Catching Up With China
Democracy, while priceless, carries a cost. India has paid that price. It is time now to reap the benefits
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When the history of the 20th century is written, 1979 will count as a defining year. In 1979, the Iranian revolution overthrew the US-backed Shah of Iran and changed the complexion of Middle East politics. Ayatollah Khomeini usurped power and set off a 39-year-long confrontation with the West.
In 1979, at the height of the Cold War, the Soviet Union made the fatal mistake of invading Afghanistan. The United States, Saudi Arabia and Pakistan collaborated to create an army of jihadis to fight the Soviets who, finally defeated after a decade, retreated in 1989. Afghanistan was left with the detritus of trained terrorists with no one to fight. They drifted to Pakistan-occupied Kashmir (PoK) and, under the watchful eyes of the Pakistani army's criminally-minded Inter-Services Intelligence (ISI), were unleashed on the Kashmir Valley. In the 29 years since that sponsored insurgency began in J&K, Pakistan-abetted terrorism has metastasised into a malignant but unsuccessful strategy to bleed India by a thousand cuts.
In 1979 another seminal event too took place that few at the time paid much attention to: Chinese leader Deng Xiaoping introduced a series of economic reforms that would catapult China from an impoverished country with a per capita income lower than India's to the world's second-largest economy with a per capita income 400 per cent greater than India's.
India began its economic reforms 12 years after China, in 1991, but liberalisation has been halting and beset with political and bureaucratic roadblocks. As a noisy, multi-party democracy with plural ethnicities, India was always likely to implement economic reforms with caution. China in contrast had no such qualms. The Communist party's word was law. Dissenters were jailed or killed. Foreign competition was controlled by state fiat. Google, Facebook and Twitter remain blocked in China. That has allowed Alibaba, Tencent and Baidu to become global internet giants.
But this has come at a cost. Chinese society remains a prisoner to the state. It has taken US President Donald Trump's hardball tactics to force Beijing to cut back on import duties on foreign automobiles and other products. China has pledged to reduce its $375 billion trade deficit with the US by $200 billion though the timeline remains vague and the details scant.
Where does all this leave India? Liberalisation since 1991 has helped the economy nearly double its average annual growth rate to 7.5 per cent from the dawdling 1960s-1970s growth rate of 3.5 per cent. But liberalisation has also spawned crony capitalism and corruption. This spurted during the go-go decade of UPA 1 and UPA 2 between 2004-2014. Bank loans were granted on the basis of a phone call from the ministry of finance to the chairman of a public sector bank (PSB). That was the genesis of the NPA virus which laid many banks low and which the Insolvency and Bankruptcy Code (IBC) was designed to combat.
China's single-minded determination to focus on growth, infrastructure and education has paid huge dividends. Cities like Shanghai and Beijing now have per capita incomes of over $50,000, rivaling income levels in Switzerland and the United States. Vast swathes of the countryside though are still poor and China's average per capita income of $8,000 puts it in the category of a middle-income Latin American country.
And yet, prosperity is beginning to change the character and lifestyles of ordinary Chinese. In the 1980s, very few Chinese, estimated at less than 50,000, travelled abroad. Today the number of foreign trips made by Chinese tops an extraordinary 130 million a year - a moving mass of people equal to the combined population of Britain and France. According to Hyde Chen, an equity analyst with UBS AG in Hong Kong, "Historical experiences from mature economies suggest that household incomes of wealthy and poor areas in China will likely converge over time. In China, the income convergence is taking place at a fast pace, with the household per-capita income gap between lower-tier cities and tier-1 cities narrowing from 56 per cent in 2005 to 46 per cent in 2017."
China's urban-rural ratio has risen to 70 per cent compared to 82 per cent in the US. India lags behind at 33 per cent while middle-income Thailand is at 50 per cent. India's democracy is a short-term impediment to growth. But in the long run, freedom will prove priceless. China could at some time in the future discover that the cost of dictatorship can be a heavy social burden. After achieving a basic level of prosperity, history tells us that societies demand freedoms - of choice, dissent, liberty and electoral franchise. Without these, no amount of gleaming office blocks and superhighways can serve as compensation.
India's young workforce is now the world's largest even as China's workforce ages. But that demographic window will shut in 20 years as India to starts ageing. Tough economic decisions can no longer be allowed to be held hostage to electoral politics. What can India do to catch up with China on three key parameters: per capita income, urbanisation and education? In 1998, China began a campaign to create world-class universities. Within 20 years, several Chinese universities have climbed into the top 200 rankings of global educational institutions. Since university rankings are skewed towards research paper citations in peer-reviewed academic journals apart from the quality of faculty and infrastructure, Indian universities have lagged far behind.
To achieve the per capita income of a middle-income country like China ($8,000), India will need to grow consistently at 8 per cent a year for the next 20 years. Assuming India's population plateaus at 1.50 billion, nominal GDP will climb from $2.70 trillion today to $12 trillion in 2038 at fixed exchange rates. That would give India a per capita income of $8,000 - 20 years after China reached that landmark in 2018. By then, China growing at 5 per cent a year would have achieved a per capita income of $20,000. The disparity between China and India though would have nearly halved from 4:1 to 2.5:1.
Democracy, while priceless, carries a cost. India has paid that price. It is time now to reap the benefits.
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