ROADS FOR LARGE POPULATIONS TOWARDS DEVELOPMENT AND PROSPERITYS. P. GUPTA

In this paper I like to discuss the experiences of large populous economies in respect of growth and development. In general, they are notably different in many respects from the small/medium sized economies. Among the developing countries we can broadly identify seven most populous countries starting from China, India, USSR, Indonesia, Brazil, Nigeria and Argentina in the descending order. These countries between them cover 51.5 per cent of world population and in contrast a meagre 9.2 per cent of world Gross Domestic Product [GDP] measured at 1990 US dollar in 1994. Further, when their share in the world population decreased from 51.94 in 1980 to 51.51 in 1994, their share of the world GDP increased from 7.9 per cent to 9.2 per cent over the same period. This shows that although they started with a big handicap of a very low per capita GDP in 1980 compared to the rest of the world, their achievements in regard to GDP per capita are marginally better.

If you measure their population growth rate between 1980 and 1994 it comes to nearly 1.6 per cent as against 1.8 for the world overall. Of course world population growth averages the high growth of sub-Saharan Africa (above 3.0 per cent) and some Latin American and South Asian countries, alongwith a very low growth of developed countries. Among the 7 big populous countries the population growth rate is lowest in USSR followed by China and is the highest in Nigeria. In terms of GDP growth of this group of seven, the growth rate was 4.9 per cent between 1980 and 1994 as against a growth rate of 3.6 per cent, for other small and medium developing countries and 2.8 per cent of global growth between 1980 and 1990 and 1.96 per cent between 1990 and 1994. The developed countries witnessed a growth rate of 2.73 per cent in the 1980s and 1.58 per cent in the 1990s. This clearly shows that the overall growth rates and growth in GDP are much higher in the larger developing countries compared to other developing and developed countries. But inspite of this comparatively high growth, its per capita income is lower than that of other developing countries, mainly because of its large population.

Among the seven countries, we have chosen the first two most populous countries, China and India. Interestingly, these two countries together show the highest growth rates among the most populous seven large economies, India growing at 5.2 per cent between 1980 and 1994 China 9.6 per cent between 1980 and 1994. As against this, USSR is showing a negative growth and Nigeria has grew by only 2.3 per cent over the same period. Indeed, among most populous economies the success story comes mainly from China, India, Brazil and Indonesia of which again three are from the Asian sub-continent.

If we examine their individual growth performance, Brazil’s growth has accelerated very recently, reflecting its liberalisation policy since 1992; China’s growth trend started much earlier since the reform of 1978. But it accelerated significantly from 1991- 92. For Indonesia the growth accelerated from 1985 coinciding again with their economic liberalisation activities. Nigeria and USSR are showing a deterioration in recent years. USSR’s negative growth is explained by their problem of transition to a market economy. For Nigeria their new economic policy seems to have failed to show any positive impact.

There is often a generalization that all success stories of large and small developing countries can be explained by the growth of world trade and opening up of these economies with market based deregulation. But from any indepth scrutiny one finds that the reform package under the broad heading of "libera!isation" is very different from country to country. There is no standard recipe of a "reform package". Also their country specific applicabilities are not "neutral" to the factor endowment or initial conditions of any country as is often propagated by many economists. Indeed, the failure to appreciate the need for country-specific adjustment has left a large number of economies in Africa from the main stream of fast growth. Here, in the case of China and India, I shall try to bring out certain specific development features which are relevant mostly for large populous countries. These are mainly in the area of regional imbalances and problems of backward areas -which get increasingly bypassed by a market economy oriented growth process. Indeed, the increasing regional imbalances observed both in China and India under market-oriented reform, are also applicable to most other populous countries. Similarly, in large countries, the problems of centre- state financial relations are coming more and more into sharp focus. The "new economic policy" in these countries asks for stability of the macro economic balances by centralised control and at the same time looks for micro level incentives (i.e. at the grass root) which are possible only by increasing decentralization and private sector involvement. Here an inherent conflict is coming out between the centralized role of the Government and the decentralization autonomy of the provinces/states. These two features are common in most large countries, given the diversified availability of factor endowment unevenly distributed spatially. These problems are much less in small economies like Hong Kong or Singapore. The wide spectrum of diversified factor endowment also encourages predominance of any import substitution lobby. In this respect, even the United States with its large diversified factor endowment is not an exception where there is a very strong lobby for the protection of domestic sector. To some respect this applies also to some of the European countries. Therefore, in the growth process of large populous economies there is a continuous debate on the role of domestic investment versus foreign direct investment. The general experience of most large countries tells that success is more visible in those countries where domestic saving and domestic activity have largely supplemented foreign direct investment and enterprise. The present high saving ratios of China and Indonesia are telling examples. The recent declining savings ratio of India is, therefore, a cause for concern among most economists. Another special feature of large populous countries is that they have large geographical coverages. This bring to focus the importance of transport, communications and spatial management of investment allocations. Also, the problem of rigidity or restriction in inter-regional movement, adds to the transaction cost in production in these economies.

