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Did India Miss Out on World Economic Expansion of 80s & 90s?

Paper No. 724                                                      27/06/2003

Guest Column: by Hari Sud

India did not reach its full potential of development until 1995. Prior to that a slow growth rate of 3% of GNP was maintained during a good crop year and lower if there was a drought.  As opposed to that the average population growth stayed study at about 2% a year.  The latter nullified the impact of the great development plans initiated by Nehru in 1951. Only one achievement stands out i.e. enough food grains are produced since 1984 to ward of drought and hunger.  The great Nehruvian dream of industrial India stayed unachieved.  There are few macro factors, which prevented India on its path of industrialization:  

* Internal factors  

* External factors  

The internal factors were way too many to count. These can largely be classified as political – incompetent politicians, lazy civil service, Soviet Union model adopted for economic planning, lack of trained manpower, mutual hostility between businesses and the governments, corruption, nepotism, wars etc. etc. These are maladies, which lead to slow economic growth.  

The external factors include - foreign technology & how to pay for it, shortage of development funds, and trade practices of the West, trade restrictions in India on foreign goods, general dislike of India by the West for siding with the Soviet Union, lack of infrastructure in India to attract foreign investment and political disputes resulting in mutual hostility etc.  

None of the above helped the development of the country. Rather these were impediments to progress.  Politically, the leaders maintained that they are succeeding, but I believe the results were otherwise. 

Elsewhere in Asia – What was happening?  

Neighboring countries - Pakistan, Burma, South East Asia, Indonesia, China had also had a dismal performance during 50s, 60s and 70s.  A few economies prospered.  But these were exceptions.  China in particular always stated as part of their official propaganda that they are succeeding but the truth was otherwise.  All of them have had similar reasons as India, for their lack of success.  Then came the end of the Vietnam War in 1975 and suddenly, the focus of the West (more specifically in US) shifted towards new political re-alignment, exploiting low labor costs in Asia and generally policies to benefit the West.   Two places stood out where US attention was the greatest:  

* China  

* South East Asian Counties.  

Chinese decided to align with the West after their border dispute with the Soviet Union.  They became the major beneficiary of US & Europe’s attention. Other South East Asian countries (also called Asian Tigers) benefited mainly due to US desire to eliminate the menace of Communist take over. Development of China was targeted as a high priority because it was understood that to gain an advantage over the Soviets in the Europe, Chinese could be used to backstab them.  Chinese and the Asian Tiger economies could only prosper if these are reformed with massive outside investment and transfer of low-level technologies (mostly former).  It took likes of George Bush (Sr.) and other US ambassadors to China eight years to negotiate and reach a clear understanding on how to reform Chinese economy to benefit both the US and the Chinese.  Then only the floodgate of foreign investment was opened.  From 1981 to 1992 an average of $20 Billion Foreign Direct Investment a year flowed into China and thereafter it increased to $40 Billion.  

In short Chinese economic miracle was made in USA.   

India and China from 1950 to 1975  

During the ages, India traded well with other countries and prospered.  This trend was reversed when British became the masters of India.  Similarly Chinese traded well through the ages and maintained a high level of prosperity for its people. During the nineteenth century the European took advantage of civil unrest in China and exploited the situation to the best of their advantage. When Mao Ze Dung came to power in Peking (now Beijing) in 1948, he settled down to expel all western and US influences from China.  He struck a deal with the eager Soviets to get help to improve its economy and military.  He soon realized his mistake.  He later struck a deal with the visiting US President Richard Nixon in 1973 to bury the hatchet and converge policies not only in the military matters but also in the economic matters.  This has stood them well.  

In case of India the boldness needed to sway from Soviets style was not there.  It is partly that India is a democracy; hence any shock therapy given to the economy may result in political chaos.  Also a bit of animosity developed over 25 years with US and the West was not ready to go away that easily.  A price had to be paid. Indian leaders were unable to think of ways to pay it.  Hence a lack luster economic performance continued even if it was realized that Chinese economic development is gaining momentum after its political settlement with the US. From 1981 onwards, Chinese economy expanded very rapidly and Indian economy with lack of money maintained its turtle pace.   

Trade, the source of Economic Well Being  

  Trade is mother of all keys to prosperity. Its increase guarantees prosperity.  The colonial powers of nineteenth century began their power grab as traders. Trading made Europe prosperous.  They stayed in the region for over a hundred years. During this time frame they ensured that their colonies import goods from them only at high price in exchange for low cost raw materials.  

The World War II ended most of the colonialism and made US, a world economic and military power. To some extent USSR tried to copy this but were not very successful.  Hence US and Europe (the ex colonial powers) stayed as pre-eminent economic powers and trading blocks.  

To ensure free and beneficial trade for them and to include rest of the world including LDCs (Less Developed Countries) an organization called General Agreement on Trade and Tariffs (GATT) was created.  Impetus for creating such an organization existed since the Depression days of the 30s, but its formal existence had to wait the end of WW II.  

Since its creation in 1947, GATT has had several major negotiating rounds. These were minor until 1964-67. That year a major step was taken to end protectionism.  It was dubbed as Kennedy Round (named after late US President John F Kennedy).  Industrial tariffs were reduced by 35% over five years. This change in rough terms amounted to about $400 Billion in trade.  Other smaller issues were also thrashed.  This was followed by Tokyo Round in 1973-79 ($300 Billion in trade), Uruguay Round in 1985-94 etc.  Each time the developed world managed to enforce its own requirements. LDCs were either ignored or received a lackluster deal. 

