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Terms of Trade | China's economic prosperity is also in India's interest
The difference in political systems notwithstanding, does politics seek a common economic goal as far as India and China are concerned?
Two out of the last three cover stories of The Economist, among the most authoritative journalistic voices on modern capitalism, have been on India and China. The coverlines are self-explanatory: China’s slowdown: The Trouble with Xi’s new economic model and India’s moment: Will Modi blow it?
The Economist’s editorial judgment seems to be in sync with data from the World Economic Outlook (WEO) database of the IMF. Between 1980 and 2021 (for India these are fiscal years 1980-81 and 2021-22), India’s GDP growth rate has exceeded that of China only eight times. Four of these eight years have been under the Narendra Modi led government. There was a three-year period from 2014 to 2016 when India replaced China as the fastest growing major economy in the world. While China regained this position as the Indian economy experienced one of its worst ever slowdowns even before the pandemic hit, India has surged ahead of China once again with a growth rate of 8.7% in 2021-22 compared to China’s 8.1% growth.
If the IMF projections are to be believed, the best is yet to come for India. Although both Asian giants are expected to experience a moderation in growth rates, India will retain its fastest growing economy status until 2027, the latest period for which IMF projections are available at the moment.
To be sure, another set of statistics in the WEO database caution against any exuberance on the Indian side. The catch up in GDP growth rates notwithstanding, there is unlikely to be a convergence in living standards in China and India. China’s per capita GDP, in current dollar terms, was almost similar to India’s in the 1980s. It became twice as large as India’s in 2000. By 2010 the gap had increased to more than three times and it is more than five times at the moment. While this gap is not expected to increase any further, IMF data does not project a reduction on this count as well.
These statistical comparisons, to be sure, are not being made for the first time in these pages. Beyond this obvious reasoning in any India-China comparison, there are more difficult questions to be asked.
Is there a larger political economy story to be told about the current economic situation in India and China? Where does politics come into play in shaping the economic trajectory of these two countries? The difference in political systems notwithstanding, does politics seek a common economic goal as far as India and China are concerned? Can India replicate the upward economic mobility story in today’s world which China achieved when it pulled 800 million people out of poverty in the last four decades? Can China manage a soft landing for its economy where domestic consumption replaces exports and investment as the main engine of growth?
Given the importance of China and India in the world, there exists a large amount of scholarship on these questions. The best take on these issues is perhaps yet to come. However, one factor which lies at the heart of these questions is whether the regimes in China and India will be able to strike a balance while trying to nudge markets; sometimes in not so subtle terms, in what they think is the desired direction. Before dwelling on this point any further, a brief snapshot of the economic evolution of these two countries is useful.
The history of economic policies
India attained political independence two years before the Communist Party of China pulled off a revolution. While Communist China’s initial focus was understandably on redistribution, especially of land, India adopted a more conciliatory policy in class terms where the state’s focus was on marshalling as much resources as possible to build a modern economy. Neither India nor China were entirely successful or unsuccessful in their initial endeavours.
Abolition of land monopoly and initial investments in education gave China the base on which it could build its modern economy. In India, the state-led planning model was successful in achieving some sort of economic self-sufficiency, especially in critical sectors such as steel production.
However, political competition and associated decisions — in India’s case of the electoral variety and in China’s within the Communist Party — led to policies which would create major economic disruptions.
China had a tumultuous period from the late 1950s to the mid-1970s when Mao Zedong unleashed the policy experiments of Great Leap Forward – millions of people perished in a famine which was a result of forced appropriation of food production by the state – and the Cultural Revolution — where anarchy was unleashed in the name of purging ideological adversaries from the society at large. The fact that Mao’s successor Deng Xiaoping unleashed large-scale economic reforms almost immediately after Mao’s death clearly shows that even the leadership of the Chinese Communist Party was not really in sync with Mao’s radical ideas.
