Updated: Feb 7
C3S Paper No. 0079/ 2015
The past runs to catch the future before the present gets there
A dragon runs through time
To save the history to save the past,founder of the present
The dragon flies forward,dodgesthe hurdles,ducks the bars
Its future ahead, but it is the end
The danger of not finding the past becomes a problem
Will the past slow him enough?
By Nicholas Alexander A poet from Jamaica
Then there is an elephant of a country
That is large and populous and argumentative
So it is hard not to notice it
But yet the world ignored it
We see it moving now with languorous long strides
Ina world that is supine and unable to get up
Will the elephant stumble or move along
We are watching with bated breath
M.R. Sivaraman with apologies to all poets
The world is watching the dragon China and the elephant India entering a march together to meet with the epoch inhistory when the two together accounted for 50% of the global GDP. Nations like individuals have their destinies andevents in history determine them.China’s destiny was determined by Confucian ethics of discipline and sacrifice for the collective good so that the individual could partake in the destiny of the country. Mao collectivized the dispersed, demoralized and decrepit masses of China into a country, which remained ignored till the Vietnamese with the help of China reminded the US that small little people when determined could vanquish a Goliath.Mao established a country with provinces and not provinces with a country as in India. It could not have been otherwise as China’s Hans account for 91.59% of the population and Mandarin is spoken by almost 72% of the population. Religious beliefs do not count for anything in China, as it is purely personal. India is almost everything that is not China. India’s has been conditioned by individuality determined by eons of exposure to a religion that preached self -abnegation for the realization of the self whatever it meant. Hundreds of castes, scores of languages and myriads of religious practices have made this country unique but incapacitating it in its ability to move rapidly on the path of economic growth. Added to this have been the sharp political differences on the paths to be followed for economic development and the disturbances faced by wars and internal situations that continue to hinder progress periodically.
China although wedded to communism, launched itself under the leadership of Den Xiaoping into a motivated frenzy of economic growth all others including human rights, freedom of speech, thought and action getting subjugated to that one goal to bridge the gap between the west and China. “China the present-day economic super power is the legacy of Den Xiaoping. It is not that he designed specific programmes to accomplish his ends. Rather he fulfilled the ultimate task of a leader-of taking his society from where it is to where it has never been.”(Henry Kissinger On China) Strangely India under the leadership of the Congress party chose the path of socialist development only to get bogged down again and again on non-issues of politics of ideology, religion, and castes to the detriment of economic growth. The elephant while in the room was not visible as a whole but only in parts. The endless debates amongst economists and philosophers on whether growth is faster under autocracy or democracy has been squarely answered by the phenomenal achievements of countries like Singapore, South Korea, Malaysia and to some extent Thailand that a benevolent autocracy produces faster convergence with the west rather than a democracy which is only in name but has all the trappings of an anarchy with corruption and gross inefficiency permeating all aspects of governance. China has demonstrated after capturing the position of being the second largest economy of the world in less than 30 years after it started, with foreign exchange reserves of over 3.99 trillion dollars (latest Bloomberg Report) that is about 24% of US GDP, that the Chinese way even with its share of corruption and scandals is probably the shorter road to eliminate mass poverty and destitution. In late nineteen eighties the exports of China was only a shade more than that of India around 30 billion dollars. The author and Mr. Ranganathan then Ambassador in China received in New Delhi the Chinese commerce minister in 1988.The Minister was thrilled to see some of our large textile factories in Mumbai and the NAL in Bangalore.In 2013 China exported $274billion of textiles against $40 billion of India as per the data of apparel export council of India.
Today China’s exports exceed 2.5 trillion dollars per annum while India’s is stagnant at $300 billion.