Both in China and India a large majority of the population lives in rural areas and is engaged in rural activities. Hence, in their developmental activity, agriculture comes as a focal point. Finally, population policy in a populous country also became the key development objective. China’s success can be ascribed largely because of its effective population control.

In the pre-reform days, both in China and India top priority was given to equity, removal of poverty, increasing the social aspects of standards of living. This, however, was attempted in China under a total state-controlled economy and in India with the public sector playing a dominant role along with the market forces. Both the ecorlomies adopted a strategy of import substitution and heavy industry growth. China over time, realized that maintaining high standards of living is becoming difficult unless efficiency in resources use is increased. The attempt to maintain equity through forced saving and administered directives resulted in social unrest, which came to a breaking point after the controversial Cultural Revolution. The key objective of present reform in China is to bring incentives back in the economy by increasing the role of the market with minimum changes in their political institutions. This is defined in China as an experiment in a socialistic market economy.

In India, because of heavy import substitution leading to increased inefficiency in production, the generation of a surplus for maintaining the tempo of equity measures and social development become impossible. This led to heavy borrowing, culminating in a balance of payments crisis. To meet the crisis, the new economic policy in India has been initiated.

China started her new economic policy much earlier, from 1978, but experienced acceleration from 1992. Compared to China, India started very late. Although the deregulation of the India economy started in mid 80s, the new economic policy in fact came into force from June 1991. However, at the beginning of her reform process the general indicators of social development were much lower than in China. Therefore, the concerns among economists about the social cost of transition were comparatively less in China, as compared to India.

(A) China‘. Key Economic Reform Strategies

Unlike India, China was not forced to undertake reforms by any economic, political or social crisis. Rather, Chinese leaders, in spite of the significant achievements in China’s pre-reform era, in the elimination of mass poverty and substantial gains in the health, education and quality of life of the people, realised that the economy was becoming increasingly costly in terms of supression of personal consumption and that sustaining the past strategy will not be possible.

To reform the economy internally, the household responsibility system was put into effect in the countryside. Later on, in 1984, reform of the economic system has begun in the cities. During the process of economic reform, the Chinese Government stressed persistently on the role of commodity economy, while promoting the market mechanism under the guideline of macro- economic adjustment and control. Simultaneously, as part of socialist market economy public ownership was allowed to co-exist with the market. The socialist market economy consists of five key links such as the modern enterprise system, unified and open market, sound macro-economic adjustment and control, reasonable personal income distribution and multi-level social security system.

In order to open the economy to the outside world, as early as in 1980 four Special Economic Zones (SEZs) namely, Shenzhen, Zhuhai, Shantou and Xiamen were opened up. In 1984, fourteen coastal cities were opened up as a further step. In 1985, three delta areas along the Yangtze River and Pearl River and in the southern part of Fujian province as well as several other places were opened up. In the following years, Hainan Island, Pudong New Area in Shanghai, five big cities along the Yangtze River, eighteen provincial capitals and a part of inland and border cities were opened up. These zones were created initially as experimental stations to adjust and watch their operations vis-a-vis open market interactions.

There are four consistent themes in the Chinese approach to reform: gradualism, partial reform, decentralization and self-reinforcement of reforms. In almost all areas of reform, implementation has been spread over time, often several years and usually after experimentation. Such experiments were carried out in designated reform areas and after the results of trials were observed, these were then spread to other parts of the country. By using the gradual approach and by not subjecting the state sector to major shocks, China has succeeded in avoiding severe social costs during its transition. China’s economic reform strategy can be examined under four major heads: Agricultural reform, Rural enterprise reform, State enterprise reform and Trade liberalisation.

