By Nirvikar Singh,
In the last quarter of 2023, BYD, a Chinese automobile manufacturer, overtook Tesla as the world’s largest seller of electric cars. BYD was founded in 2003, but much of its growth has come in the last few years, as the technology has matured, and as demand has grown in response to the pressure of climate change. Other Chinese car manufacturers are following in its footsteps, and China is well on its way to being a leader in the transition to electric vehicles (EV).
BYD began its transition to EV production over a decade ago, and has been achieving success in export markets, particularly Europe. The US has higher tariffs against Chinese cars, making exports more difficult. Europe is also worried about Chinese imports, and may take restrictive steps. But BYD is ready to do what the Japanese did, and set up production in the US and in Europe.
By contrast, India, while a large producer of conventional-technology cars, is barely getting started with the transition to EVs, which has to be a part of the global response to climate change. India lags behind China in the obvious areas—infrastructure that is much inferior, a smaller and poorer domestic market, scarcity of capital, and quality gaps, especially at the cutting edge of technologies.
All of these disadvantages can be reduced over time, but the market-driven speed of such changes can be slow. One reason that the US and Europe are unhappy with China is that they complain about unfair government subsidies. But subsidies exist in many forms, even in developed countries. In the case of China, local governments often provide those subsidies, in the form of access to land and other local resources. National consumer subsidies have also been used for EVs in China, just as they are in the US.
The EV success story in China is another example of a familiar pattern of economic development in that country: business and government working in tandem, but with the discipline of competition. The benefits of market economies come from the incentive effects of competition, and export-orientation provides one source of competition. Being able to take on developed country firms in their home markets requires competing on quality, not just on price, and China has followed the model of Japan, South Korea and Taiwan. In the case of China, competition among local governments (meaning large urban area governments, not the dominant Indian idea of village self-rule) has been an important part of the development process.
Sometimes competition can be inefficient and destabilising, and China is struggling with problems such as a glut of real estate and high indebtedness for local governments. That happens when the incentives for dynamism in attracting and building factories and industries lack adequate guardrails. In the Indian case, the problem has tended to be over-caution, rather than overreach, although the period after the global financial crisis saw an unsustainable investment boom in India.
In such cases, there has to be some component of investment that is based on expertise and hardheaded calculations. BYD had an early investment from Warren Buffet’s financial holding company, Berkshire Hathaway. They have recently been cashing in their stake, possibly because of the changing risk environment surrounding China. But India has tended to do less well in attracting such capital into manufacturing.
In the Indian case, domestic financial intermediation lacks expertise for large, risky projects, and funds are scarce. There is a chicken-and-egg problem because expertise comes with experience, but lack of expertise acts as an obstacle to scaling up investment in the first place. One other barrier is the lack of confidence in the government’s ability to define and consistently support strategic industrial policy. EVs require a new supply chain, including a range of semiconductors.
India’s national government is promoting the idea of domestic semiconductor manufacturing, but one Silicon Valley veteran suggested to me that top bureaucrats do not have a good grasp of all the things that have to be in place for complex, expensive efforts such as making microprocessors. The more general point is that developing high tech supply chains requires high levels of knowledge and coordination.
China has more competition among local governments than does India. Much of this is tied to decentralisation of authority and funds, but also to incentive mechanisms. Indian governmental institutions tend to be less amenable to risk taking and to incorporation of outside expertise. Advancement is not based on the same criteria of promoting industrial development.
It might be argued that governments are supposed to provide public goods such as basic health and education, not act as corporations. But every case of economic development has involved some governmental role beyond the narrowest possible conception. Accountability mechanisms, including robust electoral competition, can keep cronyism and corruption in check while economic development is prioritized. India is moving in the direction of strategic industrial policy. Industries such as EVs and semiconductors will provide important test cases. And studying the Chinese experience on these fronts will provide vital lessons.
(The author is Professor of economics, University of California, Santa Cruz)