How India’s economy can catch up with that of China

SOME economists say India was in the dark ages before 1991, when the economy was lit up with the IMF-induced reforms.

I grew up in post-Independence India. The world did not seem dark. There was aspiration to build a new nation and exhilaration in learning new capabilities. I worked for 25 years with the Tata group, building enterprises; then as a consultant to ‘learning enterprises’ in the US and other countries for 20 years. I became a Member of India’s Planning Commission in 2009, tasked to determine why India had lost the industrialisation race to China after 1991 and propose corrections to Indian policies.

Let's step back into the pre-1991 history. India needed wheels for economic growth when it became independent: trucks to carry goods and buses for public transport. Four joint ventures were licensed in 1954 to produce such commercial vehicles; the Tata-Daimler Benz joint-venture was one. A multi-year phased manufacturing programme (PMP) was laid down in consultation with several foreign technology providers. Indian companies had to learn to produce more complex components in each phase with the technology provided by their foreign partners. The PMP in the automobile industry extended to 15 years, by the end of which 90 per cent of the vehicle had to be produced domestically.

The Tatas were good learners. Within 15 years, they produced trucks and buses to Daimler Benz’s exacting standards, with over 95 per cent domestic content, incorporating components produced by hundreds of domestic companies, large and small, around the country. The Tata group established its own design and development centre in Pune, the first in India. When the technological tie-up with Daimler Benz ended, the group became free to export Indian-made vehicles. By the mid-1980s — before the 1991 liberalisation — Tata trucks and buses were running on roads of 50 countries, overtaking foreign competition.

Sustainable economic growth is a process of enterprises in a country learning new skills and creating collective capabilities they did not have before. In a competitive world, late industrialists must learn faster than those ahead of them. A country’s policymakers must create conditions for nurturing industries until they are strong enough for more open competition. That’s how Germany, Japan, South Korea and China became industrial powerhouses. India lost the plot when, swayed by the Washington economics, it abandoned industrial policies prematurely. Ultimately, the race between countries is one between the abilities of their policymakers to learn faster.

Chinese policymakers have proved to be faster learners. The Chinese and Indian manufacturing and capital goods sectors were of comparable size in 1991. By 2010, China’s manufacturing sector was eight times larger, its capital goods' sector 50 times and China was exporting machinery and computers around the world.

The economy of a large country is a complex adaptive system. Many industries must grow together. Lopsided growth of one industry can harm others, weakening the economy. India cannot rely only on software/services growth. It needs more hardware/manufacturing.

India’s software industry has produced wealth for promoters of companies. They obtained the wealth from the arbitrage between low cost, English-speaking Indian engineers produced by IITs, and prices of software services abroad. The firms reaped the benefits of public investments in India’s world-class engineering institutions. They were also given incentives to invest and grow their businesses — land at low cost and extended tax holidays.

Software engineers require computer hardware to work on. India complied quickly with the Information Technology Agreement, concluded by 29 participating countries at the WTO’s Ministerial Conference in Singapore in December 1996, led by the US, to do away with import duties on computer equipment. The Indian government agreed in March 1997, persuaded by its software industry, to reduce its hardware costs. China signed only in 2003. It used the shield of import duties to strengthen its own electronic hardware sector, which has grown formidably since then, and even become a threat to the US.

India must build its own hardware industries quickly for its own security. The government has introduced production-linked incentive schemes to promote manufacturing. It is also re-negotiating agreements with its trading partners. Liberal economists complain that these policies are a return to what, in their minds, were the dark ages before 1991.

Economists obsessed with Gross Domestic Product (GDP) growth as a panacea for a nation’s success are realising that policies to spur GDP growth are insufficient for all-round progress. Growth must be more inclusive and environmentally sustainable, too. Citizens are included in economic growth with jobs and livelihoods that provide them good incomes; poverty also reduces in an economically sustainable manner. Whereas price subsidies and unearned income support, which governments are politically compelled to give when the economy is not functioning well, are unsustainable in the long run.

The evolution of India’s industrial policy stalled in 1991 because industrial policy was a bad phrase in the Washington Consensus’ framework that swept the world with the fall of the Soviet Union. According to the new economic consensus, open trade across national borders and freedom for capital to roam the world is good for everyone. It is good for consumers everywhere, who can buy the best products at the cheapest prices. Unsurprisingly, the opening of the Indian economy was broadly supported by Indian citizens.

The catch is that citizens must earn enough to buy the products they are tempted to buy with open trade. For this, they need to earn adequate incomes. The unintended consequence of India’s open-market reforms is haunting the country now. Insufficient incomes, under-employment and inadequate social security — in agriculture, manufacturing and even services — is causing unrest nationwide.

Industrial depth was forsaken in recent decades for growth stimulated by free trade, which spurred shallow GDP growth. India’s post-liberalisation policies must be reassessed and reformed to create faster learning enterprises and more productive employment. Premature and muddled liberalisation made it easier for investors to do business, but harder for the common man to earn and live with dignity. Ultimately, there are no shortcuts to the nurturing of human assets for the growth of economy. It is good for the people and good for economic growth, too.