Tiger economies are snapping at US heels

China and India and are moving toward becoming the biggest economies in the world: with 2,4-billion people, or 40% of the world’s population and annual GDP growth rates of between 8% and 10%, experts say that they could one day overtake the United States.

Professor Pieter Bottelier, of the Centre for Strategic International Studies, says: ”If these two countries continue to grow at the current rate, they will overtake America, although that probably won’t happen for a number of decades.”

The countries are very different politically: India is the world’s biggest democracy, but China is under tight communist government control. Economically, China has had a head start. Bill Emmott, former editor of the Economist, says in his book Rivals that India’s time has yet to come; to date it has been constrained by a poor infrastructure, social divisions, a caste system and mind-boggling poverty. But it is fast making up for lost time and no doubt Emmott wouldn’t disagree with Steven Roach at US investment bank Morgan Stanley that ”India is on the cusp of something big”.

Bottelier says the challenges the countries face are quite distinct. ”Generally, China has gone much further than India in trade liberalisation and in opening to foreign investment.” But he says things are starting to change.

Bottelier adds: ”Issues facing India are much more broad-based, such as improvement in infrastructure and facilities, effective administration and labour reforms. Minus points for China include a lack of good quality software, a low proportion of Chinese who speak English and a less mature outsourcing industry.”

India is hamstrung by bureaucracy: ”When the Chinese say they are going to do something, they get on with it and you can see the results much more quickly than in India where red tape is everywhere,” says one analyst. On the other hand, the huge increase in trade between the two nations has fuelled talk of the ”Chindia” effect.

In 2006, trade between India and China reached $18,4-billion. However, there is still mutual distrust. India remains suspicious of China’s relationship with arch-rival Pakistan, while China is concerned about New Delhi’s growing ties with Washington, especially their nuclear agreement allowing India access to civilian nuclear technology.

Observers expect the US to deepen its ties with India, which Washington views as a counterweight to China. America’s relations with the Chinese are more strained as a result of tension over Tibet and Taiwan, not to mention the obvious ideological political divide. But that hasn’t stopped US companies investing heavily in China, more so than British ones which have been quicker to spot opportunities in India, perhaps because of their historic affinity.

But these days investors tend to get more excited about India than China. True, a superficial look would argue in China’s favour: its world class infrastructure, gleaming skyscrapers, huge supply of cheap labour and ability to direct resources anywhere they are needed. However, a report from Bloomberg says: ”For all the stories about China churning out millions of engineers and scientists, innovation isn’t at the heart of the economy. Foreign investment and massive government spending, not ideas or start-ups, lie behind China’s boom.” There is a dearth of internationally known Chinese companies that operate on a global scale and market their products abroad.

In contrast, India has fostered globally known and competitive firms like Infosys and Reliant Industries, and has done a better job protecting intellectual property rights. China may get more headlines, yet the steady increase of Indian billionaires (Lakshmi Mittal, to name but one) is a reminder that India’s markets are more developed. The demographics also favour India which has younger population.

A report by Deutsche Bank cites surveys indicating that India has better corporate governance standards and its companies are more commercially driven. The bank adds: ”Although India started economic reforms a decade later than China, it is far more advanced in its institutional and financial infrastructure. This is reflected in contrasting outcomes: foreign direct investment is considerably lower than in China, but returns on investment are better on average.”

A new measure of world economies, published by the International Monetary Fund, indicates that China and India are closing the gap on America. In a measure of purchasing power parity, adjusted to take account of exchange rates, the US is ranked at the top with $13-trillion, China is a close second at nearly $10-trillion, while India is fourth with $4,2-trillion, behind Japan.

The Indian academic Jagdish Sheth expects China to become the world’s biggest economy by 2020, and India to overtake Japan to become the third biggest in just two years’ time. That sets the stage for the next leg of the race between China and India in what promises to be one of the most dramatic developments of the 21st century. – guardian.co.uk Â

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