[Answered] Analyze the decentralization model in China and its role in the country’s economic growth. How does it compare to the Indian federal structure in terms of governance and fiscal responsibilities?

China’s decentralized governance model played a crucial role in its economic miracle, especially during the period of rapid industrialization and export-led growth. Local governments were given broad fiscal and administrative powers, enabling them to compete for investment and promote regional growth.

Economic Growth through Decentralization

• Local Autonomy and Growth: Local governments had a mandate to spur economic growth, using tools like land rights to attract investors. Offering industrial land at low costs, they prioritized industrial output, aiming for increased regional growth and future tax revenues.
• Structural Overcapacity: Local governments, focused on short-term growth, overinvested in industrial projects, resulting in wasteful investments, excess production, and loss-making entities.
• Centralized Corrections: Under Xi Jinping, the central government sought to address the excesses of decentralization by strengthening central control and directing investments more strategically, especially in sectors like semiconductors. However, this led to inefficiencies as local governments continued indiscriminate investments, resulting in numerous firms being unproductive, with around 30% of industrial firms making losses by mid-2024.
• International Perceptions: China’s international image, particularly its behavior in the global economy and geopolitical arena, has further complicated its decentralization model. Overcapacity in industries like telecom and electric vehicles is now seen as a national security threat by other countries, while initiatives like the Belt and Road Initiative (BRI) have not succeeded in creating sustainable demand in participating countries.

Comparison of China and India

• Central Control: China’s decentralization model is more centrally controlled than India’s federal structure. The central government in China retains significant authority over local governments.
• Fiscal Federalism: Both countries have adopted fiscal federalism, but the division of revenue and expenditure responsibilities differs. China’s local governments have more autonomy in revenue generation and expenditure.
• Economic Decentralization: China has been more aggressive in promoting economic decentralization through SEZs and other special zones. India has also implemented regional development policies, but its approach has been less centralized.

Conclusion

China’s decentralized model, which once fueled its rapid economic growth, has now reached a point of diminishing returns due to overcapacity, inefficiency, and excessive competition among local governments. India, with its federal structure, can avoid the pitfalls of extreme decentralization by ensuring that state-level competition for investment is fiscally responsible and strategically aligned with long-term national goals.