Economic Growth rates of the two countries
95-2000 2000-2005 2005-2010 2010-2014
China 8.3 9.7 10.6 8
India 6.1 7.5 8.3 5
The figures given above are simple arithmetic average growth rates for the periods taken from the World Bank statistics on GDP. Excepting for the last five years, the difference in growth rates has been around 2% percent. China started with a GDP of $728 billion in 1995 and India $366 billion. India has now a GDP of$2048 billion and China$10355.The PRC had double the GDP of India when it was already on the path of reforms and went ahead swiftly and with determination to gain a major leap advantage over India.The latter started reforms only in 1991 and progressed with it in faltering steps to be left behind by the dragon. China did not and does not have the constraints of India in implementing any reform as the latter is constrained by the attitudes and implementation capabilities of the states. China also has large regional disparities in growthbut national level policies are implemented without question. India’s problem is clear from the differing expected growth rates in the states as projected by the fourteenth Finance Commission for the period 2015-2020 from a high of 24.32% for Sikkim to a low of 10.88% for Assam. Some of the larger states like Gujarat, Maharashtra, Tamil Nadu, Haryana and Punjab all expected to grow higher than 12% per annum in nominal terms. Large interregional disparities may also exist in China but the agenda of reform is carried out as decided by the Politburo of the Party unlike in India where any reform agenda that requires parliamentary approval gets into a game of football between the opposition and the government that sponsors it as a test of mutual strength not debated, amended as may be required in national interest of growth. Even when it is approved the political moguls in the states may or not implement it depending upon how they perceive from their political dividend point of view. Together with these factors also have to be taken into account the pervasive black money generation in all-economic activities in India and illegal transfer of capital outside the country. A newspaper quoting a report of the National Institute of Public Finance and Policy New Delhi on the quantum of black economy in India has given an astonishing figure of 75% of the GDP. If this is correct even by a mile of error it makes nonsense of all policy parameters based on the current estimates of GDP.
The race between the dragon and the elephant has to be viewed in this background.
There are several economist soothsayers who have predicted the dragon slowing down and faltering in its stride towards convergence with the west.What they have forgotten is that as per World Bank GDP figures in terms of PPP for 2013 China is close to the US GDP falling short by just 0.6 trillion dollars and India at the third position way ahead of Japan. Probably China has already surpassed the US in 2015.
What are the strengths of China? It has the world’s largest Foreign Exchange reserves at $3.9 trillions much of it is through current account surpluses and growing as the Chinese still have a current account surplus. They can use these reserves to protect their currency or even their banking system from any collapse. By all reckonings China is expected to grow at 7% per annum. “China has launched a further series of reforms following the announcements of these reforms in its Third Plenum. Xi Jinping is reported to have taken charge of implementing these reforms in a decisive way.China’s economic reform took major steps forward on the personal initiative of Xi Jinping beginning in thefourth quarter of 2014.Major policy initiatives were launched on consolidation of local government finances and debt,agricultural land property rights, and preparation for commitment to more rigorous free-trade agreements. The period of slow reform progress after the Third Plenum has now ended. We can now start to see the outlines of a distinct Xi model of economic reforms.” Barry Naughton in “Is there a Xi Model of Economic Reform? Acceleration of Economic Reform since fall 2014” Brookings Institution.
What are China’s weaknesses? Debt burden, falling exports, rising wages, labour problems, technological changes leading to shifting of manufacturing back to where they came from, are a few issues that confront not only China but all the EMEs. Whether Chinese dragon will crawl or continue to take strides on the path of growth is dependent on many factors. China for long has been the factory of the world, its exports now exceeding 2 trillion dollars. Most manufacturers of hi- tech and low -tech items shifted their manufacturing base to the SEZs in China bulk of them going from the US and EU countries. China’s low wages, disciplined labour, the availability of skilled labour at low wages hassle free infrastructural facilities and a generally helpful government when it came to increasing production in China, all helped it to become a global production zone. The very fact that Foxconn employs over 200,000 people in just two locations to manufacture Apple products and closed down its only unit in Chennai in India is a testimony to the fact that China provided distinctly more conducive production environment than India.By manufacturing all possible items at economic costs helped by an increasingly connected world that made a fascinated Nayan ChandaDirector Yale center for Study of Globalization write in his book Bound Together about how the personalized iPod gift he ordered for his son from California took its origins in China and within two days reached him.China has been able to develop clusters hat cater to all kinds of production units that cuts all kinds of costs to a bare minimum.The infra structure base of China makes it possible both for efficiency and economy at the same time the cost of infrastructure having been borne by the state. The financial crises of 2008 and the deep recession into which the developed countries have fallen have reduced the rate of growth in trade, consequently affecting China’s exports. According to a WSJ report US imports from China as percentage of total imports has flattened out at 25% and declining imperceptibly while its exports to China is moving up gradually. (WSJ Jan13, 2015). With the rapid advancement of the 3D printing technology US may slowly but gradually get back some units from China.