1. Agricultural Reform 

Agricultural reform started with the introduction of the household responsibility system and abolition of communes in agriculture and with this, Chinese authorities laid a firm foundation for reforming other sectors. Prior to 1979, agricultural production was organised according to communes that consisted of brigades and production teams. Detailed production planning decisions were made by higher level authorities and often did not take into account the local conditions. Remuneration for workers was based on the total income of the commune and was not closely linked to individual productivity. However, farmers generally were allowed to have private plots of land and to market their production from them at rural trade fairs.

The inefficiency of the agricultural sector prior to the reform was reflected in slow growth of production. To improve agricultural performance, the Government initiated reforms in the rural areas in 1979. The size of private farm plots was increased, diversification of production was encouraged and rural free markets for agricultural products were allowed to grow. Experiments were conducted with various methods of giving individuals greater autonomy and by 1984 the household responsibility system had emerged as the dominant arrangement. Under this system, right to use collectively owned land was contracted out to farm households for a fixed period. The household was responsible for meeting a share of the production teams mandatory state procurement quotas, taxes on agricultural output and contributions to collective services. After meeting these obligations, the household was allowed to dispose of its output either by selling to the state at negotiated prices or in the rural free markets.

The household responsibility system, together with increases in the relative prices of agricultural products, unleashed substantial productivity gains and resulted in a diversification of agricultural production. The growth rate of agricultural output averaged nearly 8 per cent a year during 1979-84, compared with a growth of less than 2 per cent a year in 1958-78. However, it declined to about 4 per cent per annum during 1985-93.

2. Rural Enterprise Reform

Since 1979, restrictions on non-agricultural activities in the rural areas have been relaxed and enterprises in these areas have been allowed to sell their products at market prices. As a result, a large number of individually or collectively owned enterprises were established or expanded in townships and villages. These township and village enterprises (TVEs) absorbed significant amount of the surplus labour that emerged as agricultural efficiency increased following the implementation of the household responsibility system. Competition in input and output markets is generally tougher for the TVEs than for state enterprises and their budget constraints are harder, reflecting their less easy access to subsidies and credit. Consequently, they have proved to be more flexible and more responsive to changes in market conditions than their counterparts in the state sector. The TvEs have made an important contribution to China’s development by providing competition for state enterprises and creating an environment for the development of entrepreneurial expertise. 

The rapid growth of the TVEs has led to a dramatic change in the economic landscape, particular1y in the countryside, where they were estimated to total about 19 million and to employ more than 100 million workers in 1992 out of a total rural labour force of about 430 million. They contributed to about half of rural GDP and accounted for about one-third of the country’s total in 1992.

3. State Enterprise Reform

In the pre-reform period, State enterprises were centrally controlled via the plan; leaving enterprise managers little or no room for initiative with respect to production, pricing, marketing and investment. Enterprises transferred all their surplus funds to the State, while losers were covered by budget subsidies. Investment funds and some working balances were provided to the enterprises through the Government budget in the form of grants; the banking system supplied additional working capital. Wages were paid according to a centrally approved wage scale and age was a major determinant of wage differences among worker. Under this system, enterprises were not held responsible for their financial results; instead, their main responsibility was to fulfil quantitative output targets established by the plan. Enterprise managers therefore had little incentive to improve efficiency and productivity.

The focus of enterprise reforms has been on increasing incentives by enhancing the enterprise decision-making authority and by providing them with greater financial resources, while making them more responsible for their own profits and losses. Following some experimentation, the Government in 1983 initiated a changeover on a national scale from profit transfers to income taxation and by 1986 profits of almost all enterprises were subject to taxation rather than being fully remitted to the Government. Since 1986, the Government has started to reduce interference in the day-to-day operations of the enterprises through the introduction of contracts for large and medium-sized enterprises. Under this contract responsibility system, targets were specified for an enterprise over a three-or four-year period for its performance, its production quota to the state and financial obligations to the Government. About 90 per cent of the enterprises had signed management contracts by 1988.

To accompany these changes, a bankruptcy law was enacted in 1986 and become effective in 1988, but until recently it was hardly used against state-owned enterprises. In 1988, the authorities also enacted an Enterprise Law, which seeks to transform the SOEs into fully autonomous legal entities that are responsible for their own profits and losses. Detailed regulations giving effect to the broad provisions of the law were issued in July 1992.

