New York Times

29 November 2002

Once a Close Economic Rival of China, India Falls Behind

By KEITH BRADSHER

ONEPAT, India — Raj K. Gupta, a partner in one of India's largest shoe manufacturers, makes a dreaded but necessary trip every two months to Hong Kong and then into Guangdong Province in southern China.

He goes to buy Chinese shoemaking machinery, because India has few producers of such machinery.

He goes to purchase Chinese synthetic leather, because India makes little of the material and most of that is of low quality.

He goes to visit Chinese shoe factories, to draw lessons from their enormous size, advanced technology and highly organized operations.

When he is done, after eating too much Chinese food, which he dislikes, he flies home and thinks about how India, despite democracy, has fallen behind China, a one-party state struggling with the aftermath of Communist economic policies.

"If we were more developed here I wouldn't have to go so much," he groused, sitting in his office, where incense burned in a corner before a group of paintings and statues of Hindu gods. "We should have that kind of technology, both for our international competitiveness and for our domestic market."

India's continued backwardness compared with its neighbor across the Himalayas has become a national obsession. The world's two most populous countries, China and India were close economic rivals just two decades ago, each struggling to bring progress to vast numbers of impoverished peasants.

But now China, by quickly converting much of its economy to an unfettered and even rapacious version of capitalism, has surged far ahead. The average Chinese citizen now earns $890 a year, compared with $460 for the typical Indian, according to the World Bank.

Only slightly more numerous than Indians these days, Chinese citizens now buy one-third more cars and light trucks each year, 3 times as many television sets and 12 times as many air conditioners. China has high-speed freeways, modern airports and highly efficient ports that are helping it dominate a growing number of manufacturing industries.

India's potholed roads, aging airports and clogged ports make exports difficult. China attracted as much foreign investment last month as India did all of last year.

Some blame India's lagging performance on the country's still stifling bureaucracy, although many market-limiting regulations have been lifted since New Delhi began dismantling its "license raj" in 1991.

Some blame the country's cultural and religious traditions, contending that a national thirst for economic equality may have stunted progress. Some even maintain that a democracy may be less able than an authoritarian government to promote growth in a poor country.

Like China, India has a growing middle class — it is just not growing as quickly, perhaps in part because India's expansion started in 1991, 13 years after China's.

The Chinese economy has been expanding by 8 to 10 percent a year for the last two decades, while India's has been growing at a still healthy 6 percent only for the last decade. India's population is growing twice as fast as China's, moreover, so income growth per person has been slower in India.

Both countries are encumbered by many government-owned enterprises with low productivity — for India, most notably, its monopoly on distribution of electricity.

The Indian economy has a few genuine bright spots. Pockets of high-tech prosperity have popped up in two southern cities, Bangalore and Hyderabad.

These have benefited from India's willingness to allow free trade and minimal regulation for new industries, often involving computer software, telephone service centers for financial institutions and other service industries that do not involve moving goods on India's poor roads.

But success stories like Bangalore and Hyderabad remain a tiny part of the overall economy, because software companies hire workers by the hundreds and not by the tens of thousands, as manufacturers do.

"You look around and the rest is a disaster," said Joydeep Mukherji, an Asia analyst with Standard & Poor's. "One billion people are not going to be programming computers; they're going to be making shoes and cars, and serving coffee."

Indian shoe companies had as much cheap labor available two decades ago as Chinese companies, and workers here were better educated. Yet Chinese manufacturers increasingly dominate the global shoe market. "In the shoe industry, China has gotten ahead and will stay ahead," said Martin Merz, a partner in NJB Merz Ltd., a shoe company in Hong Kong.

Mr. Gupta and his family control the Action Group, India's second-largest shoemaker, after Bata. But the newest of Action's dozen factories, next to a dirt road across the city line in New Delhi, is unlikely to inspire fear in foreign competitors. The cramped building has room for just 150 workers, not enough to achieve the economies of scale of Chinese factories, where up to 20,000 toil in a single complex.

Mr. Gupta said local regulations prevented him from building anything bigger. Particularly onerous are laws limiting how much land a company can acquire in a city. The laws are intended to discourage speculation and leave land available for housing, but they make land expensive for new business ventures.

To walk inside the dimly lit factory on a recent morning was to enter a pungent cloud of glue vapor rising from the open pots and brushes that the workers use in assembling shoes. A. K. Sharma, the factory manager, explained that the factory's ventilation had been switched off because of an electricity blackout.

The factory had been running for the last three days on diesel generators, at more than twice the cost of using electricity from the municipal grid; another factory here in Sonepat runs an hour or two on generators every day because of blackouts.

Power failures are rare in the Chinese province of Guangdong, where domestic and foreign companies have invested heavily in power plants, but they are a regular occurrence here. Yet Mr. Gupta had to build his latest factory in the city because electricity was not available at all in many rural areas.

Stacked in the basement are rows of large boxes, each holding dozens of pairs of shoes. Scribbled in purple pen on the sides are the size, style and color of each box's contents. There are no computer-printed labels, and shoe stores in India do not expect them, Mr. Sharma explained.

The boxes, next to many sacks of raw materials, signal another problem. The factory keeps a two-month supply of raw materials and a one-month supply of finished shoes, a huge inventory tying up money that could otherwise be invested in modern machinery. By contrast, Chinese factories keep small inventories, because they receive regular deliveries of raw materials from nearby suppliers and ship finished goods easily on smooth highways to efficient ports like Hong Kong's.

The minimum wage for urban industrial work here is $3 a day. While fairly high by the standards of very poor countries, it is lower than the wages in Guangdong, where competition for skilled shoemakers has pushed up pay.

Some changes are starting to appear here. Construction has begun on new freeways. A quarter of India's states have repealed laws limiting business ownership of land in cities. The central government is mulling whether to allow private distribution of electricity, a step that could bring the investment needed to make blackouts less common.

India is starting to lower its 35 percent tariffs on a wide range of goods, including shoes, forcing producers to compete internationally. Mr. Gupta said he was unconcerned, because tariffs will also fall for imported shoemaking machinery and because he believes that Indian workers make higher-quality shoes.

Indeed, the Gupta family's latest project has little to do with shoes, reflecting instead the human values and limited interest in the global market that still characterize many Indian businesses.

Comfortable with its share of the domestic market and not eager to increase the 3 percent of production that it exports, the family is donating $9 million for the construction of a five-building, state-of-the-art, nonprofit hospital to care for the poor.

While an American family might seek as large a business empire as possible, Mr. Gupta said, his family is more interested in public service.

"What would we have done with that empire?" he asked. "It's a matter of thinking."

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