The Power of Decentralisation: Why China’s Economy Outpaces India’s
China may be more centralised politically — but economically, it’s the opposite, and that made all the difference
China has a PPP per-capita GDP that is 2.5 times more than India (PPP indicates its accounting for the fact that China is more expensive than India, in nominal terms its 4.5 times larger).
There is a misconception that this is because China is politically centralised and India is decentralised. But this is opposite of the truth.
The Decentralisation Myth
Let’s look at India and compare it to both China and the US, and see how the executive and the economy in India is far more centralised.
According to a research paper, in China, 51% of the total government spending is controlled at the city level, whereas in India it is 3%, and 27% in the US. This makes India far more centralised than nearly all countries in the world.
Also mentioned in the same paper (and this tweet) is the following graph explaining that while US and China employ around 60% employees at the local government level, India employs less than 20%.
Why does this matter?
Having the source of funding close to the ground allows pinpoint decision making and easier accountability. Let’s understand this both from a business ecosystem perspective and a governance perspective.
Impact of Decentralisation on the Business Ecosystem:
In China, cities try to setup one-stop approval process, and provide multiple incentives for investment to businesses looking to setup units. In India, cities don’t even have that power. Even if say a small town would want to give incentives to a manufacturer to setup shop, neither would they have the budget, nor the decision making power to provide any such tax breaks, reduced regulatory burden, or incentives.
There is an unverified account describing investments by the government in China and India.In China, when the state wanted to boost the startup ecosystem, it partnered with top venture capitalists and co-invested, letting the VCs pick the winners. It worked. In India, the government also wanted to invest — but let bureaucrats (probably some IAS officer who’s never run a startup and has no idea about upcoming businesses) and politicians choose which startups to fund. Not a single one of those grant recipients raised follow-on private capital.
Impact of Decentralisation on Governance:
When power and funding are far from the ground, outcomes suffer. If a road isn’t built or trash isn’t collected, the person responsible is too far removed to care — and rarely held accountable. In a decentralised system, local representatives see the direct impact of their decisions, are better incentivised to act, and held accountable for bad behaviour.
In a TV series on Osho, I remember watching an episode where the residents of the commune in the US could convert that area into a town because they had a certain number of residents living there. This number was very small, in the lower hundreds if I remember correctly. Compare that to the horrible mess in India where Pune had expanded far beyond its municipal limits. There were areas like Wagholi that by no stretch of imagination was a village anymore. But these areas did not come under any municipality, nor could they vote and create a new municipality, which should have been the right way forward. It was only when the court ordered that these get included within the Pune Municipal Corporation’s boundaries that these areas officially became urban.
In India, there’s a saying — ‘There are 3 levels of power, the PM, the CM, and the DM’. This in a nutshell encapsulates everything that’s wrong. How many of you remember the name of the Mayor of your city? In India, the Mayor is powerless, it’s the CM and the DM that holds all the power. And that makes city governance in India ineffective.
Further Reading:
If you want to learn further, you can read about this article by Pranay Kotasthane saying that India isn’t competing against China, it’s competing against many Chinese cities.
