Wednesday, October 29, 2014

Would India Beat China?

The mantra of the new Prime Minister of India is 'Make in India'. His economic policy hinges on getting Indian manufacturing going, to get to the double-digit growth figures that he would need to deliver his promise of 'development'. And, indeed, this is what it should be: India will need to create 10 million non-farm jobs every year at least through the next decade, to absorb the new people entering the workforce productively. Service industries, for all their glamour, do not employ as many people as manufacturing does (at least in theory) and therefore, Mr Modi must steal some of China's thunder and try to make India world's next manufacturing base.

In many ways, this new economic policy is modelled on China. The focus is on investment in infrastructure, reform of labour laws (which means deregulation and reduction of power of the organised labour), making land acquisitions easier for industrial development etc., all the things that China has done with great efficacy over the last thirty years. Even the political model that the Indian middle classes want, as expressed in the complete mandate given to Mr Modi in last May's general elections and subsequent state elections this month, is based on the Chinese - not the quarrelsome democratic model that India built, but an unified strong state backed by an elite business class. Mr Modi could have said, India is the new China, but instead contented himself with the pithy but suggestive 'Make in India'. 

Given the disappointments international investment community has had with India in the last decade, this message may sound like empty rhetoric. India seems to be forever in this catch-up game with China. I once had an English colleague who was greatly optimistic about India, mentioning quite frequently how India's democracy and openness would eventually propel the country ahead of China. As it would happen, last year, I travelled with this colleague first to India, covering seven cities in about two weeks, and then to Shanghai, for a similar tour covering multiple cities: It was poignant when he eventually turned to me, while we were rushing to catch a train in Shanghai Hongqiao Railway station, and said that he was wrong and India might not catch up with China in the next hundred years. The scale and efficiency of China indeed would give that feel to any observer: Just compare the views one sees while approaching to land at Shanghai and Mumbai airports, respectively.

However, there is more than just hope in Mr Modi's strategy. There is a calculation, articulated in the Indian policy circles in the last year or so, that China will eventually become unattractive because of its increasing costs of operation and various acts of intrusive legislation and regulatory assertiveness shown towards international companies. China is also increasingly pursuing leadership in intellectual property, and tinkering with patents in various ways, whereas the Indians have been more benign in that regard. Mr Modi's team hopes that this would make India a very attractive alternative, once and if the infrastructure issues are sorted out.

While one must remember that China was world's pre-eminent economy before Industrial Revolution, and indeed, well into it too, but also that in recent times, it came from behind to establish a lead over India, and eventually on all other economies except United States. The arguments in India is that if with a strong, purposeful state, China could achieve such an astonishing turnaround in the last three decades, India should be able to do it too. And, indeed, India's diversity, which is cited as a problem, is well matched by the diversity of China: It is just that we talk about the latter less. 

However, India has other things to watch out for. 

First, China has a much longer history of strong central government than India: The Indian state in its current form, is a relatively modern entity, while China maintained a more homogenous administration for a longer time in history. So, imposition of a strong central rule may not be easy in India, despite the obvious promise of development. The painful adjustments that one has to make to improve infrastructure or create business friendly environment are harder to do when the basic necessities of daily lives are not available

Second, China's many revolutions and civil wars, while painful to its people, may have shaken the society enough and allowed a kind of social mobility not experienced in India. In fact, India's relatively peaceful continuity in history has created stable structures of power and privilege, which sometimes works against the country. If the theory, advanced by many social scientists, that development happens when the common people can hold the elite to account is correct (historical evidence bears it out), then India is behind China on this count. [One must admit that there may be some noticeable change in the recent years: Narendra Modi is the first outsider to reach the pinnacle of power in India, while one sees the rise of 'princelings' and an entrenched privileged class, in China.]

Third, manufacturing jobs may be leaving China not for the reasons of cost and regulatory intervention, but for the trend that technology-intensive manufacturing moving back near to the consumers. China itself has been losing manufacturing jobs steadily for many years because of factories automating themselves: So, the game is no longer about being cheaper and easier to do business with (notwithstanding the comparison with China, India is a very difficult to do business in - just try forming a company with a foreign director!). 

Fourth, India lacks expertise, more so in manufacturing. It is not just about building factories, but also finding skilled people. The technology-rich manufacturing that one does today requires educated workers, where China certainly trumps India. Even for higher level expertise, China's meritocratic culture is helpful, whereas India's caste-role dictated ideas of work and career often come in the way of professional expertise and practice (Indian coders don't want to code because doing things by hand is considered a lower occupation: They would rather be managers). A revolution in education and training is needed in India before a manufacturing revolution can happen.

In short, India trying to play China's game may not work out, partly because of the bottlenecks in Indian society and economy, and partly because the game is changing. One may want to think India, given its innovativeness, energy and diversity, may be better off taking a different path: Instead of trying to induce foreign manufacturers set up shop in India, one may think in terms of an 'enterprise revolution'. In fact, this is one thing happening in India in abundance already, with the traditional ideas about careers and life breaking down and small businesses are becoming successful (despite all the barriers government throws at them). This may encompass manufacturing, services, research and development, everything: It may generate jobs, and change the views about life and state that India urgently needs. This is where India may truly trump China (though lately China has indeed stolen a march on this front too) and may come to lead the world. One should start thinking about an Ministry to help foster enterprise, and converting the talk of loving small enterprises into action.  



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