The most common cliché used when talking about China and India to use the analogy of the tortoise and the hare. They are the two largest countries in the world by a comfortable 900 million people each, share 4,000km of border, and took centre stage when the BRIC(S) concept was founded in 2001. India represents the tortoise, shackled by political inefficiency and colonial-era bureaucracy but steady in its progress, whilst China represents the hare; bounding ahead with a series of targeted five-year-plan style advances, but at risk from inflexible politics and instability. Though, as predicted, India currently boasts the fastest-growing services sector in world, she still lags far behind her neighbour, with barely a fifth of Chinese GDP. The hare appears comfortably in the lead.
Unfortunately, this is due to a myriad of substantial and multi-faceted problems that face the Indian economy, as a mixture of corruption and over-regulation have stunted fiscal progress. The current governor of the Reserve Bank of India, has been on record saying that recent corruption could have cost the Indian government as much as 2 trillion rupees. A series of labour laws and bizarre corporate restrictions is blamed for holding back local businesses and discouraging foreign investment. Many of these archaic regulations date back to the early 20th century, when all ‘big business’ was still under close British control, leading some firms to deliberately remain small in order to avoid the bureaucracy. For example, any business with more than 100 employees needs government permission before it is allowed to scale back, despite only 15% of Indian workers having any kind of job protection. The result is labourers who work in small companies under poor conditions, but who are extremely expensive to lay off.
However, no one can deny that India has real economic potential. It has a young, ambitious population (with half its residents under 25), which is yet to be tapped into by investors either at home or abroad. There is also huge scope for improvement – ‘catch up growth’ can happen extremely quickly (see places like Dubai and Singapore). India is so poor in so many areas that any concentrated development could bring rapid change. Happily, many projections suggest that India is now much better placed than any other BRICS economy for a successful next ten years.
The recent slash in oil prices has worked in the favour of a nation that imports four-fifths of its oil, and the government budget unveiled in February was met by approving nods from businessmen. The new reforms, mostly aimed removing obstacles that constrict business owners, have helped India’s growth rates to stabilise at 7.5%, above that of China for the first time in decades. Another of India’s strengths is its democracy – when Narendra Modi’s BJP government was elected last year, it came off the back of a long discussion about India’s stuttering economy and the promise of change. When the Chinese government recently suffered the Shanghai stock market crash now known as ‘Black Monday’, its response was instead to arrest journalists.
There is still much to be done – Prime Minister Modi must follow through on his promises to end the corruption and cronyism in the Indian civil service, and regular power cuts still cost some firms up to five working hours a week – but there can be no doubt that things are looking up. With the hare tottering after China’s Black Monday revealed some institutional instability, and the tortoise plodding with increasing confidence, India has cause for cautious optimism.