State Investment Fuels China And India's Rapid Growth

China and India are the world's fastest-growing major economies. They demonstrate a common pattern of development that differs from the slowly growing Western economies. Both countries have rapidly growing state investment, while private investment is either growing very slowly or declining. In contrast, Western economies rely on private investment with no rapid growth of state investment. This economic reality is crucial for China's practical economic policy as the country seeks to achieve its goal of a moderately prosperous society by 2020 and a high-income economy by World Bank standards shortly after.

India's tech sector

Growth and Contribution to the Economy

The IT-BPM sector in India has experienced significant growth, with a revenue estimate of US$245 billion in FY 2023, employing approximately 5.4 million people as of March 2023. The sector's contribution to India's GDP has also increased over time, rising from 1.2% in 1998 to 7% in 2019 and further expanding to 7.4% in FY 2022. Exports dominate the industry, constituting about 79% of the sector's total revenue.

Major Hubs and Companies

Bengaluru, often referred to as the "Silicon Valley of India", is the country's biggest tech hub, contributing significantly to India's IT exports. Other major ICT centers include Hyderabad, Chennai, New Delhi, Gurugram, Mumbai, and Pune.

Tata Consultancy Services, Infosys, Wipro, Tech Mahindra, and HCL Technologies are among the leading Indian IT services providers, with a global presence and recognition.

Government Initiatives and Investments

The Indian government has recognized the importance of the IT/ITeS sector and has taken initiatives to promote its growth. Both central and state governments have focused on developing technology solutions to digitally enable citizen services, with an emphasis on areas such as cybersecurity, hyperscale computing, artificial intelligence, and blockchain technology.

The government has also encouraged foreign investment in the sector, allowing up to 100% FDI in data processing, software development, computer consultancy services, and other related fields.

Global Recognition and Impact

India has established itself as a preferred destination for global capability centers (GCCs), with over 1580+ GCCs present in the country. Additionally, Indian SaaS companies have doubled their share of global markets, and the country boasts numerous unicorn startups, with 23 new additions in 2022 alone.

The country's digital infrastructure and low data costs have further enhanced its attractiveness for global businesses, facilitating ease of access to various services, including banking and governance.

Future Prospects and Challenges

India aims to grow its ICT sector to $1 trillion by 2025, targeting a contribution of 20% to the predicted GDP. The industry has set an ambitious revenue target of $350 billion by 2026, with digitalization, modernization of services, and emerging technologies like AI, IoT, and cybersecurity expected to play a pivotal role in this growth.

However, the IT sector also faces challenges, such as high attrition rates, the impact of AI on certain job roles, and the need to continuously reskill and upskill the workforce to adapt to evolving technological advancements.

China's economic reform

Pre-Reform Economy

Before the economic reforms, the Chinese economy was dominated by state ownership and central planning. From 1950 to 1973, Chinese real GDP per capita grew at a rate of 2.9% per year on average, albeit with major fluctuations. This placed it near the middle of the Asian nations during the same period, with neighbouring countries such as Japan, South Korea, and Singapore outstripping mainland China's rate of growth. Starting in 1970, the economy entered a period of stagnation, and after the death of Mao Zedong in 1976, the CCP leadership decided to abandon Maoism and turn to market-oriented reforms to salvage the stagnant economy.

Stages of Reform

The Chinese Communist Party (CCP) carried out the market reforms in two stages. The first stage, in the late 1970s and early 1980s, involved the de-collectivization of agriculture, the opening up of the country to foreign investment, and permission for entrepreneurs to start businesses. However, a large percentage of industries remained state-owned. The second stage of reform, in the late 1980s and 1990s, involved the privatization and contracting out of much state-owned industry.

Results of the Reform

The success of China's economic policies and the manner of their implementation resulted in immense changes in Chinese society in the last 40 years, including greatly decreased poverty while both average incomes and income inequality have increased. China's economic growth since the reform has been very rapid, exceeding the East Asian Tigers. Since the beginning of Deng Xiaoping's reforms, China's GDP has risen tenfold. The increase in total factor productivity (TFP) was the most important factor, with productivity accounting for 40.1% of the GDP increase. Per capita incomes grew at 6.6% a year. Average wages rose sixfold between 1978 and 2005, while absolute poverty declined from 41% of the population to 5% from 1978 to 2001.

