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March 10, 2012

‘Chindia’, China or India?

Contrary to what most people think, it could (still!) well be India

If the first decade of the new millennium has mostly been kind for India in terms of economic growth and rising global prominence and visibility, there certainly has been a sting in the tail, which has carried forward into 2011. Of course, seasoned observers and participants of the country’s socio-economic fabric should—and do—treat both passages with an equal amount of skepticism. That said, it is undeniable that the past 12-15 months have not been rosy for the India story, both domestically and in internationally. Be it political gridlock and incompetence, to stories of widespread corruption, to the growing Naxal insurgency, to the clownishly managed Commonwealth Games, the list goes on and on.

Photo: Kimberli/MadhatRK

All this stands in stark contrast to the glowing reception that China continues to receive, especially in terms of its growth geopolitically and economically. It is now—in American eyes, even politically—a military force to be reckoned with, a bonafide economic mega power, and certainly pulling away from the BRIC pack it was lumped in a decade ago.

Yet, as someone who visited China in 2010, one couldn’t help be struck by how significantly stronger India is. On three critical dimensions, economic growth, political structure, and social cohesion, India scores far ahead.

China’s much vaunted economic growth is on very flimsy foundations. Although they’ve gone from 173rd in world GDP rankings in the 1970s to second today, the economic model in place is to keep currency low, have an unlimited supply of labour, and export to developed nations. Western consumption ensures they earn dollars, which along with near total capture of all household savings, are pushed back into the economy, with a single minded focus on infrastructure. This has led to bizarre situations such as gleaming highways where one can drive for hours and see no vehicles.

The success of this is based on trading with the world’s wealthiest capitalist country through the post-World War global trading system, where the US can significantly damage the trade by the stroke of a pen which forces them to revalue (or it can close down trade doors, which is hard for the US to do, given how badly off it is in itsown way). It leads to a ridiculously lop-sided economy, with not much going on—local consumption is almost negligible. The amount of ‘economic waste’ is unbelievable: nearly half of the skyscrapers in Shanghai are absolutely empty.

When, and it’s a question of when, and not if, the crash happens -– which could be the collapse of exports, the internal property waste bubble bursting, the GDP will see a very severe contraction, which would result in lots of unemployment, and wealth destruction.

And that brings us to the most vexing part of the Chinese economic story -– contrary to what the world thinks, there is a lot of poverty in China, the kind of degrading, dehumanising type one associates with Africa, India, and South America, and in much larger numbers –- 800 million of them. In interior China, people live on 1000-1500 RMB a year, which is about 200 RMB a month, or about a dollar a day—a statistic often thrown about with regards to Indian poverty.

The political structure is an equally disheartening story. Communist control is highly dependent on continuous growth, but that has been achieved through brutal control, especially in terms of total control of capital, as well as labour. Permits are required to move in and out of one city (the irony of that being implemented in India makes one’s head spin). An unfortunate consequence of communist rule has been to destroy every single institution that is present in a real society -– media, government, judiciary, citizens organizations. Private industry cannot flourish -– while 70 percent of China’s GDP is locally produced, it’s actually all government controlled; land is allocated by the government, and all resources/permissions are linked to the government.

The government owns everything, and the destruction of all institutions means that the common people have effectively been stripped of all and any means of rising, or of growing personally. A good example of this is in banking—banks exist, but the decisions on who to lend, where to lend, what to lend –- nothing is in their hands. Beijing decides all that. No media exists. At the hotel where this writer stayed, there was a different newspaper for foreigners and for locals.

Socially, as well, it appears as if the past three decades have created a disjointed social network. There are lots of people who feel really rootless, with no grounding. Whether this is more inherent is an open question, as Nehru observed almost 50 years in his interactions with Zhou Enlai. There is a vast population that just lives as hawkers, peasants and workers, under tight-fisted control. This is supplemented by a totally disjointed middle-class, which only cares about wealth, cars, apartments, and property. It is very tangible, when you talk to the people, to see what has happened.

It’s the combination of all these things – the weak economics, the political backwardness, and the skewed society, which makes India more appealing than China.

And what of India?

The overall economic story in India remains rock-solid. There are a variety of industries which are flourishing, and private sector growth drives the country. Domestic consumption keeps growing. On the negative side, the taxpayer base remains extremely low, which is at best 10 percent of the country. More worryingly, the informal sector shows no signs of abating, or merging with the formal economy, which means that distortions in wages and labour markets show no signs of improvement. The demand for improved infrastructure and public services can only come from the formal sector growing, and pushing for improved institutions and governance models. The other big fear for India lies in its energy dependence. The worsening global situation, especially with Iran, could worsen the price of oil, and put severe pressure on public finances.

Politically for India, the situation is, almost, as bad as China. While the government is democratically elected, and not a totalitarian regime, the overall system is a colonial era relic, which leads to ineffectual and corrupt administrations, disconnected from every aspect of modern governance requirements, both in terms of framing policy and delivering solutions. The expanded power of patronage, another legacy of colonial rule, means the government is present in the lives of citizens, except when it is actually required.

Socially though, India’s strong institutions, especially the press and judiciary give it a vital edge over China. The broad social base and the large middle class also ensure a greater engagement with local issues than other countries. So while China’s economy is almost four times that of India’s, the combination of all factors does make India still look a more long-term viable growth prospect.

To quote Edward Luce, things in India are never as good as they seem. Nor as they as bad. India is on a journey with a lot of challenges, and it’s not on autopilot. That said, the path is correct, and the pilots know what to do. And that is a lot to be thankful about.


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