In India, a failure to deliver on the economic promises of the independence movement and stated objectives of five year plans (the plans in fact struggled to even find the required resources) led to a steady corrosion of the Congress’s support base and opened up political competition from multiple sides including the left, right and caste based parties often championing socialist rhetoric. Some parts of the country also saw the growth of armed secessionist movements. This growing political competition was accompanied by a growing asymmetry between foreign exchange receipts and requirements which ultimately culminated into the balance of payment crisis in 1991 and triggered large-scale economic reforms, a process which has enjoyed a bipartisan consensus (so far) and is still a work in progress.
The contrasting political climate
Why did economic trajectories of India China diverge so widely even though they adopted economic reforms at almost the same time? To some extent, the most clichéd answer to this question is actually right. The fact that the Chinese state did not have to worry about short-term democratic pressures meant that it had a lot more leeway in realigning the economy the way it wanted once reforms were kickstarted.
The most relatable example on this count would be the massive political opposition, especially on the question of land acquisition which erupted when India tried to replicate China’s Special Economic Zone (SEZ) model in the 2000s. Ironical as it may sound, the protests against SEZs dislodged the longest running communist party government in West Bengal. While the Communist Party of India (Marxist) or CPI (M)’s leadership might have been rightly awed by the role SEZs played in making China a global manufacturing powerhouse, they forgot that their comrades in the Communist Party of China did not have face elections where angry peasants whose lands had been confiscated could vote them out.
SEZs are not the only issue on which the Chinse communists have been more pro-reform than the Indian state. When the Narendra Modi government repealed the three farm laws (months before a crucial state election cycle) after more than a year of farmers’ protests, an article in the Global Times, a media outlet affiliated with the Chinese state took a dig at the state of economic reforms in India. “As there are always groups that stand to lose out in the face of reform, politicians are inclined to shun those unpopular policies for the sake of their own political interests, which, to a certain extent, may weaken the effects of certain policies”, the article said, adding that “reforms in crucial sectors like labour, land and agriculture are stalling, due to the obstruction of vested interest groups in the country”.
However, to infer from these examples that China’s economic success story is just the result of a bunch of party apparatchiks pushing a so-called reform agenda in the absence of democratic pressures would be akin to missing the woods for the trees.
China’s reset, block by block
Where China’s economic evolution is unique is in the fact that unlike the Soviet Union and its east European satellites, China did not experience an economic meltdown when it ultimately decided to move away from a socialist command and control economy system. Experts have attributed this to the existence of a successful domestic political-intellectual counter to shun “shock-therapy” recipes – basically a mix of sudden price deregulation accompanied by privatisation and fiscal austerity – which were advocated (and accepted by countries such as Russia) by institutions such as the World Bank and IMF in the 1980s and 1990s.
Isabella M Weber, an economist at the University of Massachusetts Amherst, has explained this very well in her authoritative book How China Escaped Shock Therapy: The Market Reforms Debate.
“To use a metaphor, if shock therapy proposed to tear down the whole house and build a new one from scratch, the Chinese reform proceeded like the game of Jenga: only those blocks were removed that could be flexibly rearranged without endangering the stability of the building as a whole. Yet, through this process, the building was fundamentally changed. As everyone who has played Jenga knows, certain blocks may not be removed lest the tower collapses”, Weber writes.
India and the manufacturing bus
In post-reform India, even though the policy apparatus has been careful in not unleashing some of the riskier reforms (such as capital account convertibility), the state does seem to have erred in believing that just getting rid of the license-quota raj would trigger an economic revolution, especially in manufacturing. This mistake was made despite a plethora of evidence to the contrary that there are hardly any manufacturing success stories in the world where the state did not play a hands on approach via an industrial policy.
To be sure, there are examples to the contrary as well, including in pre-reform India, where state control in the name of buttressing the economy eventually mutated into an inefficient economic structure which only thrived on rent seeking.
It is on this count the current government in India seems to be making a departure from what can be described as a more risk-averse approach to economic transformation by previous governments.
Not only has it been trying to experiment with various forms of incentives/support through programmes such as Make in India and Production Linked Incentive (PLI) schemes, there is also a concerted attempt at expediting what the pro-regime economists describe as a process of creative destruction in the informal sector, which it is argued, will catalyse the growth of formal sector takeover and unleash untapped efficiency gains for the economy as a whole.