China's infrastructure revolution

A Shift in Investment Strategies

A significant shift in China's investment strategy occurred around 1978, when the government encouraged the formation of rural enterprises and private businesses, liberalized foreign trade and investment, and invested in industrial production and workforce education. This marked a departure from the previous years of state control over all productive assets. As a result, China experienced average real growth of more than 9% per year, with per capita income nearly quadrupling in the last 15 years.

The Role of State Investment

China's economic growth has been strongly correlated with its rapid growth in state investment, which has compensated for the stagnation or decline in private investment. In contrast, Western economies, which rely more heavily on private investment, have experienced slower growth rates. China's deliberate decision to increase state investment, particularly in infrastructure, has been a key factor in stabilizing its economy and preventing downturns.

Comparison with India

Both China and India demonstrate a common pattern of development, with rapidly growing state investment playing a significant role in their economic expansion. India has also experienced a shift from state-driven to market-driven investment, with an increasing contribution from the private sector. However, China's investment rates and infrastructure development are still ahead of India's.

Challenges and Opportunities

However, China's infrastructure revolution has also presented various opportunities, such as the development of rural enterprises, the creation of jobs, and the establishment of new markets for consumer products. The country's open-door policy and welcoming of foreign investment have further fueled its economic transformation.

In conclusion, China's infrastructure revolution has been a key driver of its rapid economic growth, with state investment playing a crucial role in stabilizing and boosting the country's economy. The development of physical and digital infrastructure has laid the foundation for China's economic success and positioned it as a global economic powerhouse.

India's private sector

In India, the private sector has been assigned the task of developing consumer goods industries. It has been allotted the entire agriculture and allied activities, plantation, mining, internal trade (both wholesale and retail), foreign trade, and road freight traffic. The private sector has been playing a dynamic role in introducing new products, new varieties, new processes, and new designs, thereby updating the entire production system.

The private sector has been playing a dominant role in road and water transport and, since the introduction of the New Industrial Policy in 1991, the government has opened some areas like power generation and air transport for the participation of the private sector. The private sector has also been actively participating in building highways and bridges on a Build, Operate and Transfer (BOT) basis.

The services sector of the country is almost totally under the control of the private sector. The entire community and personal services, which contributed nearly 11.1% of GDP in 1994-95, are entirely managed by the private sector. The entire professional services, repairing services, domestic services, and entertainment services are solely rendered by the private sector throughout the country.

The private sector is also providing active support to the country's infrastructural sector. The private sector has the power to harness and use technology to unleash greater prosperity for the nation. An important objective for the private sector must be to facilitate the transfer or spread of new technology through industry-led initiatives or by building new business models that employ technology in new ways, increasing productivity and leading to sustainable economic growth.

The private sector has been playing a responsible role in India's economic development, and in recent times, it has been assigned an increasing role and responsibilities in a developing country like India.

China's private investment

China's private equity market has been growing steadily over the last decade, with a compound annual growth rate of 26% between 2009 and 2019. This growth has outstripped other private investment channels such as real estate and infrastructure. Despite this, China still lags behind major markets like the US and the UK, where private equity contributes over 2% of the GDP, compared to 0.5% in China.

The Chinese private equity market is dominated by state-owned enterprises, and a handful of major general partners. The top ten China-focused private equity firms accounted for 30% of funds raised last year. Another characteristic of these firms is that few are locally operated. The total funds raised by private equity firms have increased in recent years, although funds from private Chinese general partners have fallen by $40 billion since 2017, constituting 65% of the total market value in 2017.

To remain competitive, Chinese-operated private equity firms will need to take strategic action. Wouter Baan, an associate partner at McKinsey in Hong Kong, suggests that private equity firms operating in China will need to acquire new capabilities and adjust their strategies to create value in their portfolio companies.

McKinsey recommends four strategies for private equity firms in China:

• Focus on value creation: General partners in China need to lay out a clear value creation strategy to attract funding from limited partners.
• Drive excellence in business fundamentals: While China is a significant market from a human capital perspective, it remains lacking in certain skill areas, and filling this gap could be a tremendous value generator.
• Refine the deal-making process: Building sector-specific expertise and having a clear idea of asset value creation will enable private equity firms to deliver on more complex deals.
• Plan exits carefully: Private equity firms should begin strategising their exit at least a year and a half before execution to allow time to shape a compelling equity story.

Provided that private equity firms can make progress on these four pillars, Covid-19 could be an opportunity for the market. Many businesses will be realigning their value proposition to meet new market needs, creating a landscape ripe for investment.

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