India and China: Who is Headed in the Right Direction?

What do India and China have in common? The answer is a border. That's it? Yes, more or less.

India and China have experienced phenomenal growth over the past five-to-seven years… both emerging as global economic superpowers. But the two Asian nations have their distinct experiences and their success stories are quite different. To begin with, India has relied on its services sector in general and the IT sector in particular for growth, while growth in its neighboring country has been led by the manufacturing sector.

India's economic development has followed the text book case. Theory suggests that as an economy develops, there is a sharp downturn in the primary sector's (agriculture) contribution to the country's GDP. The contribution of the secondary sector (industry) first rises sharply and then stabilizes or declines. The tertiary sector (services) grows gradually, till its contribution to the country's GDP is significantly higher than that of the other two sectors. India's growth has followed this trajectory and its services sector contributes a much higher proportion of the GDP (more than half) than in China (around two-fifths).

Interestingly, although China's service sector contributes less to the GDP, it provides employment to a larger number of people than in India. A decline in employment in India's service sector can be attributed to an increase in productivity.

Even though India's economic growth is expected to decelerate, the services sector (which includes IT, entertainment, transport, trade, and communication) is expected to grow. In fact, a recent KPMG survey of the BRIC (Brazil, Russia, India and China) countries has shown that India's confidence in the service sector is the highest. Among the Indian firms, 60% expect activity to rise, while none of the firms anticipate a decline. In comparison, the Spring 2008 KPMG Business Outlook Survey reveals that around 59% of the Chinese firms expect a rise in activity, while 3% anticipate a decline.

Although India's outsourcing opportunities have been hurt by the plummeting dollar, around 42% of the respondents expected a rise in outsourced work. Only 16% of the service providers in China expect growth. India is also more bullish than China about an increase in employment opportunities by this sector. While almost 41% of the Indian firms expect an increase in employment, merely 27% of the Chinese firms anticipate this.

What does all this mean? Which country has the right formula to ensure sustainable growth? I guess both India and China have capitalized on their individual strengths and both have a lot to learn from each other. And both are huge markets. In my view, increased cooperation between these two superpowers can go a long way in ensuring sustainable high growth.