The Wealth of Nations — an Indian Entrepreneur’s take

As an entrepreneur in India, I frequently came across comparisons of Indian and Chinese economies — Indian economy is just 10–15 years behind China’s; Indian economy will follow China’s footsteps, rather than America’s; Indian entrepreneurs should emulate successful business models from China;…

Intrigued, I set out to build my own mental model.

The Facts

1. China’s current GDP-per-capita is almost 5X that of India’s (China at $8.8K, India at $1.9K). However, until 1990, GDP per capita was almost the same for both countries. Starting 1990, China’s GDP per capita just accelerated at a fast pace.
2. China’s current exports are almost 5X that of India’s. However, until 1980, both countries exported approximately the same $ amount. Post economic reforms in 1978, Chinese exports just skyrocketed.
3. Until 1980, exports accounted for ~6% of GDP for both China and India. However, China witnessed a sharp rise in exports with exports accounting for 36% of GDP in 2006.
4. China currently receives 4X more FDI than India. In the early 2010s, China received 10X more FDI than India. FDI inflows into China picked up pace only in 1992, 14 years after its economy opened. FDI into India picked up in 2006, 15 years after Indian economy opened in 1991.

source: World Bank

The Hypotheses

Chinese economic reforms resulted in China becoming a global manufacturing hub (90% of Chinese exports are goods). Manufacturing being labour intensive, a huge section of the Chinese population received the benefits of these reforms in the form of higher wages. On the other hand, Indian reforms were service led, benefiting primarily the white collar workers (goods account for only 62% of India’s exports).

Exports are the only way to create long term wealth. India needs more of it.

Wealth Creation vs. Wealth Distribution

Ask any Indian consumer internet company which city contributes the most revenue — most probably you’ll hear Bangalore. Even though Delhi and Mumbai have almost double the population and more wealth. This is because Bangalore is home to the largest number of people working in the IT sector in India. Majority of these people work at companies exporting IT services globally.

For Indian consumer internet companies to scale and become huge, we need many more people to contribute to India’s exports. We first need to get majority of Indians to export and create wealth. We can then have India-focused companies to distribute wealth.