October 19, 2012
by John Lee
In 2006, Indian Prime Minister Manmohan Singh heaped considerable praise on the so-called Beijing Consensus approach to economic development, arguing India could learn much from China in terms of reinventing, rebuilding and rediscovering itself.
With the Chinese economy now stumbling, Julia Gillard is desperately hoping India can take up some of the slack, declaring that her goal is to double bilateral trade between Australia and India to $40 billion by 2015. For that to occur, India needs to reject the Chinese approach and look instead to its vibrant private sector to lead the country into the future.
Like China, India has an economy that is too big to ignore. With two-thirds of the population still in rural areas, it has a faster rate of urbanisation than China at 2.5 per cent a year. With a population that is set to exceed China's within the next two decades, and an age demographic that means it will remain a young country well into the middle of this century, it has an economy that has been expanding at about 7 per cent a year since the early 1990s.
This means a rapidly growing India will need even more of our coal. It will need huge quantities of food for its growing population. As a consumption-driven economy with a more sophisticated services sector than China, English-speaking India should welcome Australian services expertise. And to top it off, it is surrounded by weak or small states, meaning India will need to look further afield for meaningful economic partners during the next few decades.
In theory, this all bodes well for an advanced, resource-rich and agriculturally strong economy such as Australia. But there is no such thing as inevitability when it comes to continued economic growth and reform. A telling signal of how a country is really faring is what private entrepreneurs are doing with their capital. In the latest figures available (2010-11), outward investment from India more than doubled, while inward investment plunged. If India is well on its way to becoming an Asian economic superpower, the $US20 billion net outflow from an economy that desperately needs investment does not make sense.
A closer reading of why Indian and foreign entrepreneurs are investing abroad rather than in Asia's second fastest growing economy is troubling. India is in a weaker structural position now than it was several years ago. An entrenched socialism, combined with widespread admiration for the Chinese approach, has meant the re-emergence of Indian economic statism, the conviction that the government needs to take the lead in steering economic development into the future.
Take the present Indian five-year plan (2007-12). In line with the Chinese approach and as Derek Scissors from the Heritage Foundation puts it, "state-led infrastructure is the centrepiece of economic policy and growth strategy". Of the $US500 billion spent on infrastructure development across this period, only 17 per cent came from the private sector and almost all of that came from telecommunications firms.
For the next five year plan (2012-17), the government has set the target of $US1 trillion in infrastructure spending, with half to come from the private sector. No one in the Indian private sector believes this is an achievable goal.
Why are domestic and international private investors so reluctant to commit? One problem is that regulatory conditions and tendering processes are biased against private firms, while cheap loans generally are offered only to state-owned firms. In proposed public-private partnerships, the government's attitude is skewed towards socialising profits and privatising losses. Partly from a legacy emphasising the co-operative and collective ownership and exploitation of land, little progress has been made on an effective land title registration system. This means it is unclear who owns various pieces of land and investors cannot be sure that their infrastructure projects will be granted legal sanction.
Moreover, because the state still dominates - or else limits foreign firms from participating in key industries such as banking, insurance, agriculture, mining and minerals, energy, retail and transport - extremely inefficient and protected state-owned firms allocate and receive far too much capital while delivering far too few products and services at too great a cost. The impact on the agricultural sector is particularly troubling since some indicators suggest productivity in this sector has declined, a worrying trend for a country with a large and growing population to feed.
This means that the economic model, like China's, grows increasingly addicted to throwing more and more money at poorly performing state-owned firms to guarantee growth.
One consequence of heavy reliance on cheap money (in addition to subsidies, tax breaks and protective tariffs) offered to undeserving firms to drive growth is a government debt-to-gross domestic product ratio of 50 per cent - large for a developing country with a small tax base, and one that spends little on welfare - meaning interest payments absorb more than one-fifth of the annual budget. Another is that the money supply is growing three times faster than GDP, contributing significantly to 7 per cent to 8 per cent annual inflation in the past few years. As in China, the state-led mobilisation of resources is preferred over an emphasis on efficiency and productivity.
India's problem is not its democratic past but its socialist legacy. Across the past two decades, India can boast the rise of world-class private sector firms in areas such as telecommunications, pharmaceuticals, vertically integrated manufacturing and bio-technology, which occurred despite government policy.
The most vibrant economic sectors are dominated by domestic private firms that can compete with the best in the world on equal terms. If Australia is hoping an Indian economic miracle can match or surpass the Chinese one, then New Delhi needs to move on from its history and look beyond Beijing for inspiration.
John Lee is a Hudson Institute Visiting Fellow and an Adjunct Associate Professor and Michael Hintze Fellow for Energy Security at the Centre for International Security Studies, Sydney University. He is the author of Will China Fail? (CIS, 2008).
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