India’s growth story must generate confidence, not complacence. We must learn from China the ability to move on from momentary success or failure, keep the focus on reforms, take a decision and execute it
China’s banking sector has been notorious for its non-recoverable loans — till a few years ago, some estimates had placed these at almost half the total outstandings. By contrast, “non-performing assets” of Indian banks are placed at just about 5 per cent of their outstandings.
That is a difference you would expect us to capitalise on. In practice?
The Industrial and Commercial Bank of China is China’s largest personal bank. It has more than 150 million customers. But its portfolio was so weak that, last year, the Chinese Government had to pump $ 15 billion into the bank to help bring its bad loans to what an expert calls “a controllable level”.
Yet last month, the ICBC raised over twenty two billion dollars through an IPO. This became the largest ever IPO in financial history. Upon listing, the bank’s market capitalisation amounted to $ 143 billion — that is almost twice the market capitalisation of the entire financials universe of India, which is around $ 85 billion. Its market capitalisation makes the ICBC the fifth largest bank in the world.
But there is a more telling index. Guess what the offers for subscription to the IPO amounted to? Over five hundred billion dollars.
And remember, the IPO brings down the government holding in the bank by just 10 per cent. That is, the government retains full and complete control over the bank — even after the IPO, it will have 70 per cent of the bank’s equity.
A typical episode, with so many lessons for us in India:
• The confidence that China has been able to generate in its growth story — even in banking, its weakest sector, it can orchestrate a flood of investment.
• Its ability to take a decision and execute it.
• The funds can now be used for rehabilitation, modernisation, expansion.
By contrast, in India we have been debating whether government holding in our nationalised banks should be reduced for at least ten years. By now, what with everyone having enough power to block every proposal, we have given up even talking about reducing government equity in the nationalised banks. As a result,
• The banks continue to perform well below their potential.
• Resources that could be raised for development remain untapped — in three years of disinvestment, we raised $ 9 billion by selling just 1.6 per cent of government equity.
• Our reputation as a country that will not eventually be able to carry through on its announcements is reinforced.
The current self-congratulation
Two features always strike me as special to us. One, we are too easily swept off our feet by momentary success, and too easily plunged into dejection by momentary defeat. Two, we rush to appropriate that victory — even when we personally have done nothing to contribute to it; and, with equal alacrity, we rush to distance ourselves from a setback — even when we have in some sense contributed to it. Just take a look at how our commentators declaim when our team wins a cricket match and what they say when the same team loses.
There is much self-congratulation about, and much appropriation of, our growth rates these days. Much of this congratulation is warranted. Our economy is today the second fastest growing economy in the world. (Incidentally, remember how our commentators used to deride us with, and distance themselves from, the “Hindu rate of growth”. Who is accounting for the 8 per cent growth today? The same Hindus! You can bet that those who were calling that “the Hindu rate of growth” will never but never call this “the Hindu rate of growth”!) The achievements of the services sector are well known. The lesser noticed story is about the Indian manufacturing sector: it has been reinvented on the shop floor. You go to the manufacturing plant of a company like Bharat Forge — it is what we used to read about Japan: a “lights-out factory”. The entire process is CAD-CAM: Computer-aided Design, Computer-aided Manufacturing.
This reinvention and the consequential confidence are showing up in the results: Indian companies have acquired close to 250 companies abroad — this year, what with the Tata’s spectacular acquisition of Corus, India is liable to be the largest foreign investor in Britain!
But there is a central point to this growth. The trigger for it has been that because of reforms — of the first two and half years of Narasimha Rao’s government and of the six years of Vajpayee’s government — the dead hand of the state has been lifted from large swathes of our economy. This has created the space for the long-suppressed entrepreneurial and middle class professional classes of India to work more to their potential.
