Celebrating Capitalism in China

“Prime Minister Narendra Modi meets the world’s richest businessmen in foreign capital” is a pretty straightforward and somewhat customary headline, right? Almost every visiting Indian Prime Minister meets with Bill Gates, Jack Welch, Michael Dell, Mark Zuckerberg, Warren Buffett, David Cote and several peers when he visits Washington. What’s the big deal here?

The big deal is that this was not Washington. And the big deal is that the 22 capitalist titans who queued up to meet Modi were Chinese entrepreneurs, from Jack Ma of Alibaba, Yan Zhiyong of PowerChina and Lin Bin of Xiomi, to Sun Yafang of Huawei, Zou Lei of Harbin Electric, Kuok Khoon Chen of Shangri-La Asia, and Liang Wengen of Sany, among others.

The big deal is that Modi tweeted: “Had a very good meeting with Jack Ma.” The big deal is that Alibaba tweeted back: “Jack meets Indian Prime Minister Narendra Modi to discuss how Alibaba can help empower small businesses in India.” The big deal is that Jack Ma is a tycoon in communist China with a staggering personal wealth of nearly $25 billion. The big deal is that Modi was killing several birds with one slingshot; spraying several messages across the globe with a single selfie.

Making A Point

One, he was telling western leaders that he is equally comfortable courting Chinese enterprise and investment; that Washington and London did not hold his economic ambition in thrall. By openly wooing such a countervailing force, Modi was driving up India’s bargaining power in western capitals. Two, he was celebrating capitalism and free market economics in China, sending a subtle message that the genie of openness and democracy could not be stuffed back into the bottle.

Three, he was emphasising his hopes and aspirations for putting India back on a high growth trajectory: “I have come to say to you — Make in India.” He pushed his “5F Formula — From Farm to Fibre to Fabric to Fashion to Foreign … India is ready for business. You must be sensing the winds of change in India. I only advise you to come and feel the same.”

And four, Modi was trying to right a horrible wrong of history. In the 17th century, China and India accounted for almost half the agrarian global GDP; understandably so, given the huge land mass of both countries. And then both were enslaved under a vicious form of colonialism for the next 250 years. Both fought bruising battles to become free, China through a violent war, and India via a mostly peaceful political struggle. When they became free in the 1940s, their combined share in global GDP had fallen under 10 per cent.

Where India Stands

Ironically, India was ahead of China on most counts. In the 1960s, democratic India’s GDP was higher — yes, higher — than communist China’s. Then we got bogged down in a mixed up Soviet-style controlled economy, while Deng Xiao Ping forced China to open up to the world with unbridled state capitalism. But even then we held our own for about two decades, because as late as the early 1990s, our per capita income was higher — yes, higher — than China’s.

Before we could say “Hail socialism”, China shifted into top gear, while we got trapped in reluctant, crisis-driven reforms. Prime Minister Narasimha Rao and Finance Minister Manmohan Singh did pretty extensive work in liberalising trade and investment policies, but stopped short of other structural work. China simply pulled away — today, China is five times our size, their $10 trillion GDP dwarfing our $2 trillion pygmy. So a country which was smaller than us just two decades ago is today nearly five times our size. Astonishing!

And this is where Modi wants China to teach him and India a few lessons. How did they do it?

China mopped up huge surpluses from its domestic economy: by taking land cheaply from farmers and selling it at astronomical prices to foreigners and investors; by suppressing wages and keeping profits high in state and private, often foreign-owned, factories; by taxing domestic consumers via a cheap currency, which transferred profits to exporters, often foreign companies; and by opening the floodgates to foreign investments, thereby mopping up a huge cache of dollars (its foreign currency reserves today are over $4 trillion, while we are at a relatively puny $0.35 trillion).

Terrific Moves

What China did with these surpluses is even more mind-numbing. It invested them in creating a world class infrastructure — roads, ports, highways, railways, bridges, irrigation canals, dams, nuclear power plants, wind farms, smart cities, hospitals, universities and schools. It wasn’t just physical, but more critically, social infrastructure that China invested in, with vigour and ambition. Such a massive amount of domestic investment, on a scale unknown in human history, created an escape velocity for their economy, which jumped many levels to a higher plane, today cruising at $10 trillion. Yes, in the process, they have created economic crevices and pitfalls which could pull them down a notch or two; but it cannot be denied that on balance they have crafted an economic miracle.

In China, Modi seemed eager to know how we could work a similar miracle for ourselves. So let me attempt a summary of the learnings he could have carried back with him.

Clearly, being a democracy, we cannot, and should not, purge surpluses out of our people. Frankly, democracy is our institutional strength. But we need to supplant it with an almost maniacal drive to increase investment in our economy.

Four things are critical: we must harness our domestic savings in long-term investment instruments, such as 30-year bonds; we must open up to foreign capital, including in health and education; we have to up our absorptive capacity in quantum terms by hacking archaic laws; and finally, it’s important to shrink the role and size of the state in our economy. If we can do these four things, we can actually think of getting “even” with China.

(The article had first appeared in The Hindu, Business Line on May 31, 2015.)