While reforms contributed to a pick up in the growth of output by the state enterprises, their share in total industrial production fell from 81 per cent in 1978 to less than 50 per cent in 1993, reflecting the greater dynamism of non-state enterprises and the serious problems that continue to affect the efficiency of state enterprises. Price controls persisted, production quotas for sale to the state remained part of the contracts, the SOEs had access to certain quantities of cheap raw materials, credit was readily available for investment and the budget continued to provide support for loss-making enterprises. It shows the unfinished nature of the reforms which is jeopardizing the macro-economic management. SOEs are contributing to a rapid rate of credit expansion, which reflects the mounting demands on the state budget to cover enterprise losses and low revenue buoyancy. To address these problems, the authorities during 1991 announced some 20 measures, 12 of which were to improve the operations and external environment of the SOEs and the others were aimed at facilitating the operation of market forces on the SOEs. Some measures, such as reducing mandatory planning, were a further step towards market economy. 

Another important experiment in SOEs reconstruction is the shareholding system boosted by the establishment of stock exchanges in Shanghai and Shenzhen. Except for large enterprise in strategic sectors of the economy such as defence and high technology, most SOEs could eventually be converted into shareholding companies with the State retaining a significant share.

About 70 per cent of the losses of SOEs are policy-induced, mainly because of price control and if these enterprises are to be financially independent, it is necessary to liberalise the prices of the goods and services they produce. 

4. Trade Liberalisation 

Prior to 1978, China’s foreign trade was handled exclusively by 12 stateowned foreign trade corporations (FTCs) organized along product lines. These corporations procured and traded the quantities directed by the central plan and all profits and losses which did not have direct access to foreign markets were given production targets under the plan for supply to the FTCs. Through this trade plan, balance of payments was controlled.

Under the reforms, the FTCs were progressively given greater autonomy and made more accountable for their operations, while the administration of the system was decentralized and provincial authorities were given authority to establish their own FTCs. By 1989, most local branches of national FTCs had become independent entities responsible to the local authorities for their financial results, bringing the number of FTCs to about 4,000.

Starting in 1991, a number of new measures were taken to liberalize trade, in part stimulated by China’s efforts to make its trade conform to international practices in the context of its application for re-entry into the WTO. All direct budgetary export subsidies to foreign trade corporations were eliminated from January 1991, and export tariffs on mineral ores were reduced. Import duties were reduced on a number of commodities and China’s customs duty regulations were replaced with the harmonized commodity description and coding system. In April 1992, the import regulatory duty was eliminated and in October 1992, it was confirmed that the import substitution regulations had been terminated. In addition, under a memorandum of understanding with the United States, China announced its intention to publish many internal trade regulations to increase the transparency of the system. Other trade-related measures included a revision of the patent law to bring it into line with international conventions and various steps toward establishing legal conventions and practices for the conduct of external trade.

During the early stages of reform, various arrangements were tested for sharing foreign exchange with the objective of improving incentives for exports. A retention system was evolved, under which exporters surrender their actual foreign exchange and are issued retention quotas by the State Administration of Exchange Control (SAEC) equivalent to a portion of such earnings. Through 1990, a complex set of regulations had been developed that allocated foreign exchange differently according to industrial type and provincial location. In 1991, a significant simplification occurred under which a uniform retention rate for enterprises was set throughout the country and standard formulas were established for sharing foreign exchange between the centre and the localities. During the early 1990s, experiments with cash retention have been undertaken (notably in Hainan, Shanghai and Shenzhen).

In December 1991, all domestic residents were allowed to sell foreign exchange at the swap rate at designated branches of banks; since then, there has been virtually no restriction on the sale of foreign exchange in the swap centres. However, restrictions remain on purchases and for about three months in early 1993, the authorities attempted to cap the 5Wap market exchange rate. This effort was abandoned when it became evident that most transactions were being driven into the black market.

With the new exchange arrangements in 1986, the official exchange rate was in effect pegged to the US dollar. There yere two devaluations in 1989 (21 per cent) and 1990 (9 per cent) and in 1991, small frequent adjustments in the official rate Nere made. By April 1993, the real effective exchange rate of the official exchange rate had depreciated 33 per cent more than in 1986 and 70 per cent more than in 1980. The authorities have indicated that the ultimate goal is unification of the exchange rates and convertibility of the currency.

