THE justified pride that India takes in its IT prowess, and the outsourcing boom it has helped spawn, cannot disguise its irrelevance to the vast mass of Indians. The entire industry employs only about 1m people. According to estimates by NASSCOM, its lobby, income in 2004 from exports of software and services, and from outsourced services such as call-centres, reached nearly $17 billion, equivalent to a quarter of India's merchandise exports. But the industry makes up only 4% of India's GDP, and only a small fraction of the service sector as a whole.

So the notion that India can somehow skip a development phase and jump straight to a post-industrial, IT-services-led economy is not taken very seriously. That it has any currency at all stems from a trend that at first sight seems odd: as agriculture's share in the economy has shrunk, its place has been taken not by industry but by services (see chart 5).

The contrast with China is stark. There, as farmers leave the land they go into labour-intensive manufacturing. However, research by Jim Gordon and Poonam Gupta of the IMF has shown that, although services make up a somewhat bigger share of its economy than is usual for a country at its stage of development, India is far from being an oddity. Rather, it is China that is peculiar in having such a stunted services sector. This may be a relic of the old Stalinist model with its emphasis on heavy industrialisation in the countryside. Or it may simply be due to the under-reporting of China's informal sector.

For India, it is nevertheless worrying that industry has, until recently, grown so much more slowly than services, and has provided so few jobs. The government's numbers show that in 2002 just 6.2m people were employed in manufacturing, fewer than in 1991 (6.3m)—though this partly reflects a change in definitions.

In China, about 160m people work in “secondary industries”, ie, manufacturing. One reflection of the country's resounding success at becoming the world's workshop was the global panic at the lifting of quotas on its clothing exports at the end of last year. Some forecasters thought that China might snatch as much as half of the big quota-constrained markets, the EU and America. India, by contrast, was expected to grab at most 15%, even though the business plays to Indian strengths—cheap labour, a domestic supply of both cotton and man-made fibres, and a long textile tradition. Yet here, as in so many other areas, India is following in China's wake, not overtaking it.

Under Manmohan Singh as prime minister, the Indian government has recognised where it needs to concentrate its resources if the country is to raise its long-term growth prospects from about 6% a year to 8% or more. In speech after speech he and his ministers emphasise the importance of improving the lot of farmers, of raising levels of investment, especially in infrastructure, and of delivering elementary education and primary health care. In January, Mr Singh even spoke of adopting “the Chinese model”. But does that really make any sense in such a different political and social environment? It does, up to a point. Consider four areas: agriculture, investment in industry, government finances and foreign trade.

Down off the farm

In China, reform started in the late 1970s with the explosive burst of energy that came from the dismantling of the old rural collectives and communes. The “responsibility” system, in effect returning land to individual farmers, boosted rural incomes and freed tens of millions to work in new “township and village” industries. India has no hope of such a one-off miracle. But if it is to raise growth rates closer to China's, it has to move people from the land into factories.

At present, roughly 70% of Indians live in the countryside, compared with 60% of Chinese (though some economists think the real figure is lower). Both countries face similar agricultural problems. After big surges in yields, productivity has stagnated, albeit at much higher levels in China than in India. In 2001, China produced 6,350 kilos of rice and 3,823 kilos of wheat per hectare, compared with 2,964 kilos of rice and 2,742 of wheat in India.

Both have distorting price and subsidy regimes that favour excessive grain production. In both, many farms are too small and farmers too poor to invest in inputs. There is little access to rural credit. Land has been degraded, water is scarce, and in many places groundwater has been extracted at unsustainable rates. There is mounting competition with cities and industry for land and resources.

Already, many farmers are idle much of the year. Large numbers are on the move from fertile places with a labour surplus, such as Sichuan in China and Bihar in India. In China the number of migrant workers is estimated at anywhere between 100m and 150m, despite a restrictive registration system (“hukou”). India, by contrast, has comparatively few: about 11m in 1999-2000, according to national surveys.

The absence of mass migration in India also reflects the poor levels of basic education and the lack of job opportunities. That is partly explained by the barriers to investment, which the government has pledged to lift. Some are already vanishing as the relics of the licence raj are dismantled. Every year, for example, more products are freed from the rules “reserving” their production for small businesses (though they still cover 600 items, such as hairbrushes and socks).