But reforms are not an once-over switch that, once turned on, can be forgotten. Governments have to keep at them. New impediments arise — often, the very developments that reforms have triggered foment new impediments. These have to be removed. The process has to be extended to ever new areas. But look around. What has happened in the last two and half years? Apart from two areas — civil aviation and railways — reforms have come to a complete standstill. In several areas — for instance, the reversion to the administered price mechanism in the petroleum sector — there has been regression. The result is predictable: in little time, entrepreneurs and professionals will reach the edges of the space that has been cleared for them, and be blocked by walls again.
Many things account for the progress China has made — the incredible 49 per cent high investment rate, for instance — contrasted with our 28 per cent; the strictly hire-and-fire/no strikes/no unions/freedom to retrench labour laws, for another: no wonder, the World Economic Forum’s Competitiveness Report for last year, ranked India as 111 out of 117 countries, and China as 26th. But the main factor has been that, unlike us, China has transformed the nature of the Chinese state.
As for reforms, the first thing to remember is that China began them in 1978; we waited till the bankruptcy of 1991/92. That single fact has made such a difference: when things are not changing much, if we fall behind by a few years, we can catch up — the other fellow wouldn’t have got far; but when things are changing rapidly, being late by 14 years makes it almost impossible to catch up.
Second, China has kept at reforms relentlessly — in our case, even since 1992, we have pushed reforms only by fits and starts; and even then, there were more feet on the brakes than on the accelerator. The third difference, of course, is execution: China has actually, and mercilessly, implemented what it decided; we have been halted by our processes — land acquisition, court proceedings, changes of government; and just as much by thoughts of brilliant alternatives — “Why not this way?” — and second thoughts. There is a telling index of this: even after the figures are put on comparable basis, China has been receiving seven times the foreign direct investment that we have been getting; and this, even though in the manufacturing sector, for instance, the ceiling for foreign investment has been 100 per cent for several years now.
We are often carried away by figures of inflows these days. We should remember that in the last five years, only 17 per cent of foreign inflows into India has been in the form of FDI, 83 per cent has been FII inflow. That 17 per cent compares with 68 per cent for other emerging economies.
The difference
We should temper our self-congratulation by reflecting on the difference that these factors have made. An excellent study by Steve Roach, Chetan Ahya and their colleagues at Morgan Stanley, points out that, as recently as 25 years ago, the per capita incomes of China and India were about equal. Today, China’s per capita income is two and a half to three times that of India. During this period, China’s average growth rate has been 9.5 per cent. Ours, 5.8 per cent. Its GDP has grown in this period by 7.5 times. Ours by 4.5 times. Its economy is now close to three times ours.
Its exports have grown to 41 times what they were — they are now close to $ 850 billion. Ours to 13 times — they are $ 155 billion. Our foreign exchange reserves are $ 160 billion — a great achievement compared to where they had fallen in early 1992. But China’s are one thousand billion dollars — and we shall soon see the clout that these give it. Compared to our total reserves of $ 160 billion, China added to its reserves last year more than $ 250 billion. Its trade surplus with the US alone exceeds $ 100 billion a year.
China’s achievements in health and education have put an even greater distance between the two countries — in China, one of every 32 children born dies in the first five years; in India, one in every 12. In India, 45 per cent of children under 5 are estimated to be undernourished; in China, 8 per cent. Gross enrollment ratio is estimated to be more or less the same in both countries — but the drop out rate in India is 21 per cent, in China it is 1 per cent.
Last year China is estimated to have spent $ 201 billion on infrastructure. We spent $ 28 billion — that is, one-seventh of China. We spent about $ 6 billion on roads last year; China spent about $ 68 billion. And that is just the difference in expenditure — as for execution, the Indian Express has been reporting how the actual implementation of the programme has been mauled here. The costs of this difference are manifest: we produce around 565 billion kWh of electricity; China produces close to 2.3 trillion kWh. Our industry has to pay double of what Chinese factories pay for power; for ferrying freight by railways, our industry pays three times what Chinese factories pay.
The same pattern mars every sphere. We are the second largest producers of cement — a fine achievement. But against our production of 142 million tons, China produces 1.06 billion tons. We produce 43 million tons of steel, a great leap compared to how things used to be in the socialist era. And in Tisco we have the least-cost producer of steel in the world. But China produces over 450 million tons...