(8) Indian Economic Reform Strategy 

In India there were several attempts to liberalize or reform the system of economic management. In 1980, India began to adjust the long-pursued economic policy which stressed on development of state-run heavy industry and import-substitution. The main contents of the new economic policy consisted of measures such as to relax the control on private enterprises and foreign capital, to open industries (e.g. aluminum making, machine-tool building, chemical industry, chemical fertilizer, electricity, pharmaceutical etc.) which had been monopolized by the public sector, to foreign and private capital. It also raised the proportion of private capital in the planned investment from 45 per cent in the Fifth Five-Year Plan (1974-79) to 46 per cent in Sixth Five- Year Plan (1981-86). India’s competitiveness had weakened because of its technological backwardness. In order to change the situation, the Indian Government revised the policy of import substitution to provide incentives to export and reducing the protection on imports.

In the 1980s, the Indian Government stressed on reorganization of low-efficient state-run enterprises and partial disinvestments, further relaxations of the control of private enterprises and foreign capital, introduction of a competitive mechanism, reduction of protection for domestic industries, promotion and importation of advanced technological equipment from abroad etc.

In July 1991, India had introduced a series of economic reform measures. These measures were initiated with the purpose of macro-economic stabilization mainly by a sharp reduction in the deficit of the public sector in the Central Government budget. The Government continuously attempted to reduce the ratio of fiscal deficit in GDP by reducing public expenditure, increasing taxation, abolishing part of commodity price subsidies and a partial privatization of public enterprises. In addition, a new trade and industrial policy was announced. The new industrial policy abolished the system of industrial licences, opened nine of the 17 industries which are monopolized by the state to private enterprises, the proportion of foreign equity was raised from 40 per cent to 51 per cent. It also eliminated licensing requirements for private domestic and foreign investment in certain industries and relaxed the restrictions under the Monopolies and Restrictive Trade Practices Act on expansion, diversification, mergers and acquisitions by large firms and industrial houses. The power sector, which had been a monopoly of the public sector, was opened to private, domestic and foreign investors. Regulations on pricing and distribution of steel were lifted. Domestic and foreign investors were invited to invest in the production, refining and marketing of oil and gas and in certain segments of the coal industry. A National Renewal Fund was established to assist workers who might be laid off during the process of modernizing, restructuring or closing uncompetitive firms in the public and private sectors. The Committees appointed by the Government to look into the functioning of the financial sector insurance and the tax system have submitted their reports. Another committee has formulated guidelines for the privatization of public enterprises.

The new trade policy deregularised export and relaxed control over import of advanced technological equipment. In order to promote exports and link India with the world markets, the Government has reduced tariffs many times. In February 1993, the rupee on trade account was declared to be fully convertible. In terms of policies related to foreign capital, the important measures which have adopted since 1992 include: foreign institutions are permitted to buy shares issued by Indian companies; the development of many kinds of minerals has been opened to foreign capital in accordance with the revised law of mineral products and India signed the convention of protection for foreign investment. 

(C) Results of Economic Reform

In this section, I would like to explain the diverse economic results of the two countries over the last 14 years. The annual growth of Gross Domestic Product (GDP) in China during 1980-92 was 10.1 per cent as compared to 5.2 per cent for India. China had a per capita Gross National Product (GNP) of US$ 609 in 1992 compared with US$ 310 for India, with an average annual growth rate of 7.6 per cent and 3.1 per cent respectively. In specific sectors, especially in agriculture, the Chinese have made considerable progress with a growth rate of 5.4 per cent compared to India’s 3.2 per cent during 1980-92. In regard to industry, China recorded an average annual growth rate of 11.1 per cent in comparison with India’s 6.4 per cent during the same period. In the 1992-94 period, the Chinese economic growth rate has been very high at about 13 per cent per annum. In the case of India, the growth rate has been about 4 per cent in the same period. The annual rates of inflation during 1980-92 was 6.5 per cent in China. In the last two years (1992-94) the inflation rates have reached double-digit levels in China. India’s inflation rate during the same period of 1980-92 was 8.5 per cent and has continued to be in the range of 8 per cent in the 1992-94 period.

Savings and investment ratios to GDP have been significantly higher in China. Gross Domestic Savings as a proportion of GDP in 1992 was 38.7 per cent for China compared with about 23.10 per cent for India. The Gross Domestic Investment ratios were 37.7 per cent and 23.6 per cent correspondingly. The figures for Foreign Direct Investment (FDI) shows that China has been much more successful than India in attracting GDI. Foreign Direct Investment in China was about US$ 95.6 billion from 1979 to 1994. In the case of India, FDI, which was negligible in 1991, has picked up substantially to reach a level of US$ 3.0 billion in the period of 1991 March to 1995 June.

