What India must do to outpace China

Martin Wolf's weekly Financial Times piece today discusses What India must do to outpace China (subscribers only).   Wolf concludes:

The improved performance of the Indian economy in the last quarter century is both a fact and an achievement. Yet it could be better still. It will not become better, however, without substantial further reform. ..change must occur in five pivotal areas: deregulation of labour markets and an end to the reservation of production to the small-scale sector; revitalisation of agricultural growth; increased investment in infrastructure; elimination of fiscal deficits in the current budget; and, finally, across-the-board privatisation and further trade liberalisation.

Yes, all this will prove difficult. But it is also hugely important. India stands on the threshold of accelerated growth, but it will not cross it without a great deal of assistance.

Mark Thoma provides key excerpts in his post, Will India Grow Faster than China? But Mark did not include the charts. The first (above) shows, as Wolf writes, that "not only has Indian growth averaged just under 6 per cent over the past 25 years, but a five-year moving average has deviated remarkably little from this level."

The second chart compares governance in China and India. Wolf notes:

It is true, again, that India has a number of institutional advantages over China: a well-developed private sector; a relatively entrenched legal system; a stable democracy; and freedom of speech. The World Bank’s governance indicators reflect some of these advantages, particularly a vastly superior score on “voice and accountability” (see chart).

It also gives India a modestly better score on the control of corruption and the rule of law. But it gives a worse one on regulatory quality and government effectiveness. Of the latter there can be little doubt: China’s ability to mobilise resources remains far greater than India’s, as demonstrated in its vastly superior performance in provision of infrastructure.

To see the charts properly, just double click on them.

Comments

[claus vistesen]

Very interesting post and article ... especially for us non-FT subscribers :)!

[David]

So India must privatize to grow, but China does fine with huge government run companies?

[ICA Institute]

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