The Uruguay Round was a bit trickier than others. These negotiations were held when US and most economies in the West were undergoing a structural change i.e. moving away from manufacturing into the service sector.  Significance of this change was that the west managed to transplant smoke stack industry of the West into the LDCs, allowing the West to concentrate on high technology items like computers, banking, finance, R & D etc. All these are high value items for which greater profits could be made as compared to simple manufacturing or assembly line operations.  Just about that time, on the political and diplomatic front, China as well as rest of the South East Asia were emerging as a low labor cost countries, where manufacturing could be relocated.  

Who Benefited the Most?

China at that time had emerged as an Anti Soviet stable country, whose advantages lay in its political ability to enforce capitalism by a simple decree.  In addition, it was known that “ if you develop China you have a major military advantage i.e. you have tied down a big portion of Soviet military on the Eastern front”. Discussion with Chinese leaders from 1975-84 had produced a model that America could live with.  In layman’s language - capitalism and communism could prosper side by side.  Now the floodgate of investment from US and Europe to China opened.  Small manufacturing was relocated to the Chinese provinces facing Hong Kong with Hong Kong acting as financial center to facilitate trade and finance. Other South East Asian countries joined the boom.  

As we stand today, China is a pre-eminent low tech-manufacturing bureau of the world with exports of about $200 billion a year. This huge export is sustained by an average of $40 billion a year Foreign Direct Investment.  

To sustain a long lasting export boom, Chinese have very cleverly priced their products at the lower end of the scale. These low export prices ensure importers a huge margin of profit. This has sustained the Chinese product mania currently sweeping the West.  

But this low pricing policy has a downside. The lower prices leave almost no margin for the Chinese exporters.  Hence other than providing jobs for the masses, the generation of wealth, which is the second key to prosperity of a country, has been masked.  Hence the manufacturing heaven, where endless masses have jobs, have no profits to sustain the typical capitalist model of profits to generate return on investment.  

This is not all that bad but is not completely kosher either.  

Where does India Stand?  

When China & US were negotiating a deal, India was mired in a political crisis of its own making.  Quarrelsome Indira Gandhi (1966 – 84) had managed to upset everybody in the USA. Rajiv Gandhi, her son, in his famous meeting with President Ronald Reagan failed even to ask him to consider India as a site for transplanting US manufacturing.  Political will to liberalize Indian economy emerged after 1994 cash crisis.  In next few years, successive governments liberalized investment rules and put up signs of “Open for Business” at India. But there were no takers.  The manufacturing investment had decided to settle down in China.  In spite of these failings, the economic performance improved in India a bit but it was lackluster as compared to what China was achieving.  

At Indian government’s invitation, US companies showed a minor interest in System Software Development field to exploit the rich educational and English language background of the masses.  The interest started to grow more and more in the mid 90s as the Y2K crisis loomed.  India was waiting for this opportunity and continued beyond the Y2K.  Soon India became a destination of choice for software development.  

With elections in 1998 and a new NDA government in place, the task of settling all political issues with US began in earnest. Most of the outstanding issues were settled.  It resulted in India becoming an important factor for this vital sector (systems development) of the world economy.  Now this sector is growing rapidly as more and more companies indent their software requirements to India.  A major thrust to relocate Call Centers of the world and systems processing work to India should happen in next 3 to 5 years, giving India a further advantage.  

Good Work India!!!

But there is still no foreign investments in India on the scale as in China to modernize and upgrade manufacturing, infrastructure, power etc. etc. China is still the favored destination for that.  All kinds of reasons have been assigned for this apathy.  Some are internal reasons, which can be dealt with; others are external on which a much greater political, diplomatic, statesmanlike response is needed. 

Did India really miss it during 80s & 90s?

  Yes, India did miss the economic expansion of 80s and 90s. China was the major beneficiary.  I am theorizing that, had the NDA Government of 1998 come to power in 1984, the situation would have been different.  NDAs have shown a greater willingness to settle outstanding issues with USA now and they would have done the same 15 years back.

But India has begun in earnest to regain the lost ground even if FDI on the Chinese scale does not materialize.  Reasons – China produces manufactured goods at low margin hence makes no money or very little money.  India produces high tech, vitally important systems products, which are highly valued and hence achieve a greater profit.  Although this business is at the nascent state today but within 10 years it will overshadow all other traditional Indian exports. 

Other exports of high value items i.e. diamond, jewelry, manufactured machinery etc., if continued on an accelerated pace will put India at par with China.

  I must compliment China that they have an additional advantage i.e. large-scale manufacturing provides large-scale employment, on the other hand development of high tech items in India provides limited employment that too, to highly skilled people.  Masses stay unaffected.  This is one serious limitation to India’s experiment.   

What is left now for India to do?  

The die is already cast for a long time to come. China is going to be the manufacturing bureau of the world.  India has to become the systems service bureau of the world.  The often-accepted wisdom of China 15 years ahead of India may soon be a history.  

China in its relations with US is treading very carefully, not to upset the balance.  India has to do the same and stay engaged with US at all levels. (The author is a retired technocrat based in Toronto,