In regard to foreign trade, the increase in exports and imports since 1979 has been extremely rapid in China. In fact, China’s foreign trade grew even faster than the rest of the economy. The trade turnover rose from US$ 38 billion in 1980 to US$ 236 billion in 1994. The annual export volume in 1994 reached US$ 121 billion and the import volume was US$ 115.7 billion. India’s export, on the other hand, witnessed an average annual growth rate of 5.9 per cent during 1980-94. India’s trade turnover in 1994-95 was US$ 54 billion only.

The ratio of China’s exports and imports to its GDP has also risen rapidly since 1978. In the fourteen years of reform and open door policy from 1978, China’s ratio of exports to GDP rose sharply from 5.31 per cent to 19.58 per cent, while for India this was 5.6 per cent to 7.6 per cent. As a result of China’s phenomenal expansion in foreign trade, its share in GDP rose from 13 per cent in 1980 to a high of 37 per cent in 1991. In India, the share of trade in GDP fluctuated within a narrow range of 18 to 20 per cent. Thus, not only did China’s exports grow faster than India’s in dollar terms, they also grew faster in relation to domestic growth. While India’s share in world exports declined from over 2 per cent in the early 1950’s and stabilised around 0.5 per cent, China more than doubled its share from 1 per cent to 2.7 per cent between 1980-end 1994. 

China-India: A Comparative Outlook

There is a major difference between Chinese and Indian reforms. In India, agricultural land has always been in private hands and the organization of production consisted overwhelmingly of small owner-operated farms. Since Indian agriculture was never communised, it did not have to be decommunised. Further, Indian Government has proposed no significant agricultural reforms. Thus, the spectacular growth in output and productivity that China has experienced since 1978 after the household responsibility system has no counterpart in India, where the growth in total factor productivity is more gradual. In China, production of food grains rose from 163 million tons in 1952 to 450 million tons in 1993. In India, output of food grains was 51 million tons in 1950-51 and 177 million tons in 1992-93.

The contrasting achievements of India and China can also be seen in terms of important social parameters which show the position of China to be better than that of India. While life expectancy at birth in India is still as low as 59 years, the Chinese figure is 10 years more (69 years). In fact, mortality is two and a half times as high in India (79 per thousand live births in comparison with China’s 31). China is well ahead of India as far as the elimination of health deprivation is concerned. Another important area in which the contrast is extremely sharp is basic education and literacy. In China, the proportion of rural population below the poverty in this period, and the magnitude of reduction has been much more modest: a fall from 55 per cent in 1977- 78 to 42 per cent in 1989-90. China has done much better than India in this respect. This is mainly due to the high rates of growth of output and real income in China, which have helped to reduce poverty and to improve living conditions.

Concluding Remarks

The economic reform processes in China and India have been marked by extensive decentralization and deregulation, adjustments in the exchange rates, reduction in tariffs, financial sector reforms and modernisation of industry. In China, however, there is a distinctly discriminating "area-based" policy where zones have been provided with faster liberalisation measures, more favourable incentive packages and easier access to FDI. These then act like windows to establish contact with the rest of the world. This is warranted because China had no significant experience in the operation of a private sector market economy. In India, there has been only a limited effort at establishing special economic zones, primarily oriented towards exports. Since India too was a relatively closed economy in the pre-reform period, the successful way China has used the SEZs to open up the rest of the economy should be a lesson for India. For, in terms of achievements, the Chinese approach has induced a much better response than the Indian economic reform policy.

Both India and China have a major role to play in the future international economic scenario. But, they face a number of similar short and long-term economic problems. The Chinese economy is at present "overheated" and needs to contain its inflation and prices. It also has to streamline its centre-state relations and institutional framework for the conducive use of indirect, market-based instruments of economic management by the Government. India also has a problem of inflation, but in contrast to China’s problems of "too much growth", her problem is one of "too little growth". Market-based economic management in India is in a much better shape but it too has a centre-state problem, though of a different kind: the problem of percolation of economic reform to the grass-roots because of some rigidity in the constitutional allocation of funds and revenue sources between the Centre and the States. India needs more decentralization whereas China’s central authority is trying to revive its lost control on many provinces. Both economies have problems of building up an infrastructure base and containing growing inequality, both spatial, and between rural and urban areas. In the long run, China has the most challenging problem of establishing compatibility between its reform strategy and political structure and economic institutions. India is fortunate in this respect as her political institutions are closely geared to a democratic market-based system.