A recent report in the Economist states that china is becoming less import intensive for its exports, sourcing most components within china itself.The World Bank has found that the share of imported components in China’s total exports has fallen from a peak of 60% in the mid nineties to 35% today. This is partly because China boasts clusters of efficient suppliers that others will struggle to replicate”. (The Economist March 14, 2015). This will compensate partly for the higher labour cost that seems to be palpable in China in recent times. “Fast-rising wages, worker activism, and intermittent labor shortages suggest that China, whose economic rise has depended on a vast supply of low-cost labor, is about to enter a period of widespread labor shortages. As China crosses the line from being an economy with plentiful low-cost labor to one with higher-cost workers, the implications for both China and the global economy could be far reaching”. Mitali Das and PapaN’ Diyae inFinance and Development June 2013 issue Volume 50 no.2.China’s working age population has shown a sharp decline and the trend will continue. This again puts pressure on the availability of cheap labour. Some commentators are of the view that it is a deliberate policy of China to increase disposable incomes so that the economy becomes less dependent on exports that has shown signs of sagging and move more toward hi-tech industries and services growth and by re-diversion of resources toward consumption rather than savings. This is also likely to pull up the sagging fortunes of the construction sector which contributes over 13% of China’s GDP and of late has been saddled with hundreds of thousands of unsold apartments. Somemanufacturing is shifting to Bangladesh,Vietnam and Cambodia giving a go by to India with its anti-deluvian labour policies and non cooperating states thwarting any move to replace archaic labour laws due to selfish political interests ruining India’s chances of a breakthrough in growth. China is moving on to hi tech industries encompassing machine goods, aeronautics, computer hardware, automobiles, power generating equipment like turbines and generators and also large construction works involving skills and discipline like oil pipeline laying (they did for Reliance) railway construction (Chennai metro), alternative energy like solar cell panels (it had already caused great alarm in the EU countries that the latter had come to an arrangement with China on the sale of Chinese solar cell panels) .
A furious pace of construction activity in China has fueled China’s engine of high growth. Out of the 44% share of the secondary industry in China around 7% is accounted for by the construction sector alone.China produces 2480 million tons of cement and 1607 million tons of steel against 280 million and 81 million tons respectively of India ranking first and second in the world in cement and first and fourth largest in the world of steel. “China’s construction market is enormous. Despite the volatility of the real estate market, the sector still accounts for a large part of China’s GDP and hence remains a cornerstone of the domestic economy. In residential real estate alone, China is building about 1.8bn m² per year. To put this number in perspective, China is building more than one third of all the buildings in the world, producing and consuming 55% of the cement globally in doing so. It builds the equivalent in square meters of living space of a city like Rome in about two weeks and a country like the UK or Spain every single year”. (A Report on the Construction Sector in China: The EU SME Centre a project funded by the European Union). The construction sector may slow down in China on account of the various reforms in municipal funding of such activities introduced recently by Xi.What will be the outlet for such enormous production capacity established in this sector? China is nobody’s fool to push hard for its AIIB The Asian Infrastructure Investment Bank. The estimated requirement of investment in Asia for infrastructure is eight trillion dollars.All of the existing International funding institutions put together will be able to meet these requirements and even if they are able to finance part of it, the conditions accompanying such loans would render them inoperable given the problems of environment, resettlement and rehabilitation of displaced persons in major infrastructure projects. The AIIB would perhaps have relatively flexible conditions and the largest beneficiaries will be in SEA. India would not benefit significantly by this bank thanks to the NGOs and opposition political parties who have free flags to wave against projects that may have the smallest impact on environment. China will be able to compensate their slowing construction sector opening up a window of opportunity for exports to these countries financed by the AIIB creating a win -win situation, with India providing the opportunity for people to have fun at the performance of the world’s largest democracy.
