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India can't grow as fast as China, Japan

September 22, 2014 10:29 IST

Specific growth areas for India are liable to be different from areas in which Japan, China have scored, says Devangshu Datta.

Image: Berkshire Hathaway chairman and CEO Warren Buffett speaks at a news conference in New Delhi. Photograph: S Mathur/Reuters

Warren Buffett once pointed out that it is easier to get big returns on small sums.

As he put it, "I was killing the Dow in the 1950s but that was when I was investing peanuts."

That is, he was outperforming the Dow Jones Industrial Average by large margins when his corpus was relatively small.

It got progressively more difficult for Buffett to outrun the indices, as Berkshire Hathaway's portfolio grew into billions.

High growth is also much easier to log in a small business than in a Reliance.

Similar issues of scale also hold true for national economies.

It is easier for a small economy with low per capita to grow quickly.

It is more difficult for a large economy to sustain high growth over long periods.

Image: An American flag is unfurled in the outfield before the start of Game 3 of Major League Baseball's ALCS playoff series between the Cleveland Indians and the Boston Red Sox in Cleveland. Photograph: Reuters 

The prosperity and high living standards of Europe and America came about due to steady, low growth over very, very long periods.

Stable economic growth started with the industrial revolution (1760-1820), and continued through the colonial phase.

Nations in Western Europe and America saw GDP (gross domestic product) growth compounded at 1-2 per cent per annum for over a century.

Since World War II, several nations have demonstrated that sustained GDP growth at much higher rates is possible.

The possible reasons might be that technological changes came faster after 1945 and investment flows also became more efficient.

So, GDP growth rates accelerated.

Even so, China and Japan are truly amazing.

Both countries grew at breakneck pace for very long periods, starting from low bases. 

Image: Japan's Prime Minister Shinzo Abe. Photograph: Yuya Shino/Reuters 

Japan lost its entire industrial base in World War II, many cities were obliterated and a large proportion of the working population was killed. Growth in the 1950s started from a very low base, therefore.

It continued until Japan became the world's second-largest economy in the 1980s. Since then, growth has stagnated but Japan is the third-largest economy.

Between 1930 and 1948, China suffered civil war, while also fighting the Japanese. After Mao Zedong came to power, famines and political purges led to the deaths of 10 million or more.

Mao died in 1976. In 1979, China liberalised its economic policies.

It has since grown very fast to overtake Japan and become the second-largest economy in the world.

In nominal terms, India's economy is one-fourth as large as China and one-third as large as Japan. But India only started liberalising in 1991, some 13 years after China.

Adjusting for time differentials, the macro-economic growth pattern is quite similar. India is more or less where China was in 2001.

However, researchers who point out this similarity also point out key differences.

Image: A parade in Beijing. Photograph: Reuters

China had far superior literacy rates and far more female workforce participation in 2001 than India does in 2014.

China followed a manufacturing, export-oriented growth model from the 80s onwards.

It exploited its much cheaper labour to gain market share versus other export-oriented nations like South Korea and Japan.

It is much more difficult for India to compete on this front in 2014.

The cheap-labour driven export-model has multiple players - Indonesia, Bangladesh, the Philippines, Thailand, etc.

China also got a lot of foreign direct investments coming from the well-established overseas Chinese business community.



India's upper-crust non-resident Indians are mostly professionals, and they might not be able to match this. So, India will have its work cut out emulating China's growth rates through the next phase.

The large Indian workforce is under-skilled.

The education system is in a shambles and might not respond effectively to the need to teach labour new skills.

Building scale in new manufacturing areas requires years of effort, and need changes in labour laws, land laws, etc.

The pace of movement in such areas is very slow. While these things could improve, India's growth is more likely to be driven by the positive trends that are already evident.

There are pockets of excellence in industries, where India is export-competitive, such as IT services, bulk pharmaceuticals, automobiles and auto-ancillaries.

There is a huge, under-served domestic market for many services and many goods.

As poverty reduces, there will be fortunes to be made catering to the lower end of the pyramid.

There is a massive shortage in physical infrastructure and efforts are being made to address this deficiency. India hopes to tap China and Japan for money and technical know-how.

That is fine, so far as it goes. But the specific growth areas for India are liable to be very different from the areas in which Japan and China scored.

Devangshu Datta
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