Nor is the difference confined to manufacturing and infrastructure. Arthur Kroeber, who has watched India and China for twenty years, points out that agricultural yields in China have been much higher than those in India, and that the difference in absolute terms between them has been growing. In 1980, China grew 4100 kg of rice per hectare; India, 2000. In 2005, China grew 6300 kg, India 3000 kg. The difference in yields had increased from 2100 kg to 3300 kg per hectare. For wheat the comparable figures were 1900 kg versus 1400 kg in 1980; and 4200 kg versus 2700 kg in 2005. For seed cotton, 1700 kg versus 500 kg in 1980; and 3200 kg versus 800 kg in 2005. For vegetables, 14500 kg versus 8300 kg in 1980; and 19300 kg versus 11300 kg in 2005.
By no means is the race over
Of course, the race is not done. On the one hand, we have just begun to exploit our potential. On the other, China, like other societies, has many problems — what with a displaced, “floating population” of 120 to 140 million; environmental degradation to such an extent that the effects of their coal burning reach far-away California; extreme water shortages — government spokesmen announce that this is afflicting 600 cities and that in 100 of them it is now “acute”; a near-breakdown of the health and educational infrastructure in the rural areas; growing regional disparities; corruption as endemic as it is in India; the lingering inefficient governmental enterprises; the inefficiencies of much of their industry — their steel mills use 15 to 30 per cent more energy and 2.5 times more water than mills in developed countries, their dust emissions are 10 times higher...
But we should remember three things. One, we have several of the same problems, and, the fact that China has problems is not going to solve ours. Two, China has shown that when it directs its attention to a problem it does something about it: so, when the new Plan announces that it will focus on reducing income disparities between rural and urban China, between coastal areas and the inner provinces; on improving efficiencies in the economy; and on instituting more environmentally friendly methods of production — when their Plan announces these goals, the likelihood is that the country will advance towards them. Nor will it be prudent to wait, Micawber-like, in the belief that something will turn up — that China will be drowned by its problems.
Three, the massive growth that China has already secured gives it formidable power. So, instead of drawing comfort from the fact that China too has problems, we should reflect on what the strength that it has acquired through this growth implies for us.
A good example is Gandhiji’s reaction to that scurrilous book, Katherine Mayo’s Mother India. Gandhiji nailed her exaggerations and falsehoods. But his advice was, “No foreigner should read it, but every Indian should.” For, it was liable to mislead the foreigner. As for Indians, we would see through the eyes of a critical foreigner what we are apt to ignore as it is so familiar.
The same goes for China’s growth. China should think about the problems that confront it. We should emulate the reasons for its successes:
• Focus
• Sustained pursuit of goals
• Execution
And reflect on the power which that growth gives China.
It is a grave error to be mesmerised by China’s economic growth as if it were just ‘economic growth’.
To begin with, much of ‘economic growth’ consists of things that add military muscle. When China produces modern weapons-systems — apart from many other systems, it has made major advances in cruise and ballistic missiles, space technologies including technologies to disable enemy satellites, electronic warfare capabilities; when it lays out ‘infrastructure’ in Tibet — that is all ‘economic growth’. But it has direct military implications for India. The train that traverses heights of 16,000 feet to reach Lhasa can carry tourists, no doubt; but also men and materials of the PLA. When — as satellite imagery shows and ground information confirms — China builds 39 transport routes from its interior to the borders with India, and upgrades 15 of them for heavy vehicular traffic, including a four-lane highway right up to the border of Sikkim, all that too is ‘economic growth’; but that ‘growth’ should awaken us to what it implies for our security.
