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Race with China~I

The most significant advantage the India enjoys over China is of course its strong democratic tradition and decentralized model of governance as against China‘s highly centralized model which imposes its own limitations for a modern dynamic economy in the information age.

Govind Bhattacharjee | Kolkata |

The idea of India ever catching up with China may seem outrageous to most and some may even doubt my sanity. After all, China is a giant global economic and military powerhouse. China outsmarts India in almost every aspect. Its GDP is nearly eight times larger than India’s in absolute nominal dollar terms, and nearly three times in purchasing power parity. Chinese companies dominate the Indian market, despite all the measures the government has taken during the last two years. Chinese products have supplanted Indian products to the extent that it is difficult to find something of our daily use that is not sourced from China, including raw materials for most of our drugs.

China’s Human Development ranking of 85 is way ahead our pathetic 131. The vast gulf that separates India from China militarily, economically and technologically has made us extra-sensitive and almost deferential to their sensitivities on Taiwan, Tibet and Dalai Lama, while they have treated with utter contempt our sensitivities about J&K, Arunachal Pradesh or CPEC. We have swallowed it all without even a murmur of protest.

But the pandemic and the pandemic years have changed both our world and our worldview, and with this changed worldview, the idea of catching up with China suddenly does not seem as preposterous as it seemed earlier. The pandemic which originated there by all available evidence has exposed China’s fault-lines too. Even the myth of its military invincibility has been busted by India during the protracted stand-off in Ladakh where India’s military strategy has put China at a distinct disadvantage, making the PLA retreat from the Pangong-Tso area. It has also learnt that any adventurism against India will come at a cost that might lead to fissures in its own power structure. India has shown that it can stand up to China, despite its military superiority. It has also generated some confidence that it may not be impossible to catch up with China even economically, and within the foreseeable future, if we can calibrate our approach, policy and politics in a determined manner.

In January 2020, Standard Chartered Bank predicted that India would overtake the USA to emerge as the world’s second-largest economy by 2030, next only to China which has already overtaken the USA in PPP terms. The 2030s would usher in a new economic order dominated by the emerging economies of today, with China and India at the lead. Chinese economy of $64 trillion then would be only 1.5 times that of India’s $46 trillion, and India would have narrowed the present gap substantially. Convergence is a common phenomenon in economics where poorer countries grow at faster rates than the rich, gradually closing the gap. As the per capita GDP between them tends to converge, their shares of world population also tend to converge. The world is still far from achieving that equilibrium, but the emerging economies have made significant strides in closing this gap.

IMF data and projections clearly show a convergence between the advanced and emerging economies. Presently (2021) China’s share of global GDP (18.8 per cent) is marginally above its share of global population (18.2 per cent) and by 2026, it will be substantially larger (20.4 per cent and 17.5 per cent), while India’s still has a substantial gap to cover (8.4 per cent and 17.96 per cent respectively in 2026; present shares are 7.2 per cent and 18.03 per cent). But half of India’s population is under 25 compared to China’s 29 per cent due to its earlier one-child policy; any rise in income here therefore quickly translates into consumption and boosts economy and employment by creating demand. The Standard Chartered report estimates that by 2030, 100 million new jobs must be created in the manufacturing and services sectors to meet this demand. That is a real challenge for the government as it will have to devise ways to bridge the massive infrastructure and skill gaps that exist now, while trying to reduce income inequality and improving institutional functioning by giving them required autonomy.

For most of history, however, the Indian economy was not only larger than the Chinese economy, but also grew faster, as pointed out by Angus Maddison in his remarkable study on “The World Economy”. China began to close the gap when India became weak. It was repeatedly invaded and its wealth looted by marauders from Central Asia during the 13th and 14th centuries, but under the Great Mughals, it regained its economic superiority over China.
But the real turning point came only after 1757, when the British after winning Battle of Plassey, started subjugating India. Being hostage to its colonial power which systematically started looting and deindustrialising India, the extractive and exploitative colonial economy stagnated for nearly two centuries. The industrial revolution that propelled the engines of growth could never occur in India which remained the supplier of raw materials to Britain and captive market for its finished products. In a recent book, “Reset: Regaining India’s Economic Legacy”, Dr Subramanian Swamy has estimated the extent of loot siphoned off to Britain at $71 trillion. In comparison, our current GDP is just around $2.7 trillion.

