Markets or Socialism? Successful infrastructure sectors require planning and coordination. In 1978, China chose an export-led growth strategy, and this required a focus on global connectivity. Today, China has become the world’s factory. Their government invested heavily in infrastructure to boost competitiveness of production networks, and the transportation sector in particular received massive investments. In essence, this was the result of much more than a shift in investment policy; it meant a shift in mentality. For China, this had meant a dramatic change to an economic reform agenda that was principally built on the philosophy of “getting rich first” (xianfu lun). China’s transport sector strategy extended this philosophy to suit their investment program: To get rich, build roads first; to get rich fast, build fast roads. As a result, China has over 83,230kms of expressway.  It is only in last several years that mobility for the masses has been prioritized in transport investments. In sharp contrast, India’s transport agenda pre-dates even its existence as an independent nation. The 1943 Nagpur Plan envisioned a connected India where, in twenty years, no village would be more than five kilometers away from an all-weather road. The philosophy behind this Plan has remained in many of India’s infrastructure programs and, as a result, today, rural roads account for two-thirds of the Indian road network. It is only in the last few years that India has embarked on program for high speed expressways.

Power for People? Power capacity is another area where there is a massive gap: China’s effective power capacity is more than five times that of India’s. India also has very high losses in transmission and distribution, estimated at 27% last year compared to less than 7% for China. And given India’s emphasis in providing its citizens with access to electricity, it is clear that it is not the transport sector alone where Indian policy makers have chosen individual welfare over growth and productivity improvements for the economy. Fortunately for more than one billion Indians, this has meant that differences in power capacity and high efficiency are not that large at individual household levels. Even though China’s effective power capacity is so much greater than India’s, average power consumption for a household in India is 40% of that in China: 145 kwh per capita for India versus 360 kwh per capita for China. This is because Chinese industries consume over 75% of China’s total power generated whereas this share in India is only 36%.

Roads or Schools?  Fiscal space is another factor where these two countries are far apart: Until early 1990s, India invested more than China in infrastructure. After the 1991 crisis, India faced serious fiscal constraints which resulted in a dramatic slowdown in infrastructure investments; Whereas China, with its high savings rate, was instead able to ramp up public investments quickly. The 1994 tax-sharing reforms in China placed more revenue resources in the hands of the central government and simultaneously these reforms transferred increasing fiscal expenditure burden on the local governments. Though investment data are not strictly comparable for these two countries, India invested $50 billion (about 4.7% of GDP) in infrastructure last year (2010-11) compared to China’s $635 billion (or close to 9%). Infrastructure was allocated 37% of China’s stimulus package of RMB 4 trillion whereas education and health received 3.5%. While China has tripled infrastructure investments in last three decades, the education sector’s share has only increased by 1% of GDP during the same period: from 2.5% in 1982 to 3.5% in 2009.

Rural or Urban? China’s infrastructure development model had urban bias. China invested in cities and monetized land assets to pay for the needed funds to finance urban rejuvenation. India, with its laws, some dating back 100 years, is yet to use land effectively for financing the huge demand for urban infrastructure. Last year’s McKinsey research indicates that India spends on average $17 per capita compared to seven times that amount in China for cities. It is only in the eleventh plan in China that rural development seemed to get the priority that India has struggled to deliver for last six decades.

Public or Private? India is using private sector in a big way to bridge large financing gaps, whereas China rejected this instrument a decade ago and has instead adopted a joint venture approach to finance, supported by loans from local banks. India’s current plans have seen over 36% of contributions to infrastructure investment come from the private sector. In 2009 infrastructure investment in China peaked at an all time high of 18% of GDP.  Most of this was financed through increasing local debt, bank credit expansion, and higher fiscal deficit.

Despite some recent changes, it is clear that China’s economic statism has nurtured and enabled markets through infrastructure development whereas Indian politicians have put people first in their plans. And although overall benefits of infrastructure development remain uncertain, both approaches imply large costs. It is these efficiency costs for China and India that I will explore in my next post.