China's growth shows why government support should be aimed at new starters

China's growth highlights the need for India to shift policy support towards new firms, boost manufacturing, R&D spending, and empower states and cities to drive entrepreneurship and competitiveness

In 1978, a new development approach was introduced by Deng Xiaoping in China. A centrally planned, public-sector oriented and inward-looking economy was transformed to one that relied on attracting foreign corporate investors, promoting local private corporations, and rapid export growth. In India, the major policy shift came later in 1991 with delicensing, major financial sector reforms, and enhanced links with the global economy.

 

The difference between the two economies has widened since these basic policy shifts. Until 1978, China’s per capita gross domestic product (GDP) was below India’s. Thereafter, it rose rapidly and had reached twice India’s per capita GDP by 1992. This widening of the per capita GDP ratio continued even after India’s liberalisation started in 1991 and tripled by 2000, quadrupled by 2007, was fivefold by 2012, and about five-and-a-half times in 2024. It is widely believed that China’s growth forging ahead of India’s growth is largely because of the exceptionally rapid expansion of the manufacturing sector, with its share in global manufacturing shooting up to 28-30 per cent in 2023, while India’s share was just 3 per cent.

 

The first and perhaps the most important point worth noting is the rapid development of the private sector in China after 1978, when there were virtually no significant private sector enterprises in China. The growth of the private sector in China in the post-1978 reform era came from new entrants. They were often individuals with technological skills who focused on rapid growth. In fact, it has been argued that the rapid emergence of private enterprises was not envisioned or promoted by the central government initially and much of the early governmental funding went to public-sector enterprises. The private sector development at the start of the liberalisation reform was led by new enterprises that were set up with support from local governments. Most of the private sector firms that are now large players, not just in China but also globally, were established after 1995.

 

In India, despite the focus on the public sector as the driver during the pre-liberalisation era, there were a significant number of private sector enterprises and conglomerates. Even after liberalisation, the inherited presence of an established private corporate sector, particularly the large conglomerates, constrained the emergence of newcomers in manufacturing.  Where newcomers did emerge and grow large was primarily in the services sector, particularly in the skill-intensive information technology sector. Perhaps this accounts for the fact that India’s exports of services are comparable in quantity with China’s, while its manufacturing exports are just one-tenth of China’s.

 

This suggests that, for increasing our growth rate, one lesson from China’s growth boom and from our infotech boom is that the government’s financial and policy support should be strongly directed at new starters, move away from support for established conglomerates and rely on competition from newcomers to stimulate them. A closely related issue is government spending to support private manufacturing development. The Make in India scheme has several programmes, the main ones being the production-linked incentive (PLI) scheme, and a scheme for the promotion of electronic components and semiconductors, which between them have a budget of about $36 billion.

 

Compare this with government spending in the Make in China scheme, which involved substantial funding amounting to about $330 billion to support manufacturing enterprises. This near ten-fold difference in public spending on promoting new manufacturing is one of the reasons behind the difference in performance of the two initiatives. Hence, another lesson from the Chinese experience is that more carefully planned and more substantial financial support should be directed mainly at new starters.

 

A third lesson from China is the substantial role played by local authorities. In China, local political elites played a major role in promoting and protecting the new entrepreneurs who emerged, providing welcome options for employment and local financial development, even when it was not a formal part of the central government’s policy. This continued at the level of provincial government when private sector development was an accepted part of official strategy. One particular point of interest is the role  played by city governments in promoting industry in China, for instance, recently in the development of electric vehicle companies.

 

In India, control over financing and formal support for private enterprises rests largely with the central government, although state governments exercise some influence through their direct involvement in land acquisition and the provision of local infrastructure support required by companies. But the substantial role of the Union government in choosing and providing support to specific private projects gives an advantage to large conglomerates and national-level corporate entities relative to local enterprises, particularly the small and medium starters. Learning from the Chinese experience, India should shift the responsibility for supporting projects to states. Perhaps even more important is to strengthen and empower our municipalities to play a much more active role in promoting local entrepreneurship.

 

Another area where the difference between China and India is substantial is the promotion of research and development (R&D) by the government. R&D spending as a percentage of GDP was more or less comparable between the two countries until 1999. It was 0.75 per cent in China and 0.72 per cent in India. China’s industrial strategy evolved to focus on emerging technologies such as solar and wind power, chip manufacturing, robotics, and later AI and electric vehicles. This was accompanied by a substantial rise in R&D, which reached 2.4 per cent of GDP by 2020. In contrast, India’s R&D as a percentage of GDP declined from 0.85 per cent in 2008 to 0.64 per cent in 2020. In absolute terms, the difference in R&D investment is roughly 20:1.

 

China also strengthened the link between research institutions, producing enterprises, and universities, 8-10 of which have risen to the global top-100 universities list. This has not happened in India. Perhaps the most important lesson from China for India — raise R&D spending substantially and improve the link between research institutions, producing enterprises, and IITs and other universities. This should be the strategy to guide the recent initiatives by the government, such as the Anusandhan National Research Foundation and the RDI scheme. One thing worth adding here is the importance of a sharper focus on improving the quality of school and college education.

 

There are some aspects of China’s strategy that India cannot and should not emulate. India is a democracy, and its governments cannot be as authoritarian as the Chinese government. As a democratic federation, the Union government cannot favour a few selected regions or control the regional migration of workers as the Chinese government did. But the Union government can and should focus more on supporting new starters, reducing bureaucratic red tape to speed up decision-making, encouraging more effective action by states and municipalities for industry promotion, substantially accelerating R&D initiatives by public institutions, and pressurising private enterprises, particularly large conglomerates, to do the same. 

desaind@icloud.com