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Can the Chinese Business Model be an effective solution to the ongoing economic slowdown in India?

This year’s economic survey came at a time when the economy was facing its worst slowdown in recent years with the economic growth slipping to 4.5% and the unemployment rate at a 45-year high.

The Survey suggests that India can look to emulate a typical “Chinese Business model”.

Well, on the face of it, the Chinese business model is not exceptional and uncommon. What describes the Chinese Business Model best are three keywords: ‘Labor-intensive’, ‘export trajectory’ and ‘unparalleled job opportunities’. In layman terms, it is simply the effective and best utilization of the available resources- no matter how highly disproportionate or abundant they are! Although what China did is not something mind-boggling, how it did that is something every country should learn, more specifically developing countries like India.

According to an interesting analysis by Forbes, China and India had roughly the same GDP per capita in 1985: USD 293. As of now, the Indian GDP per capita is just short of $2,000. However, over that same thirty-five-year time period, China’s economy has boomed. Its economy is now over four times as that of India’s GDP per capita of $18,450.

We do need to keep in mind that China is still the most populous country in the world.

With a mammoth population of 1.42 billion, the unemployment rate in 2019 stands at a meager 3.8% as compared to India’s whopping 7.7%.

How did this happen?

1. Labor-Intensive Economy

China has always focused on industries that were more labor-intensive, leveraging on its pool of cheap labor. China has specialized in labor-intensive dynamics and strategically created job opportunities by enabling assembling operations at a massive scale in network products – products where production occurs across Global Value Chains (GVCs) operated by multinational corporations.

Industries like textile, light engineering, and electronics receive higher investment. Furthermore, it increased exports predominantly to markets in rich countries.

This led to the creation of 7 crore jobs in China in just five years. In addition to curbing the problem of unemployment, these major strokes also helped China to become a trade superpower.

2. Focus on human development

Subsequently, and undoubtedly the most imperative thing that China did well right from the start was its focus on human development. China’s emphasis on education and healthcare facilities has helped the country perform well in human development. On the other hand, India still doesn’t fare well at the Human Development Index.

3. High Rate of Urbanisation

Another factor that elucidates the disparity between China and India is the substantial urbanization that China has undergone since 1969. In that year, India’s urbanization rate of 19.5% was higher than that of China. Currently, about 58% of China’s population lives in cities and only 37% of India’s population does. Now, according to economists, a factory worker is deemed more “productive” than a farmer, which substantiates to the fact that the economic indicators accolade an urbanized population more than a rural one. This is yet another aspect that explains China’s growth compared to India’s.

There are stark differences between how both the countries have reformed.

Education and health have always been a domain of concern for India. The prosperity of an economy cannot reach its true potential unless and until it focuses on the development of its human resource.

Moreover, India has hardly pushed for labor-intensive manufacturing growth, the sector never picked up and the country has become a services-led economy.

On the other hand, the performance of the Chinese economy in just the last four decades is remarkable and holds crucial lessons for India.

Now coming to the Chinese Business model as suggested by our Chief Economic Advisor, Krishnamurthy Subramanian as part of the Economic Survey.

The question arises – Can India replicate the same model to curb its worst employment situation? Will it face any problem adopting this model?

Despite many similarities between the two countries, there are some fundamental and undeniably major differences which set apart the two of them:

1. The form of government.

India is a democracy and China is not. India has to deal with the disarray of democratic decision making at the federal and regional levels. This makes infrastructure spending quite difficult. On the other hand, in China the Party governs with few impairments. If it decides it wants to undertake any infrastructure project, it can do so. Even if it means the displacement of people, destruction of any monument, submerging of towns or anything for that matter. There is no way that the Indian government could attempt something like that and though not completely, it works well for us. Because for a democratic country like ours, GDP is not the only factor determining the success rate.

2. Economic Policies

The most common principle countries use to uphold themselves against suffering severe effects as a consequence of global economic pressure is through trade protectionism.

3. Trade Protectionism in China

China’s economy follows a basic protectionism policy which is a proponent of the argument that new industries within a domestic market need help and support to allow them to grow, otherwise, mature foreign goods will saturate the domestic market before it even has a chance to develop. China has selectively liberalized its economy — taking a piecemeal approach — opening only those sectors to foreign investors that were considered critical to the growth and development of its economy. This protectionism has helped China to promote entrepreneurship and create employment for domestic workers.

4. Liberalisation in India

India has moved far from this protectionism policy and its economy works on the principle of liberalization. In fact, the Modi government is taking steps to increase growth through further economic liberalization.

Nonetheless, there are several initiatives like “Make in India” which have aggressively courted foreign direct investment while seeking to boost domestic manufacturing. However, India still ranks low on the “ease of doing business index”. Labour laws are still not favorable to the Make in India campaign. This is one of the universally noted drawbacks of manufacturing and investing in India.

5. The Special Economic Zones (SEZs)

Special economic zones are regions where foreign and domestic investment is done without the authorization of the central government. These SEZs work as the economic powerhouse of China by giving a boost to foreign investment. 

The various aspects associated with SEZs have some major differences in both countries.

 Size: As opposed to China’s five mega SEZs, the largest being Shenzhen built over 49,500 hectares; India opened its doors to only private players and allowed sector-specific SEZs to develop. Though abundant, they are barely 10-20 hectares in size. Huge industries cannot fit in such a small area. Also, the economies of scale which have worked so well for China by reducing costs to a fairly large extent, do not yield the same effect in India’s SEZs.

 Location: In China, SEZs are strategically located near the ports or the borders making transport even cheaper. However, in India, the selection of sites for SEZs is not apt and the sites are selected based on real estate speculation rather than the economic potential of a region which is clearly the failure of the local politicians to go beyond their personal interest to increase the welfare of the economy.

Hence, instead of becoming powerhouses of our economy, SEZs have become centers of scams and corruption. 

Tax Benefits: China gives enormous tax benefits to the businesses operating out of the SEZs. One of the most famous tax benefits is the elimination of corporate tax under losses which means if you fail to generate a profit, you do not have to pay taxes. Once a company does start to generate a profit, then there are reduced tax rates until 5 years from the start of profitability. Such tax benefits and flexibility in labor laws play a pivotal role in attracting foreign investors, which are absent in India. To make up for it, India came up with longer and steeper tax holidays than China, which again is a debatable issue because of the huge fiscal loss arising from it.

India is facing yet another issue with respect to SEZs. The number of operational SEZs is almost half of what has been formally approved. The Government of India has given formal approval for 417 SEZs, of which the number of operational SEZs is merely 238.

In other words, the same policy of SEZ has shown disparaged results in both economies.

In addition to the above factors, aiming bombastically at reviving ‘animal spirits’ in the economy when businesses have no appetite for fresh investments because utilization of existing capacities is not adequate, it might not be the best move by the government at this moment.

The only way we can do to assess the best move for any economic leap for India right now is to take everything with a pinch of salt.

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