Quest for superpower

Quest for superpower

India’s persistence with policy reform could not only follow but better China’s growth story since its unprecedented fairy tale reforms of 1979.

India could be on the cusp of making economic history. The new governments and its continuous election victories could help India leap into high growth phase for the next decade by providing confidence to the markets in the economic policies being pursued. The government’s strategy to focus and encourage housing sector, and micro, small and medium enterprises (MSMEs) augurs well for domestic economy. The art of foreign diplomacy being practiced would inspire confidence in the global markets.

India’s persistence with policy reform could not only follow but better China’s growth story since its unprecedented fairy tale reforms of 1979 which resulted in high growth helping fight poverty and make China a dominant force in world trade. In October 2014, the IMF announced that by purchasing power parity measure, the Chinese economy had become the largest at $17.6 trillion as opposed to the US’s $17.4 trillion.

The American Congressional Research Service believes China to be the largest trading economy, second largest destination for foreign direct investment, and the largest manufacturer. China provides a vast new market for global goods, and thus serves as an additional engine of growth for the world economy. Also, China is a key player in supporting the prices of global commodities that drive the economy of many other nations, and has used its vast reserves of nearly $4 trillion to develop tracts of land in Africa, and support failing corporates in Europe after the recent crisis.

The super-power status attained by China has reflected differently for India. Illustratively, recent episode of diplomacy in Gujarat and New Delhi, and military posturing on the border are a matter of particular concern. This implies astute diplomacy, strong army and a strong resolve to achieve the objectives. An examination of economic history of countries like the UK and the USA reveals that once a country achieves a special status, the economy flourishes on an auto-mode, attracts talent and FDI, and transforms itself into an economic magnet for the world.

The key issue for India is to compete successfully with China in manufacturing, and that is not going to be easy without a proper strategy. Illustratively, on many domestic festivals, even festive material sold in India is manufactured in China. What could be the reasons that India is not able to compete with Chinese products? There is a need is to identify the gaps to strengthen India’s industry. The key reason is difference in cost of manufacturing between the two countries.

Amongst the cost, price of energy plays an important role, especially for MSMEs. The official rate of electricity supplied to the industry in China is around half of the rate that is generally charged in India and cash-starved MSMEs cannot afford skilled manpower to facilitate improvements in energy efficiency. Similarly, transportation cost involved in India is significantly large despite similarity in fuel prices because of truck size, surface quality of roads, number of check-posts, and the number of hours spent at each check-post. The differential in cost of other items is also substantial.

Interest rates

In India, the rate of interest that is charged to industry by public sector banks would generally be in the range of 11-15 per cent but that charged by China is just about 4 per cent.  The inventory cost of operating MSMEs is also relatively high in India. In China, Just-in-Time (JIT) technology is extensively used while in India, local suppliers would rather create artificial scarcity and ensure that the cost of inputs increases just before the manufacturer needs it. Finally, because of large scale of production in China, products are not only cost effective but even better in quality and finish compared to India. Indeed, China is the world’s factory.

In the past few years, some sheen has been taken off the Chinese economy. Not only has the pace of growth slowed, to an unprecedented low, but some very serious concerns about property prices, bursting of the credit bubble and uncontrolled risks in the shadow banking system have emerged. There is potential oversupply in China’s housing market, steel manufacturing and in several other industries including railway lines, mainly financed on credit from financial institutions.

And in case of any sputtering, defaults can trigger a domino effect, hurting the economy. Another concern is that domestic demand in China remains suppressed. Consequently, Chinese stock market indices have reflected these concerns and Shanghai composite has declined 26 per cent over the last five years, significantly underperforming Asian and global peers. In fact, economists are now more worried about the weaknesses in China’s economy, a fact reiterated by the IMF in its global reports released in October 2014. There is a potential opportunity for India.

Prime Minister Narendra Modi has appropriately timed the suggestion that India should aggressively pursue the Make in India strategy. To ensure a conducive environment for economic growth and attracting industrial investment, India needs to build a strategy for short, medium and long run. Therefore, India needs to develop a vision for the next 25 years and beyond, and work on a mission mode.

To successfully realise the potential to be an economic super-power, India needs to strengthen the perception that the country and government is strong in resolve to protect investments and wealth within its borders. In this context, think tanks dedicated to geo-political research and related growth strategies urgently need to be established. The government must ensure secure business environment for its manufacturing, and global perception of India should that be of a strong nation pursuing status of global a superpower where not only domestic but also foreign direct investment is safe.

(Singh is RBI Chair Professor, IIM Bangalore. Gupta works in a commercial bank. Views are personal)