Firing workers remains hard in India, which deters firms from hiring them in the first place. This has a big impact on productivity. Many firms feel unable to reap economies of scale, because once they employ more than 100 people they become subject to the restrictive labour laws. In China, at first only in the four Special Economic Zones set up in 1980, but nationwide later that decade, companies were given the freedom to lay off staff and to link pay to performance.

Indian bureaucracy continues to slow things down. According to a World Bank “Investment Climate Assessment” published last November, it takes 89 days to secure all the permits needed to start a business in India, compared with 41 in China. Insolvency procedures take ten years, compared with 2.4 in China.

Access to land is a further obstacle. Ownership is often unclear, use and transfer are subject to many restrictions, and land transactions incur high stamp duties. All of this restricts the supply of land and pushes up prices. According to the World Bank, land prices relative to incomes are ten times higher in Delhi and Mumbai than in Tokyo.

Fixing that hole

For both domestic and foreign investors, India's poor infrastructure remains a huge barrier. Again, the government recognises this. But a combined state- and central-government deficit of about 10% of GDP for the past seven years leaves little leeway to build for growth.

China hardly seems a model in its handling of public finances. Although its consolidated fiscal deficit is modest, at 2.5% of GDP, the budget is opaque, and there is a vast disguised deficit in the form of the mountains of non-performing loans—as much as 40-50% of the total—that have piled up in the banking system. For years, the banks eased the pain of restructuring loss-making state-owned industries by continuing to throw money at them. They also financed a large part of that impressive infrastructure, built by bankrupt local governments.

 The road to riches

However, China has shown India the way in one respect: tax reform. There is much waste in the Indian budget, notably in the form of ill-directed price subsidies. But most expenditure is hard to cut: mainly interest payments (about 44% of recurrent expenses), but also defence and civil-service wages and pensions. If India's government is going to make a difference, it needs to raise more taxes.

Central-government tax receipts have actually fallen as a percentage of GDP since the reforms of 1991, from 10% to around 9% now. In China, over the same period, they have risen from 15% to 19% of GDP—and GDP itself has grown from 124% the size of India's to 240%. China's government simply has far more money to spend than India's does.

India's tax system suffers from widespread evasion of direct taxes and a proliferation of confusing indirect ones. To counter the first problem, officials sometimes toy with the idea of replacing all the currency in circulation, to trap those who have profited from the many deals still transacted with suitcases full of used 100-rupee notes. Simplification of a system riddled with exemptions, discretion and arcane rules would also help.

As for the second, India is, from April 1st this year, to make its fourth attempt at introducing a national value-added tax (VAT). China's experience is encouraging. Before 1994, the country's tax system suffered many of India's current woes: a confusion of cascading state and municipal sales taxes, state-border taxes, excise duties and levies. Now it has a single VAT, levied at 17% on most manufactured goods in all provinces. This provides a steady one-third of the government's tax revenues. Import tariffs have fallen from 10% of government tax revenues in 1985 to about 5% now, and direct corporation and income taxes from about one-third to 15%.

Properly implemented, India's VAT could have a similar impact. Eventually it would also speed up freight, as lorries would no longer have to stop at state borders. Because a company pays tax only on the value it has added, claiming back the tax it has already paid on inputs, VAT should also, in theory, be less easily evaded, and in time increase government revenues.

That should also help the government cut customs duties, which at present account for about one-sixth of its tax revenues. India's average import-tariff rate, at 20%, is about double China's. Cutting it would do much to spur competition and improve industry's productivity. In some industries Indian manufacturers have already shown that they can compete with the best in the world. Once the government's inhibiting protection has gone, there is no reason why they should not do so in others.

Reforms that would, in time, improve manufacturing competitiveness should also help reduce the fiscal deficit. That, in turn, would help lower the cost of capital, and allow more government spending on the big needs: infrastructure, education and health. In Deng's era, there was a popular phrase in China: “To get rich, first build a road.” And, one might add, use it to take girls to school.