China and India: The two differ in business as much as they do in politics

The excitement among investors over the prospects of the "Brics" �C the big emerging markets of Brazil, Russia, India, China and South Africa �C has begun to metamorphose into a more realistic enthusiasm for "Chindia". China and India, after all, are by the far the largest and fastest growing of the five.

China, with 1.3bn people, and India, with 1.1bn, happen to be the world's most populous nations. Both economies are growing exceptionally fast, and both are increasingly dependent on imports of energy and raw materials.

Even some of the obvious differences that do exist are simply a matter of timing. Because China started growing earlier and grew faster, India is poorer and the average Indian still has only half as much income as the average Chinese.

The Indian economy, meanwhile, is starting to become more like China's. Jonathan Anderson, head of Asia-Pacific economics for UBS, notes that India, with low savings rates and resulting low investment, used to look more like Latin America than east Asia. Now its savings rate is approaching 30 per cent, and exports are rising as a share of gross domestic product.

Mr Anderson told the Foreign Correspondents Club in Hong Kong recently: "India is looking like a tiger." His talk was appropriately entitled: "India, the next China? Or China, the next India?"

Yet some of the differences between the two are so vast that they undermine any attempt at a common analysis. China is a Communist dictatorship, while India is the world's largest democracy. China's population growth will stop in the next two decades, while India will have to find jobs for hundreds of millions of young job seekers as the number of its inhabitants exceeds China's and heads towards 1.6bn.

Chinese leaders typically hand down orders for economic reform from the top, organise the rapid building of infrastructure and cater for the urbanisation that comes with economic growth.

Indian governments generally resist reform, prevaricate over investing in infrastructure and �C sentimental as they are about a non-existent ideal of rural Indian life �C refuse to cater for the tens of millions of rural migrants flooding into the cities.

When considering these attitudes, and the fact that China is a manufacturing power exporting nearly $1,000bn a year or seven times as much as India, it is tempting to conclude that China is destined for success and India for failure. The reality is more complex and more interesting, largely because of the way politics interacts with markets and with the private sector.

Indian financial markets are lively and robust (though not immune to bubbles), whereas Chinese markets are small and highly constrained by the limitations of the country's private sector and tight government controls.

India's leading private companies have carved out niches in sectors such as information technology, pharmaceuticals and financial back-office outsourcing that would normally find a place in a much more advanced economy. And they have reacted to onerous labour regulations by developing capital-intensive businesses that would not normally exist in a country with low-cost, surplus labour.

As a result, a cohort of the best Indian companies boasts an international competitiveness that allows them to make outward investments in developed economies �C and not just in the natural resources sector, where Chinese state companies are also eager buyers. Even if one excludes Tata's contested $10bn bid for Corus, the European steel group, overseas acquisitions by Indian companies will more than double to this year from last year's $4.5bn.

"Currently, the Indian model is generating more companies ready to move to a global scale of operations," says Gordon Orr, Greater China chairman of McKinsey, the consultancy. "The advantage of the Indian model has been the emergence of a few large-scale, capital-intensive companies early on."

In China �C although outsiders imagine a rampant capitalist sector thriving under the benign guidance of a nominally Communist government �C domestic private companies remain constrained by the need to work with powerful provincial governments and the state-owned enterprises that dominate all the key sectors of the economy.

"Private firms say: 'We can only be the concubines of the state-owned enterprises or the mistresses of the multinationals," comments a Chinese economist, who asked not to be named. Asked why the private sector could not be unleashed for the benefit of all, the economist replied: "It would be good for the economy, but not for the party."

Foreign investors say the Communist Party still has an ambivalent attitude towards private companies. It regards their main roles as giving support to state-controlled companies and providing employment for millions of workers �C which is why light industrial activities such as furniture-making are favoured activities.

With a couple of exceptions �C the jury is still out on Lenovo's acquisition of IBM's personal computer business �C Chinese brands have so far failed to make a big impact in foreign markets.

Struggling to make themselves heard among the many bullish analysts, a few sceptics have sounded warning notes.

India, they say, will be hamstrung by populism, a reluctance to open its economy and infrastructure bottlenecks.

China's growth will be stunted by its dependence on the US and other uncertain foreign markets (one of the disadvantages of openness) and by the Communist Party's refusal to allow the rise of a real free-market economy.

"It's taken for granted that China will grow fast unless there is political trouble," says Diana Choyleva of Lombard Street Research. "Even on economic grounds, that's not so clear."

In the race to become developed economies, China and India have very different challenges and can hardly be said to be on the same track. They might end up in the same place. But if they do, it will take a long time and each will have achieved success by a very different route.