By Aman Shah
The manufacturing industry is a branch of trade based on preparation of products from raw materials and commodities that include all foods, chemical, textile, machines and automobile production. China has been known as the “manufacturing hub” in a modern world where other western countries have been users of its relatively cheaper products. India is another manufacturing giant which ranks third in GDP by purchasing power parity and is expected to compete against China in the war of trade. Not long ago we celebrated the completion of 25 years since economic liberalisation and globalisation. The Indian Government abolished the Licence Raj–a rule imposed during Soviet-inspired Socialist Nehruvian Era in 1991.
Ending of Licence Era opened gates for hundreds of foreign companies into a country where demand grows more than its population. The post-1991 era is considered an economic boom as well as an economic boon. The liberalisation was aimed at ending the Licence Raj by decreasing the government intervention in the business, thereby pushing economic growth through reforms in every sector, mainly in manufacturing.
What is the China Model?
China is a socialist market economy. China has currently the second largest GDP in the world. Out of which, 30% is through its manufacturing sector. Research by IHS Global Insight states that in 2010, 19.8% of world’s manufacturing output was from China and China became the largest manufacturer in the world that year. The US had held that position for about 110 years. China has been a communist state since its unification. The government owns major players of the economies, be it PetroChina, Sinopec and China National Offshore Oil Corporation. These companies rank in top 10 by their assets in the list of large oil companies that include large private firms.
China has built its economic growth on low-cost machinery and labour. Exports of types of machinery and equipment have fuelled the manufacturing sector. Massive government spendings have gone to fuel exports in this sector. The major reason also being the low living standards that allow companies to pay lesser to the Chinese workers as compared to expensive western labour. These factors make goods cheaper and products competitive even after imposing duties in foreign countries. According to a survey, China’s share in consumption of commodities like aluminium, nickel, copper and zinc is more than 40% of the world.
Looking at the history, China’s economic reforms started when Deng Xiaoping took power in 1978. Reforms o the 1980s included the de-collectivisation of agriculture, the opening up of the country to foreign investment, and permission for entrepreneurs to start businesses. The second stage of reform, in the late 1980s and 1990s, involved the privatisation and contracting out much state-owned industry and the lifting of price controls, protectionist policies, and regulations, although state monopolies in sectors such as banking and petroleum remained. That’s when China saw double digit growth in its GDP. It became one of the few major economies to have achieved that. Currently China’s model is shifting from industry & agriculture to services.
How similar are India and China’s Economic Models?
Until the liberalisation of 1991, India was intentionally isolated from world markets by pro-socialist governments of Nehru and many other successors, to protect its economy and to achieve self-reliance. Foreign trade was subject to import tariffs, export taxes and restrictions. Also, foreign direct investment (FDI) was restricted by upper-limit equity participation, restrictions on technology transfer, export obligations and government approvals. Similar were the situations when Chinese father of the nation, Mao Zedong founded the communist pillar. Both the countries had substantially low growth rate. And both of them achieved much higher growth rates when they embraced outer markets.
Currently, both the countries have flourished due to out-sourcing of services and manufacturing by the western economic powers. These neighbouring countries have built their economic growth on low-cost machinery and labour. Historically these countries have been agriculture-dominated. Both the countries have equal importance of families and values of their culture. Their economic policies have been influenced by cultural values. The middle class has been increasing in number, so are the medium and small scale enterprises. Recent trends show tax reduction and increased ease of doing business in both the countries. Thus both the countries can be seen taking a progressive path towards capitalism and had shown great resistance to economic slow-down of 2009.
What’s wrong with ‘New’ China’s Economy?
In 2005, Hu Jintao took the leadership of PRC. The pro-conservative administration began to reverse the Chinese reforms of 1978. It adopted more populist approach of increasing subsidies and taking control of the health care sector. It took a major step of halting privatization. It promoted large “national champions” (state run companies) to compete against the large foreign corporations.
When Xi Jinping took over the presidency of the PRC, the administration has sought control over the state-owned and private enterprises. Also, 288 corporate firms have revised their charters to allow the Chinese Communist Party to influence the management.
What about cheap labour?
India and China known for its cheap labour have seen increase in people’s standard of living. China’s standard of living has increased significantly as compared that of India. Cheap labour is no longer that cheap.
India must take advantage of this inevitable situation so as to gain as many companies to manufacture in India as possible. India’s products may no longer be competitive if it hits the higher labour costs obstruction.
Should India follow China?
Communist Party coined the phrase “Chinese Dream” to describe Xi Jinping’s primary plans for China as its leader. The leader has taken a scientific outlook on development. Scientific & Technology has developed rapidly in recent decades. The Chinese have placed emphasis through funding, reforming educational policies and giving Higher Education a societal status in China. Also, China has made rapid advances in areas of infrastructure, high-tech manufacturing, developing patents and academic publishing. China has been targeting indigenous innovation and aims to target the remaining cultural weaknesses in the country. This is solely done with the purpose of attracting the highly educated class back to China.
The problems faced by small companies and start-ups include the long bureaucratic process succeeding inception. Xi vowed to crack-down corruption and use the ‘eight-point guide’ to reduce the red-tape in manufacturing.
The BJP-led NDA government has taken quite similar stance by promoting business to manufacture in India under the ‘Make in India’ campaign. Under the initiative, the government launches new initiatives to help companies manufacture in India, also to increase FDI in that sectors as well as guiding them through the complex IPRs (Intellectual Property Rights). The Indian government has vowed to improve infrastructure necessary for the manufacturing industry. Thus India has followed China historically and has taken suggestions from the Chinese boom in manufacturing sector. But India must restrict itself to taking suggestions rather than replicating the model because of the fundamental difference of ideologies of the countries: one being socialist-communist and other transforming from socialist to a pro-capitalist economy.
Featured Image Source: IceNineJon on VisualHunt / CC BY-NC-ND
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