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China is ahead, but India can catch up

If India invests in infrastructure far ahead of the curve, takes bold entrepreneurial policy risks, welcomes greater private investment, and think in terms of quantum changes, we can bridge the gap with our neighbour, writes Raghav Bahl.

delhi Updated: Nov 18, 2010 09:38 IST
Raghav Bahl

I have always been intrigued that when Deng Xiaoping put China on the path of reform, its economy was smaller than India’s. Even more critically, 32 years ago the Cultural Revolution had virtually decimated China’s economic institutions. It did not have a central bank or a stock market. The universities had been emptied out. There was virtually no judiciary, as the entire lawyer community had been annihilated. Economically and institutionally China was a very weak State in 1978.

What’s more, India had a bigger GDP. Its institutions of economic governance were maturing. It was evolving into a throbbing civil society and taking the road traversed by the developed democracies of the world. So the odds seemed to overwhelmingly favour India in 1978; China seemed such a hopeless case!

Yet today, China is four times India’s size; this is a stunning statistic that bears repetition. China’s GDP is $5 trillion, while India’s is around $1.25 trillion. Here is a country that has not only left us behind in 20 years but has made us a quarter of its size.

The people of this country need to legitimately ask those who manage its economy — and I do not have only the politician in mind — what has China done so right that India has not done? Unwittingly or by design, China seems to have picked up some of the most effective economic policies of the two “miracle economies” that preceded it. Note that I use the word effective and not efficient.

From the Soviet Union, which was touted in the 1970s to overtake America in a couple of decades, China seems to have learnt the art of extracting ma sive surpluses and accumulating them in the hands of the State. As land is owned by the government and the peasant is a mere tenant, China extracted major surpluses by taking it away cheap and selling it at a high price. This is impossible in India — and mercifully so.

China also extracted surpluses from its workers by keeping wages extremely low. It did the same with consumers and trading partners by keeping the price of its currency artificially devalued against the American dollar. Finally, it kept the price of money virtually negligible for its State corporations, which can borrow from government banks at an interest rate of 3-4 %. Ultimately, the trick it learnt from Japan, another “miracle economy”, was to dramatically engage with the western world. This was at sharp variance with the insular economy that the Soviets tried to build, leading to their miserable failure.

What China did with the surpluses is even more dramatic. It invested massively in the economy — close to 50 % of GDP in infrastructure, farm productivity and soft areas like education and healthcare. No other country, at no other point in history, has invested capital at this astonishing scale. China did not want to wait long years like the West did. Instead, it telescoped the investment over 20-30 years so that the rest of the economy, and household consumption, could play catch up with investment.

Of course, such hyper investment has led to terrifying dualities; no one is saying that this has been an easy ride for China. Today it is grappling with major imbalances: between investment and consumption, in the massive bad debts that its banks are saddled with, and in a ravaged environment. But equally, it cannot be denied that no other nation in history has pulled more people out of poverty in as short a time.

The lessons for India are very clear. It should be investing in infrastructure far ahead of the curve. It should be much bolder in taking entrepreneurial policy risks. Once it manages to build 20 km of highways a day, it should double the target. The absorptive capacity of the Indian economy must go up. Otherwise we will have structural inflation in double digits. India also needs to fix its public finances. It should be far more welcoming of private investment, including foreign investment. The Indian State needs to now think in terms of quantum changes. Very often these arguments, put out by people like me, are dismissed as being “elitist”.

They are not. There is nothing elitist about getting a land acquisition law that is fair to farmers. There is nothing elitist about building good roads faster, getting power to people, or providing them choice in education and healthcare. This is not about government versus the private sector. It is about getting the Indian State to be far more energised into taking quicker policy action.

Some respected commentators, who I admire very much, have said that the race is over; China has comprehensively beaten us. But if you rewind to the end of the last century, China’s economy was just as big as India’s is today. For a moment, please suspend time and compare China-2000 with India-2010; you will find that while their GDPs are comparable, India’s institutional strength is incomparably superior to China’s. So in a real sense, India is less than a decade behind China — that’s all, that’s how little the gap can be between these non-identical Asian twins. To my entrepreneurial mind, that’s how the opportunity should be tackled.

China’s economy may be four times larger, but is less than 10 years ahead of India. That is not such a huge gap to bridge. Vox Pop

(Raghav Bahl is the founder and editor of Network 18, and the author of Superpower: The Amazing Race between China’s Hare and India’s Tortoise)