India, China and Asean — Competing, Complementing, Cooperating
October 16, 2005
INDIA, China and South-East Asia together account for nearly half of the world's population (47 per cent). Yet, this region accounts for less than a tenth of the world's income (7.8 per cent). Countries of the South-East Asian region (or the Association of South East Asian Nations — Asean) and China are, however, twice as rich as India in per capita terms.
While India's per capita income is $530, for Asean and China it is $1264 and $1100 respectively. However, in purchasing power parity (PPP) terms, India outperforms Asean with a per capita income of $2880, while the latter's is $2014. This probably explains why we in India prefer to state our income in PPP terms. However, it is important not to generalise the economic situation in Asean. Like India and China, Asean masks a vast diversity of incomes. Cambodia and Laos are no better than Bihar or UP, or many parts of interior China. Delhi, Bombay and Shanghai have profiles nearer to that of Singapore and Hong Kong.
The disparity in incomes is glaring. While six out of 10 countries in Asean have a per capita income of less than $1000, four countries have over $2200. Singapore and Brunei are, in fact, at par with developed countries with per capita incomes of $21,500 and $13,500 respectively.
The economies of these regions also have some structural variations among them. Half of India and Asean's income accrues from the services sector. However, a significant share of India's services sector is in the unorganised segment. The heavy dependence on services in both these countries is in contrast to China, which owes half of its income to industry.
The last 10 years has also seen a shift in these shares, especially in India and China. In the first 10 years after economic reforms, in India the agriculture sector's share in GDP went down by about 10 per cent, while that of services moved up by roughly the same percentage. China also saw a similar shift away from agriculture during the same period. However, in China, this decline was made up by industry.
The strength of these sectoral shares can be judged by the productivity accruing to them. Thus while in both India and Asean, agriculture has about 22 per cent share in GDP, India's farm sector employs about 60.5 per cent of its total workforce and Asean's 46.5 per cent.
Clearly, farm productivity is higher in Asean. However, it is also interesting to note that while the services sector has a similar share of about 50 per cent of GDP in both countries, India employs only 22.7 per cent of its workforce in services and Asean employs 41.5 per cent. The trend in productivity is, apparently, reversed here.
As for China, in agriculture its share of GDP is only 15 per cent but the share in employment is 50 per cent, indicating a low productivity similar to India. In the services sector, it performs slightly better with an income share of 32 per cent and an employment share of about 28 per cent.
However, where China comprehensively outshines both India and Asean is in industry. Over half of its income accrues from this sector, while only 22 per cent of the workforce is employed in industry. This indicates a highly productive industrial set-up in China.
India is clearly a nation of farmers. Is Asean a society of shopkeepers? One thing is clear. Industry does not and cannot employ the majority of the working population. The paradox of modern production technology making workers redundant is visible. But without a large industrial base is a large service sector possible?
Looking into the future, favourable demographics assure all three regions of good growth rates as the majority of the population is young, productive and still in a spending mode. About 55 per cent of this region is in the productive age group of 15-49 years. By contrast, Japan and Europe are aging societies. Only the US, among the developed countries, is demographically dynamic.
India's growth rate of 6.2 per cent is just beginning to surge past Asean's (also at 6.2 per cent) and hopefully will get closer to China's (9.1 per cent) in the next few years. However, in terms of productive age groups, Asean has an edge over both India and China. The former has nearly 61 per cent in the productive age-group, while the latter two have only about 55 per cent. India, however, has an advantage in that in the coming decades, the percentage of its people in the productive age group is going to be relatively higher.
When comparing development between regions, it is important to look beyond income and analyse social indicators also. In most such indicators India lags Asean and China. Infant mortality is 65 per 1000 in India, while it is 30 and 38 in China and Asean. Life expectancy is lowest in India (65 years), while it is 71 in China and 68 in Asean. The knowledge quotient is also the lowest in India, with only 69 per cent literacy, whereas it is 90 per cent of China's and Asean's people are literate.
The performance of these three regions is also a function of the government expenditure in health and education. India and China spend only about 5 per cent of their GDP on health, while Asean spends 11 per cent. Asean's expenditure on education is also much higher, at 17.4 per cent of GDP. It is 4.1 per cent in India, and only 2.9 per cent for China.
Prosperity indicators also portray a similar picture. There are more TV sets, computers, telephones, etc., per 1,000 population in China and Asean compared to India. Electricity consumption in India (395 kWh per capita) is less than half of China's (893 kWh) and Asean's (712 kWh). In India, 35 per cent of the people live below the $1-a-day poverty line. China and Asean are better off at 17 per cent and 11 per cent respectively. In the external sector, China and Asean's performance is clearly superior to that of India. India's exports and imports total about $125 billion. This is way behind China's total trade of $851 billion. Asean is also up there with $847 billion. Now, China is India's largest trading partner, having edged out the US last month. The total trade is worth over $13.5 billion. India's economic engagement with China is bound to expand.
Despite the popular belief that Indian markets are flooded with Chinese goods, India has a trade surplus with China. Moreover, the value of manufactured goods exported to China from India ($2.5 billion) is only slightly less than the value of similar items imported into India ($2.9 billion).
However, when moving up the production line, India's imports of high-technology goods, such as photographic material, scientific apparatus, and so on is higher. While secondary goods dominate in what China exports to India, the latter's exports to China have a large share of primary goods. India's export profile towards China is like a typical developing country.
With Asean, however, India has a trade deficit. The total trade is worth nearly $10 billion. India's main exports to Asean are primary goods, while the chief imports are secondary goods such as electrical appliances and machinery. China and Asean trade mostly in secondary goods. However, while China exports about $520 million worth of cereal to Asean, it imports about $510 million worth of wood. Thus, some amount of primary goods is exchanged between the two. The total trade between China and Asean is about $12.6 billion.
Foreign exchange reserves in India ($127 billion) are half of Asean's ($236 billion) and a sixth of China's ($711 billion). Foreign Direct Investment into India is also much lower than that into Asean and China. Asean's FDI inflows amounted to $241.7 billion from 1990 to 2003. China got $475 billion in this period, while India received $28.5 billion. FDI has changed the way China engages its working population, altered its foreign trade outlook and accounts for why it has come to dominate world manufacturing. This is just as Asean did the decade before. India is still ideologically confused about FDI.
By these trends, India and China will grow faster than Asean and their economic engagement will also rise much more than India and Asean. However, Asean is more closely linked with China than India and will continue to be so. The FDI into India is mostly from developed country MNCs using the country as a manufacturing hub. India's FDI policy needs greater clarity.
Also India cannot compete for developed country markets for manufactured goods till the concept of Special Economic Zones takes off. As for economic development, India clearly lags behind China and Asean. India is not only a much poorer country, but fares quite dismally in all social indicators also. It remains to be seen if India can translate its potential for a relatively higher growth rate into better standards of living.
(Extracted from a lecture delivered by the author at an international seminar on India and Asean: Non-Traditional Security Threats, organised by the Centre for Security Analysis, Chennai.)