The success of Ali Baba the e-commerce giant in its IPO is another indication of China moving into the international arena even in the services sector. The massive free trade zone being developed in Shanghai with some of the worlds tallest and most modern buildings and the announcement to have a liberalized financial sector there is to develop the hitherto trailing services sector.
The US and Germany which took great pride in innovations and export of high value engineering goods are in for serious competition from Chinese industries. In two to three years from now when hopefully the developed world would have recovered from recession China will have its second coming of growth. The success of China will however depend on the demand that will arise for its products. It is seeking to ensure this by setting up the AIIB the alternative lending institution so that all developing countries can borrow without much of the ubiquitous conditions of the World Bank or the ADB. They are pushing other countries to join the AIIB only with a view to augmenting its resources so that the immense needs for infrastructural financing in countries like India, Bangladesh, Vietnam, Cambodia, Laos, and Pakistan are met easily without the hassles of the existing lending institutions. When massive investment in infrastructure development activities takes place in the investment starved countries of Asia there will be a surge in employment, incomes and consequently aggregate demand. A secondary demand for Chinese products will be generated compensating for the loss of the markets in the developed world.
The doomsday forecasts on China do not take into account these emerging realities.In an autocratic society such as China particularly under the leadership of Xi who is tightening his grip on the country with his inexorable drive against opponents,euphemistically called a drive against corruption by getting rid of thousands of officials high and low who may also have been corrupt, certain economic objectives will be achieved that could never be in democratic societies.China’s road of high growth had no doubt been littered with misery too, while millions were coming out of poverty.Although China does not agree, 1.5 million people are reported to have been displaced for the reconstruction Beijing before the Olympics. Even if China is able to maintain a seven percent growth in the coming decade by 2025 it would have left the US and the EU far behind in terms of even nominal GDP. The jury on what system of government is most suited for rapid economic growth in populous societies seems to have come back with the verdict that it is a benevolent autocracy.
But there are also looming clouds in the horizon for China. Its external debt at nearly a trillion dollars at the end of 2014, while only 25% of its reserves, is still formidable. Total social funding as the IMF calls it, (the total outstanding debt) in China is over 240% of GDP is one of the highest in the world. It is true that the Banking Regulatory Commission of China in its annual report of 2013 has presented a rosy picture of the non performing loans at 1.4% of the total assets and that world class systems are being put in place to ensure the stability of the Banks most of which are in the public sector, there is still a lurking fear as to how much of the operations of these banks are in the sphere of shadow banking and what percentage of it is NPL. This has been the most worrisome part of the Chinese economy as the facts and figures in this area are only estimated figures. The Fung Global Institute in a well researched document of March 2015 “ Bringing Shadow Banking to Light” on the basis of the Chinese National Balance Data has estimated that the size of shadow banking assets would be about 53% of China’s GDP and 27% of formal banking credit system assets in 2013.China’s shadow banking products have been attributed to market response to circumvent tight interest rates and other banking restrictions. There is also a scare that many banks have also used these instruments, which are not reflected in their balance sheets. Substantial sums of short-term money have been lent long term for long gestation real estate and other infrastructure projects. This was the situation in East Asia when the financial crisis hit them and caused immense trouble for the real sector. The countries had to go under the tutelage of the IMF the latter calling all the shots. The FGI paper also apprehends that the probable NPL figures pertaining to shadow banking is also taken into account the total NPL of China’s banking system may be closer to 7%. The FGI however feels that this is a challenge which China should convert into an opportunity to reform their banking and financial system as a whole. In the unlikely event of a collapse there, it will not have a contagion impact on other countries as China is endowed with more than enough reserves, which is if any is growing unlike in the case of East Asia where large proportion of the loans had been extended by foreign banks and they were the first to rush to the exit door.
Municipal finances have been a source of worry in China as they have been using their land resources to finance capital outlays rather indiscriminately. This has not gone un- noticed. President Xi has already ordered a revamping of the municipal finances.The State Council published an important document Number 43 of 2014. Through that document the Ministry of finance each province was ordered to inventory al its local government debt by Jan2015. After the figures were received and the State Council had approved, it was to be permanently capped freezing the debt at that level with no scope for any increase. All completed projects financed through debt categorized, as non-revenue yielding will become local government debt funded through bonds.