Even after independence, our closed economic model driven by state-controlled industries, faulty centralised planning and misplaced romance with socialism sunk the country deeper and deeper into an economic morass of low growth and endemic poverty, and it never again could compete with China. More than four decades of mismanaged economy since independence had taken their toll and widened the gap with China which started liberalising its economy since 1978, while ours began only in 1991. Reforms have never looked back since, though the pace was rather uneven. But in recent times, some remarkable reforms have generated the confidence that despite the huge gap, India can achieve rapid growth over the next 20 years to catch up with its giant northern neighbour. That is what a paper (“Strategic patience and flexible policies: How India can rise to the China challenge”, March 2021) brought out by the Pune International Centre ~ authored by some of the best minds of the country ~ says.

Apart from India’s demographic advantage, it has also identified a few more areas where India enjoys distinct advantages over China. One is the strength of the Indian financial system that “allocates capital better than the Chinese financial system” giving us an “edge in translating the flow of investment into increased GDP”, thereby reducing the consequences of the gap in investment between the two countries. Further, the Chinese exports, being led by state interventions and subject to state-controlled distortions in finance, exchange rates and subsidies, tend to be fragile and unsustainable in the longer term. The recent crackdown on high tech companies by the Chinese state to curb their rising monopolistic power bears testimony to this. Indian exports, on the other hand, are based on true “competitive advantage”.

The most significant advantage the India enjoys over China is of course its strong democratic tradition and decentralised model of governance as against China’s highly centralised model which imposes its own limitations for a modern dynamic economy in the information age. Centralisation of political power leads to inferior decisions on economic policy, loss of private sector trust and suboptimal economic outcomes, besides being leader-dependent. Despite China’s phenomenal rise and integration of a capitalist economy with its communist polity, liberal democracy enjoys distinct advantages for integrating market-oriented economic policies into its political set-up.

The paper argues that “the decline in Chinese optimism and growth and the increased stress that has come for China from militarism and nationalism” has “enhanced conflict with many neighbours”. Its military adventurism in the South China Sea has made its neighbours deeply suspicious of its intent.
In contrast, India’s foreign policy has earned it enormous goodwill, simultaneously raising India’s role and importance in global affairs. The soft power of India has spread over many parts of the globe, compared to China’s hard power that is detested by most democratic countries. History testifies that global trust and goodwill easily translate into investment and growth, provided that an enabling ecosystem of physical, social and legal infrastructure operates optimally. India needs to fix these factors quickly and refocus on the domestic policy flaws to unleash the enormous energy and intellectual potential of its workforce.

China aspires to become a “Community for the Shared Future of Mankind’, but its authoritarian political system is the biggest hurdle to its goal of becoming a global superpower that is loved and respected by all. The brutal authoritarianism that has suppressed and murdered dissidents like Liu Xiaobo, purged all rivals of Mr Xi Jinping, robbed Hong Kong of its liberties in blatant violation of international agreement and put some 1 million Uyghurs in concentration camp-like prisons in Xinxiang is also showing utter disdain about international protocols and restraints while dealing with neighbours in the South China Sea or in attempts to capture foreign territories through salami slicing tactics. As an economy advances, its high growth cannot be sustained and countries often get caught in the middle-income trap. China’s growth rate has been slowing.

The paper estimates that with a sustained growth rate between 6% and 8% which seems very much achievable, the Indian economy could be almost as large as China’s in another 20 years’ time, i.e. by 2041. It could even be faster if we can orient our policies correctly for which there are many lessons to be learnt from China itself.
(To Be Continued)