Jubilation on India's exchange reserves crossing $100 billion led me to propose a higher ambition - matching China's economic performance - in Business World of 8 January 2004.
Catching up with China
There was much jubilation on the reserves crossing $100
billion. Rs 458636 crore does not sound nearly as exciting, although it is
equivalent to $100.59 billion, the reserves on Boxing Day. Nor do the revelers
like to look at other countries – for instance, Japan’s $644 billion. The truth
is that the United States has a huge payments deficit, and is exporting dollars
on a vast scale. Someone has to hold them; and India is one of the carriers.
That is neither a privilege neither a piece of good luck; it is just a
consequence of policy paralysis.
More rational governments would
use the dollars to import cheap goods for their citizens; others may use them
to pay off debt. But India is still allergic to consumer goods from abroad, and
imposes the world’s highest tariffs on them. Others would pay off their debt;
and the Indian government has done it to some extent.
But it is also a fact that India
has found it increasingly difficult to use foreign aid productively. As the
central government has devolved functions, more and more aid has had to be used
by state governments. They are all in dire financial straits, and are sorely
tempted to take aid and use it for unauthorized purposes. In many there is
uncontrolled corruption. And since it is unlikely that the states will ever be
forced to mend their finances, it is the central government that will
eventually have to repay the loans. It might just as well not take them.
Besides, foreign investment is a
good substitute. Except for 2002-03, the current account has been in deficit
ever since 1991-92, when the nadir was reached; that means that the entire
build-up of reserves has been financed by capital inflows. Aid has been a tiny
part of them; most of them have been private flows. Amongst them have been
deposits of nonresident Indians, whom Reserve Bank of India lured in by giving
them interest above that in their home countries. But there has also been
considerable genuine foreign investment that has gone to finance real assets.
Huge though it has been by our
standards, it pales before China’s investment inflow. What makes China such a
magnet? You name anything; it can be produced more cheaply in China, and to
world standards. It has acquired this reputation: if you want to compete
internationally, then you have to go and produce in China. And that reputation
can be traded in for many things. Lower cost of foreign capital, for instance:
rates of profit on foreign investment are lower in China than in India.
Restrictions on foreign investment: China has more, and more discretionary ones
than India. Quality of justice: the Indian judicial system is not great; but it
is miles better than China’s. But China’s performance as an industrial
powerhouse overcomes these negatives.
India has acquired a similar
reputation in software; it is in the process of acquiring it in research and
development. But in the vast field of material production – food, minerals,
manufactures – it is nowhere near acquiring a reputation. And the Japanese, who
know both countries, mention two things. First, Chinese workers – many of them
women – are better educated, better trained, and more in tune with mass
manufacturing. Second, in China enterprises know whom to go in the government,
they are told what they need to do, and how long it would take to get something
done; however corrupt it may be, the Chinese government encourages and
promotes, whereas the Indian government obstructs. And finally, what they do
not mention but is important: prices are low in China, and so are wages.
Let us tackle these three
weaknesses of ours. Let us train industrial workers as we train our engineers.
Let us make government offices responsive, efficient and quick. Let us manage
the economy so as to keep our domestic prices at a fifth of international prices
converted at exchange rates. The rest will follow.