Second, economic growth translates directly into the ability to bend others to subserve a country’s interests. No country in South East Asia — and that includes Australia — will take a step today without factoring in the likely reaction of China to that step. Nor can even the US Administration be oblivious of the fact that China is today the largest financier of its deficit, that it holds one of the largest chunks of US securities, that US firms have such high exposure in China. When the Chinese president announces during his visit to Latin America that China will invest $ 100 billion in that region, and gives $ 20 billion on the spot to beleaguered Argentina; when he announces another $ 100 billion investments in the five Central Asian Republics; and the country chalks up projects to invest yet another $ 100 billion in Iran, China acquires deep and pervasive influence. Will these countries heed us or China when they have to vote on reorganisation of the Security Council? Similarly, the fact that, in the contention for influence in Central Asia, China can deploy resources of an order that Russia just cannot today set aside, has compelled the latter, anxious as it is to check US advances in these five states, to accept being a sort of junior partner to China in the region. The mining boom in Australia, including its production and export of natural gas, are directly linked to China’s growth. ASEAN, and even Taiwan, have been already sucked into the Chinese sphere — their incomes are directly linked to continued Chinese growth. China does not have to deploy any means — certainly not military ones; of their own accord and in their own interest, these countries keep China’s likely reactions in mind.
Why go that far? Do we not do so? Our silence on Tibet speaks for itself. Similarly, it is well known that six years ago Vietnam offered us access to the strategic Cam Ranh Bay. We declined — so as not to offend China. Even six years after establishing a Tri-Services Command structure in the Andaman and Nicobar islands, we have not positioned any significant assets there — in part out of the apprehension that doing so would bring us into direct contest with the Chinese footprint in Myanmar and Bangladesh.
Third, China is already translating its economic power into military might. The 2006 Report of the US Secretary of Defence on China’s military prowess records that the modernisation of Chinese forces is proceeding at a pace faster than US agencies had earlier thought likely.
Fourth, more directly, the scale of China’s and India’s economic development is already making us compete for natural resources — like oil and gas. And the resources that China has accumulated are enabling it to outbid India in contest after contest. In the contest for PetroKazakhastan, China defeat our bid of $ 3.6 billion by bidding $ 4.2 billion. It already has acquired exploration rights for the overwhelming area of Kazakhstan, and has already built a 1000 km pipeline to carry oil from that country into Xinjiang province of China. We depend on Iran for being a counter to Pakistan; for much of our oil and natural gas. But China has now become Iran’s largest market for oil. It has identified projects for investing $ 100 billion in that country in the next 25 years — and this has contributed in no small measure towards its securing deals to import 100 million tons of Iranian LPG and also 150,000 bbl/day of oil — the latter deal is itself worth $ 100 billion. In far away Ecuador too China’s Sinopec and CNPC beat ONGC and won access to 143 million tons of proven oil reserves. In Angola, we had almost got the deal to take over Shell’s operations for off-shore exploration — China swooped it away by extending a 17 year, $ 2 billion soft loan to the country... This rivalry is bound to intensify in the coming years, and the differences in the resources that each side can deploy for each contest is bound to make all the difference to the outcome.
And the country is China
These factors are by themselves enough to raise concerns about the future. They are compounded by the fact that the country we are talking about is China, and not just any other country.
The dominant orientation of China throughout its history has been to power — the acquisition of power, the use of power, the manipulation of the symbols of power. Second, its singular concern in this regard has been to ‘control the periphery’ — that is, to control the areas from which, and the groups by which its security may be threatened. As the areas from which its security may be threatened now include those that are at great distances from it — say, the US — it is determined to acquire capacities that would enable it to keep those distant areas in check also. In any event, India lies literally on its periphery.
Third, and most consequentially, during the last two decades, China has completely rewritten its military doctrine — from ‘Peoples War fought on Chinese soil’ to ‘Local wars under high technology conditions’ to the current doctrine of ‘Force projection under high technology conditions’.
Fourth, China has been doggedly pursuing the consequential ‘Revolution in Military Affairs’, and the ever-new weapons systems that go with it. In particular, a novel danger stems from its emphasis on building capacities to hurl ‘the assassin’s mace’ at the ‘acupuncture points’ of integrated, modern economies — to disrupt power grids, financial systems, air traffic control networks, railway traffic control networks, communications and broadcasting networks... and to do so suddenly, simultaneously and on a fatal scale.