Revenue yielding projects will be corporatized and revenue dedicated to servicing of debt.
Projects with insufficient revenue will also be corporatized but its deficit to service the debt will be subsidized by the local body.
Projects under execution will have to be approved and funded by bonds issue.
The price of debt will be market determined.
Bold and ambitious these measures are,with far reaching consequences; the implementation has been dragging for obvious reasons. Only time can tell how well or badly they will be implemented.
Similarly the State Council and the CCP together reportedly issued a document on rural land policy which specified three levels of ownership of land, collective that never changes, land contract rights with the individual and households and are stable: land management rights that are transferable by way of lease or rented without detriment to farmer’s contractual interest. The land use rights can also be contributed as an equity stake to an agricultural corporation. To what extent they have been translated into actual practice is not known yet. These steps are indicative of the changes that are coming in the socio- economic system of China, which the west cannot understand because of the widely different cultures. The west fondly hopes for a disintegration of China as it happened to the Soviet Union. So they talk of human rights violations as if there are not any there. They talk of democracy as though there cannot be any other system where people are as free as anywhere else. China, in sum may slow down but it is the time that will enable China to re-trim its economy laying greater emphasis on controlling climate change and putting its economy on a sustainable path of growth. Even if growth slows down to a sedate pace of 6% the Chinese economy will by 2030 be double that of the US economy with its population having a developed country per capita income. The imponderables in the way of the dragon are a black swan of a major internal political disturbance arising within its frontiers that results in the overthrow of the “partiocracy” the current system as described by Frank Fang director of the Institutional Economics Centre in Chicago and the emergence of a confused democracy in China as we know it in India.He has observed “the booming economy pushes government official towards and incentive based culture(rather than a service-based culture), a culture that echoes its connection-and –power-oriented tradition and weak relationalcontrol.Such a social environment fails to institutionally discourage destructive effortsrelated to crime, social unrest, environmental degradation, and the degeneration of social mores (drug abuse, prostitution, addictive gambling) and fails to build adequate disincentives to institutionally discourage, distributional efforts related to power abuse, corruption budget based overheating, local protectionism, health care distortion, and violation of intellectual property rights”. This was written before Xi came to power but may be true even today.Secondly another major global financial crisis also could hit the Chinese economy. But both the events are unpredictable and could be left to the realm of imagination.
What of the elephant?The mahout Modi has ambitious development goals and even greater intentions. But the spike has in his hand to train the elephant is blunted in as much as his prods to make the elephant run has had only limited effects.
The Indian socio-cultural -economic milieu has to be seen in this context.India has had a 5000 year unbroken history in time but spread over bits and pieces of hundreds of kingdoms and principalities over these millennia each having its own caste and religious composition with diversified practices, overridden by the Muslim conquest and then by colonial rule ultimately being born as an Indian nation only in 1947.It is that elephant in the room described by the proverbial blind men that is being prodded by Modi to run. We do not have a country with provinces as in China but provinces with a country- that is the first obstacle. The UPA I did a great job in its initial years with a call to make the nation great and unleashing many reforms, which were enthusiastically adopted by states vowing to excel one another. The follow through was poor and dragged down further by avoidable scandals. The enthusiasm in the states also flagged with new governments in many states who saw development with their own eyes. During UPA II in over a dozen states non-congress parties came to power that were hostile to the Indian National Congress led government at the center. With scandals hounding at every corner the union government became rudderless with a captain who had no clue as to how to steer the ship in the stormy ocean. Important states like West Bengal and Tamil Nadu were openly hostile and set at naught many major development projects defying the central government while other non –congress governments followed their own paths. Despite this discordance the finances of the states improved as per the analysis done by the RBI of their budgets from year to year while that of the union deteriorated with resources getting frittered away in myriads of schemes to gain popular support. The financial crisis in the west affected Indian economic growth indirectly, more as a sentimental reaction than actual as with a proper direction to the economy with states cooperating in the endeavor, the slide could have ben arrested. The billions of dollars of stagnating investments during this period, admitted by the government as due to their failure in giving clearances has set the economy back in more ways than one, like locked loans of the banks many of them becoming NPAs, loss of potential markets as projects could not be commissioned on time, loss of employment to people, entrepreneurs just giving up projects due to frustration and so on, all of which been succinctly described in the Economic Survey 2015 of the Government of India. Government of India has initiated steps to clear the mess by auctioning coal fields, delegating powers to states to give environmental clearances with the underlying danger of graft, setting up a platform for all clearances from the central government without a hassle, accelerate and increase government investments in areas to catalyze private investment and more. ((Please refer to the DIPP site for the new initiatives undertaken to facilitate ease of doing business) Unless the government of India takes a bold step of publishing every month the number of days taken in every state for obtaining clearances in all respects for investments in all kinds of projects by the private sector the problems of red tape and corruption in every state would not get exposed.