The fact that the ruling Bharatiya Janata Party (BJP) has an ideological insurance in the form of Hindutva and the principle opposition party in the centre (Congress) is in a complete disarray has only added political confidence to this economic determination of the current regime. The current government has also adopted a tactful approach to welfare, which is focused on boosting assets rather than incomes lest bargaining powers go up in the labour market and there are labour-driven tailwinds to inflation.
Global capital’s view of Beijing and Delhi
The Chinese state, after having been able to achieve immense success in opening up its economy on its own terms, is dealing with what is best described as the tension of maintaining communist rhetoric in what is arguably world’s most dynamic and yet state controlled capitalist economy.
The Chinese economy faces two central challenges today.
The first is an opaque state controlled financial system where the monetary policy arm is at the beck and call of the communist party dictatorship to pump prime the economy even at the cost of further adding to what many believe is a hugely leveraged economy. Even as it deals with the threat of a bust in domestic real estate bubble, China is looking to build an infrastructure empire in a large number of Asian and African countries.
On this count, as least as of now, India has made a discernible improvement, although not without a cost, in bringing down bad loans on books of public sector banks.
China’s second challenge, and here the state is being pro-active rather than reactive, is the uncertain outcome of its effort to dictate both consumer and entrepreneur behaviour to seek conformity with the notions of propriety set by the communist party or perhaps just its supreme leader. These efforts include decisions to ban or regulate things such as online videogames and tuitions to prohibiting Chinese companies, sometimes among the biggest in the world, from floating public issues in share markets abroad.
Among these two challenges, it is the latter which causing more concern to the champions of free capitalism, as it could deprive rentiers of capital in advanced countries of future profits in the rapidly emerging technology driven commerce, knowledge and entertainment industry complex. An earlier piece by this author in these pages has discussed in detail how the Sino-US economic relationship has been extremely beneficial for US capital.
In India’s case, because the forced formalisation of the economy is bringing hitherto unavailable opportunities for large businesses (potential investors), global capitalism stands to gain from the regime’s stance.
To be sure, neither India’s nor China’s new economic approaches are guaranteed to achieve success. Not only does China have to find a sustainable anchor for growth in domestic consumption without replicating the speculative boom in real estate, the political regime also faces the challenge of renewing its political hegemony especially among those whose living standards are still way below high income country levels, even as it is clear that growth rates have already started coming down.
In India’s case, the state has decided to unleash a purge of the informal sector at a time when the employment generation ability of the modern sector, especially manufacturing, is a small fraction of what it used to be in the past. Because this is a result of technological evolution across the globe, there is little that can be done to change this.
The real Chinese challenge
This is exactly why the world is worried about the dark side of realpolitik taking over in both these Asian giants. In India, the BJP is widely seen as ratcheting up the communal rhetoric (directed against the more than 200 million strong Muslim population) when the economic situation becomes difficult for the government. For China, the venting route is directed at the outside world. American investor Jim Chanos articulated this well in a 2021 interview published on The Institute for New Economic Thinking’s website.
“As all of this is happening on the financial and economic front, along with the crackdown on business elites, we’ve seen a commensurate rise in bellicosity, in saber-rattling toward Taiwan, India, and Tibet. We’ve seen a much more aggressive posture from Xi in relating to the West. Now every day there’s a warning in one of the Chinese Communist Party organs threatening Australia if they come to Taiwan, threatening Japan. I don’t know if the Party is preparing the citizenry for a “them.” Someone to blame”, Chanos said.
Because India and China are neighbours, India will have to guard against the possibility of not just the domestic economic bet going wrong, but also maintain vigilance against China deciding to find a bogeyman in India to distract attention from its domestic problems. This is why a successful economic transition in China is also in India’s economic interest.
Every Friday, HT’s data and political economy editor, Roshan Kishore, combines his commitment to data and passion for qualitative analysis in a column for HT Premium, Terms of Trade. With a focus on one big number and one big issue, he will go behind the headlines to ask a question and address political economy issues and social puzzles facing contemporary India.
The views expressed are personal