In no doubt about India
And China has a clear idea about India — that it is a potential nuisance. It views us as one of the ‘claws of the crab’ — the crab is the US whose aim is to contain China; a crab with South Korea, Japan, Taiwan, Vietnam, Australia and India as its claws. The recent moves for closer relationship between the US and India, advantageous though they are for us, have had the incidental effect of reinforcing this perception.
Accordingly, China has pursued a consistent strategy of containing India in return, of keeping it confined to, and busy in South Asia.
With this aim, it has given aid to Pakistan for all sorts of purposes — including the development of atomic weapons and acquisition of missile technology. And it has a long tradition of doing so. Recall the counsel of The Wiles of War, “Murder with a borrowed knife” — that is, instead of doing anything overtly aggressive yourself, find the entity that is naturally predisposed to do your enemy down; arm it. China has entered into a military pact with Bangladesh. There have been reports of its offering to build an atomic reactor for Bangladesh. Myanmar is a dependency of China. In fact, the largest supplies of Chinese arms go to four countries in our region — Pakistan, Myanmar, Bangladesh and Iran.
Tibet has been militarised — to put the Tibetans down, no doubt; but only to put them down? China has redoubled its efforts in Sri Lanka, Maldives, Seychelles and Mauritius. It already has access to the ports of Myanmar — from which it has also taken on lease the Coco Islands just 30 miles from the Andamans. Now it is helping build and it thus acquires access to deep-sea ports round us: Chittagong in Bangladesh and Gwadar in Pakistan — the latter alone at a cost of $ 3 billion. It is also upgrading the naval base in Omara for Pakistan. Along with constructing the port at Gwadar, it is building highways that will link Gwadar to locations within Pakistan but also to Urumchi in China. The most consequential of this string of ‘initiatives’ is the project to dredge Myanmar’s Irrawaddy River — this is to be done by Chinese engineers and much Chinese labour. It isn’t just that a good proportion of this workforce will stay on in or around the new facilities. Once the project is completed, China will acquire a useable waterway giving direct access from its Yunnan province to the Bay of Bengal...
Could all this be out of absent-mindedness? The fact is that China has effectively ‘ringed’ India, and is redoubling its efforts to ring it tighter.
Furthermore, in every international arena, there is a pattern to its actions vis a vis India. It has exerted much effort to keep ASEAN from establishing closer links with India — it has campaigned to have ASEAN+3 (ASEAN, Japan, South Korea and China) and not ASEAN+4 which would have included India. It has summarily rejected the G-4 framework for the expansion of the Security Council. It did not condescend to let India enter the Shanghai Cooperation Organisation — through which it is institutionalising its influence in Central Asia. In the end, it agreed to grant us “observer status” — but only along with Pakistan and Iran; and only when we agreed to it getting the same status in SAARC and BIMSTEC: for the latter, it was vigorously supported not just by Pakistan and Bangladesh but also by our ‘traditional friends’, Sri Lanka and Nepal.
Learn from China
None of this is ground for complaint against China. It is pursuing its interest as it sees them. The question we have to ponder is: ‘What are we doing for our interest?’
The lessons are manifest:
• Do not get swept off again by the ‘bhai-bhai’ business.
• Get out of the ‘see no China, speak no China, hear no China’ policy. See what China is doing with clear eyes.
• In particular, do not leave the formulation of a response to just four/five desk-officers working on the China desk.
• Reflect on the capacities that it is acquiring — as Musharraf once said, once capacities are acquired, intentions can change swiftly.
• The time to start preparing for that sudden change of intentions is the time it would take to develop the counter — that is, decades before the change ‘suddenly’ erupts in view.
• Remember, to fall behind a neighbour is to tempt him to assault us.
• Indeed, if the present distance continues, and all the more certainly if it increases, China would not have to ‘assault’ us. The distance will ensure that other countries heed it rather than us. And that we heed it too.
(Concluded)
arun.shourie@expressindia.com