Despite the author’s sympathy for those whose lands may be acquired for various purposes the UPA Land Acquisition Act could be only termed as a non- starter. The various provisions read carefully would clearly reveal to any revenue officer who ultimately will acquire land under the law, that no land could be acquired at least not in 10 years, if all provisions had to be complied with. Instead the government could have stated that land will be acquired only for government purposes as in the developed countries with the private sector buying land like any other commodity. The latter does not want any controls on the sale of their products or on their pricing so why should they expect that government would buy land for their use.The uncertainty on this should end and government should encourage private sector to purchase land or move to places they can allot government land. The elephant can slip here.
Would it be possible for Modi to don the mantle of Deng or even Xi? It appeared he was trying to when he went on his blitzkrieg election tours electrifying masses. But India is not China. It has Chief ministers and leaders for whom the people are only instruments who could be and are purchased with whatever during elections. These states will be the impediments on the march of the elephant. But yet Modi can influence the states ruled by his party to follow him with all the best practices of doing business and make the elephant go fast. He is perhaps doing that in Maharashtra and Gujarat with Rajasthan, MP and Chhattisgarh trying to keep pace. A statement by the Government of India Secretary in charge of Department of Industrial Policy and Promotion that several states are putting in place systems to facilitate industry and commerce without hassle is encouraging.
India has to look at its taxation system, as tax evasion seems to be endemic.Any attempt to prevent evasion is seen as regressive tax measures affecting investor sentiment. Why this sentiment stands unaffected in the UK where even in the current year’s budget a number GAAR measures have been announced. Why there is no crying in the US when the IRS goes after tax evaders and puts them in prison for long terms?. It is because the Indian tax system has been ineffective against tax evaders and has permitted accumulation of black money more than anywhere else. Instead of systematically inventorying tax evasion sector by sector the government has been busy in only complicating tax laws and building opportunities for corruption. This mythical sentiment of investors seems to be affecting rational thinking in the Finance ministry. They should take pride that despite all pressures and recommendations they were able to contain domestic gas price increase without even a murmur Governance and law enforcement have been exceptions in India rather than the rule mainly because the civil services have not been reformed. The elephant has also become a donkey carrying burdens that could have been discarded long ago.
A friend sent me this piece:
During the South Asian Diaspora Convention in 2011, Lee Kwan Yew was asked, “If someone were to give you India today, can you do to India what you did to Singapore over the last three decades?” This is what he said in response.
“First, no single person can change India. You speak 320 different languages. Manmohan Singh [who was the Prime Minister then] can speak Hindi – I am not sure if he speaks Punjabi, I think he can, but at any one time you would only have only about 200 million people out of a total of 1.2 billion people understanding him, so that is a structural problem which cannot be overcome.
If you compare that with China where over 90 per cent speak one language, and when the President of China or a leader in China speaks, 90 per cent understand it. So, it’s a much easier country to lead than India.
Secondly, as I have explained, India consists of many different dialects and nation-groups. There is no connection between the history and development of the Tamil language or the Telugu language and [say] Punjabi. So, India is a creation of the British Raj and the railway system it built, and therefore it has its limitations.”
We hope the Elephant at least walks at a good pace.