods and services rose from 0.5% to 0.9% between 1990 and 2003. China's share over the same period grew from 1.1% to 5.2%.
Dynamism of the Chinese export sector is reflected in not just the growth of total exports but their structure as well. We are used to thinking of textiles, apparel, footwear and toys as the major exports of China. Yet, with the exception of apparel, these products are no longer among its leading exports today.
The two-digit Standard International Trade Classification (SITC) divides export products into more than 90 categories. Among these, three of the top four exports of China - office and automatic data processing machines; telecommunications, and sound recording and reproducing apparatus and equipment; and electrical machinery, apparatus and appliances - were virtually absent from the list 20 years ago.
And in 2004, in the first of these three categories alone, China posted $87 billion worth of exports. Recall that the total merchandise exports of India that year amounted to less - $80 billion.
The accompanying chart offers a graphical representation of the dramatic difference between the export performances of India and China. It plots the annual exports of the top two exports of each from 1984-'04. The products are selected on the basis of the average share of each product in total exports during 2001-04.
The rapidity with which the Chinese exports have grown is simply breathtaking. Until mid-1990s, each of the current top two Chinese products accounted for less than $10 billion in exports. By 2004, exports of the top product had reached $87 billion and of the next one to approximately $70 billion. In contrast, the top export of India, consisting of mainly gems and jewellery, barely crossed the $10-billion mark in 2004. We are used to thinking of software exports as our star performer. But even this product registered only $17 billion worth of exports in 2004-05.
Precise reasons for the exceptional performance of the Chinese exports relative to that of India remain to be explored. Tentatively, I would hypothesise that the differences in the degree of openness are unlikely to be a major part of the story. Today, with the top tariff rate down to 12.5%,
Indian industrial sector is not vastly more protected than its Chinese counterpart, which enjoys an average tariff of 9%. The foreign investment regime and services sector are on balance more open in India than China. Only agriculture is substantially more protected in India.
The key factor behind the differential performance is likely to be the difference in the domestic policies that have allowed China to specialise in products consistent with its factor endowments but prevented India from doing the same. In the 1990s, products that expanded rapidly in exports in China - apparel, toys, footwear and sports goods - were largely unskilled-labour intensive. As skill and capital accumulation proceeded, China has now moved into semi-skilled-labour intensive and somewhat more capital-intensive products. Except in the early 1980s, the Chinese exports have shown remarkable coherence in terms of their factor intensities.
In contrast, Indian exports appear essentially devoid of coherence in their factor content. While unskilled-labour-intensive apparel accounts for more than 10%, other major Indian exports are either capital intensive (petroleum and petro-products; iron and steel and textiles) or skilled-labour intensive (software and gems and jewellery). ndiscriminate deployment of import substitution policies to achieve ever-rising diversification of the production structure until as late as late '80s still seems to drive the somewhat idiosyncratic pattern of India's exports. Indeed, with large firms even now effectively confined principally to the capital-intensive manufactures or skilled-labour-intensive services, India's exports have yet to show the dynamism of China.
Will India pick-up the lion's share of the unskilled-labour-intensive exports that China is quietly but surely poised to exit? The answer depends on what domestic reform India is able to do to allow large-scale firms a fair chance in the manufacturing of these products.
Economic Times May 31 2006