In the late 1970s the communist government in China realised that the State Managed Enterprises, which were dominant in all sectors, were facing a severe shortage of funds. This prompted the economic reforms in China in the 1980's. The government had no intention of giving away its ownership in these sectors. Hence even though the public sector companies were not performing well, private ownership was fiercely opposed. The reforms enabled the inflow of foreign investment in China in the form of FDI and FII. This brought in the much needed capital in the country and China made sure that the capital was invested in the SMEs to sustain their growth. It gave many incentives to the foreign investors and lured them to making huge investments in China. Foreign enterprises were allowed to set up their manufacturing plants in China thus providing employment opportunities to the citizens. These reforms have ensured a high growth rate for China. The foreign investors have confidence in the economy and also in the governments resolve in continuing with the reforms.
In India the government was not against capitalism but against the flaws of capitalism. The inflow of the foreign money was opposed not to protect its public sector companies but to protect the small scale Indian industries that provided occupation to many Indians. The government never tried to take control of all the sectors and private companies always found a way to work in sectors where the PSU's had no reach. The economic reforms were introduced in India in the year 1991 due to the lack of funds with the government. Unlike the reforms in China, the Indian government reduced its control on PSUs to just three sectors (Defense, Nuclear power and Railways) and encouraged private ownership in all the other sectors. It relinquished the price control to the open markets and regulated the capital markets to ensure transparency in the use of capital. It reduced bureaucratic procedures and made life easy for business. But it did not open the flood gates for FDI as China did. The FDI and FII were allowed to invest in the country but in limited capacity.
Due to these policies the home grown entrepreneurs and industries were encouraged and the government went a step further by indirectly providing limited protection against the foreign competition. This allowed the Indian industries in high technology sectors (Infosys and Biocon) to flourish and compete against their counterparts in Europe and America. As against this, the Chinese government continued to be liberal with the foreign private ownership while at the same time creating legal and regulatory barriers for private ownership at home so that they could not pose a challenge to the SOE. It used the foreign capital to obtain economies of scale in manufacturing this making it the world’s factory.
Can India surpass China? India has a long way to go before it can really challenge China. Problems like excessive bureaucracy and slow implementation of policies need to be solved by making the political class more responsible. India has many problems other than economic growth like ethnic and religious tensions, a dispute with Pakistan over Kashmir, its internal political instability, etc. There are few incentives for FDI and FII and the poor labor policies, infrastructure and slow judiciary are a concern for the investors. The manufacturing sector and agriculture need a boost so that the long term growth of the country can be ensured. China has its own problems like the control of the provincial and local governments over vast majority of capital-hungry enterprises which creates an unsolvable collusion between regulators and the state's ownership interests. China doesn’t have an independent judiciary. Also the banking sector in china is extremely week as the banks are technically insolvable. This has led to a lack of home capital and excessive dependence on FDI.
The capital markets in India have flourished making it possible for the Indian firms with solid growth and good prospects to raise money as and when needed. The Indian firms have only a small percentage of funding coming from the operating profits while the rest comes from the markets. The banks in India have not done the same mistakes as the Chinese banks and so the banking system is robust. However it needs to have more depth to satiate the need of the growing industry demands. With the government making regulations less stringent for the foreign investors and the NRI to invest in India and with steady economic reforms and the much needed political will, India seems poised to surpass China economically and politically to become the next superpower.
-Mayank
In India the government was not against capitalism but against the flaws of capitalism. The inflow of the foreign money was opposed not to protect its public sector companies but to protect the small scale Indian industries that provided occupation to many Indians. The government never tried to take control of all the sectors and private companies always found a way to work in sectors where the PSU's had no reach. The economic reforms were introduced in India in the year 1991 due to the lack of funds with the government. Unlike the reforms in China, the Indian government reduced its control on PSUs to just three sectors (Defense, Nuclear power and Railways) and encouraged private ownership in all the other sectors. It relinquished the price control to the open markets and regulated the capital markets to ensure transparency in the use of capital. It reduced bureaucratic procedures and made life easy for business. But it did not open the flood gates for FDI as China did. The FDI and FII were allowed to invest in the country but in limited capacity.
Due to these policies the home grown entrepreneurs and industries were encouraged and the government went a step further by indirectly providing limited protection against the foreign competition. This allowed the Indian industries in high technology sectors (Infosys and Biocon) to flourish and compete against their counterparts in Europe and America. As against this, the Chinese government continued to be liberal with the foreign private ownership while at the same time creating legal and regulatory barriers for private ownership at home so that they could not pose a challenge to the SOE. It used the foreign capital to obtain economies of scale in manufacturing this making it the world’s factory.
Can India surpass China? India has a long way to go before it can really challenge China. Problems like excessive bureaucracy and slow implementation of policies need to be solved by making the political class more responsible. India has many problems other than economic growth like ethnic and religious tensions, a dispute with Pakistan over Kashmir, its internal political instability, etc. There are few incentives for FDI and FII and the poor labor policies, infrastructure and slow judiciary are a concern for the investors. The manufacturing sector and agriculture need a boost so that the long term growth of the country can be ensured. China has its own problems like the control of the provincial and local governments over vast majority of capital-hungry enterprises which creates an unsolvable collusion between regulators and the state's ownership interests. China doesn’t have an independent judiciary. Also the banking sector in china is extremely week as the banks are technically insolvable. This has led to a lack of home capital and excessive dependence on FDI.
The capital markets in India have flourished making it possible for the Indian firms with solid growth and good prospects to raise money as and when needed. The Indian firms have only a small percentage of funding coming from the operating profits while the rest comes from the markets. The banks in India have not done the same mistakes as the Chinese banks and so the banking system is robust. However it needs to have more depth to satiate the need of the growing industry demands. With the government making regulations less stringent for the foreign investors and the NRI to invest in India and with steady economic reforms and the much needed political will, India seems poised to surpass China economically and politically to become the next superpower.
-Mayank
