A RACE TO THE FUTURE

[beijingwalker]

A RACE TO THE FUTURE
Monday , February 4 , 2013

- Unless India changes in crucial spheres, China will stay ahead

In a recent article in The New York Times Steven Rattner compares the Indian and Chinese economies and shows that on all economic parameters, India has lagged far behind China. He says, “China has lunged into the 21st century, while India is still lurching toward it… While China often seems to eradicate its past as it single-mindedly constructs its future, India nibbles more judiciously at its complex history… [A]fter years of rocketing growth, China’s gross domestic product per capita of $9,146 is more than twice India’s. And its economy grew by 7.7 per cent in 2012, while India expanded at a (hardly shabby) 5.3 per cent rate.” In GDP per capita, its annual growth, inflation, investment as a portion of GDP, unemployment, budget deficit and current account in the balance of payments, China is far ahead of India.

China has 16 subway systems to India’s five. China is building a superhighway in the high altitudes of Tibet. Indian roads even on the plains are few and badly kept. India’s electricity grid experiences frequent shortages and blackouts.

“India’s rigid social structure limits intergenerational economic mobility and fosters acceptance of vast wealth disparities.” But rapid urbanization, massive migration from rural areas, a youthful population, growing literacy and new skills, massive penetration of mobile telephony everywhere, of the internet and social media in urban India dilute the adverse effects of caste and social structure. They do co-exist with more than half the urban population living in slums, often devoid of electricity or running water, and with monstrous inequalities.

Rattner blames India’s failing in the race with China on India’s social structure and base in tradition. China’s totalitarian regimes have prevented it from being held up by public opinion. China’s relatively unitary culture, and a respect developed for authority over centuries make for better implementation of decisions in China. China has diversity but not on the scale of India with its many languages, races, religions and castes.

These differences also strengthen India, not weaken it. India’s famed democracy, its ability to hold increasingly free and fair elections on a mammoth scale, and the docile handing over of power by one elected government to the next, have reinforced people’s faith in democracy. India’s ability to move speedily in tackling crises — earthquakes, tsunamis — is legendary. So is the ability to organize mega events like the kumbh mela. This requires building, every 12 years, a megacity larger than many large cities together, with roads, sanitation, safe drinking water, and so on. The ability to settle most arguments by discussion and compromise is a strength. An orientation towards languages and mathematics has made India an information technology superpower. Strong family orientation and values ensure that families stay together and look after their weak and vulnerable. But India has not reached its potential.

An abysmal infrastructure, poor maintenance of roads, buildings and so on, the inordinate time taken to complete infrastructure projects, difficulties to start new businesses are glaring differences from China. Capital is more expensive. Employing labour in industry is subject to many controls. It is difficult to start labour-intensive industries, and almost impossible to close weak or dying industries. Bankruptcy laws do not permit a quick restructuring of industries. There is no provision, as in the United States of America, for a title 11 of the bankruptcy code.

Indian tax laws are archaic and unfair. For example raw materials (products like PVC) are subject to higher import duties than the finished products. Without a goods and services tax and uniform tax rates in each state, it is easier for foreign competitors. They pay only standard import duties while domestic industries pay differential taxes in each state.

Corruption is endemic and has increased with the liberalization of the economy. All natural resources are under state ownership or control. With economic growth, natural resources (land, spectrum for telecommunications, coal, iron ore, other minerals, water, electricity and so on) are in increasing demand. Their allocations by government agencies require bribes to be paid to politicians and bureaucrats. Black money, that is, untaxed income, accounts for perhaps 50 per cent of the GDP and is interspersed through it. The government loses the tax revenue.

As a major investor in the economy, the government is into massive road construction, the building of flyovers and metro rails in cities, housing for the poor, slum clearance, garbage removal and so on. These require large government expenditures and construction contracts. These are also a source for corruption.

Economic development has been accompanied by large social expenditures for the benefit of the poor, on livelihoods, health services, education and so on. These expenditures experience large-scale thefts by government employees as benefits are distributed to non-existent beneficiaries, or only partially to beneficiaries.

China is also known for massive corruption. But the government’s schemes are implemented to a large extent, and quickly. It is not so in India. Jobs in Indian governments (teachers, recruits to the army, police and so on) at times require payments to recruiters. Government certified documents also are given for an extra price to the issuer. Corruption in India slows the system. It does not speed it.

The Indian civilian administration has little or no individual accountability. Collective responsibility holds no individual responsible for poor delivery. In most of India the police are avoided by citizens because they harass the ordinary person. Women and the poor are particularly vulnerable.

India, unlike China, has regular and bitterly fought elections whose cost has been escalating. These are held for Parliament, state legislatures, municipal bodies in urban India and local bodies in villages. The cost of fighting an election is high. Money, mostly unaccounted for and untaxed, is spent much in excess of given limits on publicity, on bribes to leaders who can deliver blocs of votes and to individual voters themselves. While the Election Commission tries bravely to prevent these excessive expenditures, it is only marginally effective. This expenditure has to be recouped by the winning candidates by using their positions in governments as elected representatives. They sell government-owned resources, contracts or permissions and are paid in ‘black’ money.

Thus it is not social structure and caste that are alone or even mainly responsible for holding India behind China. It is the poor governance and lack of accountability of government officials. In China the government bureaucracy is overseen by a parallel party bureaucracy which is more powerful. While party officials might take extra benefits, party monitoring also ensures that the government is accountable for performance and follows party directives. Provincial and local governments have greater financial clout and are able to take decisions at lower levels. There is better supervision of government officials than there is in India.

The administrative reforms commissions and the various police commissions have made many recommendations for administrative and police reform, as has the Verma committee this month. So have the judicial reforms commissions for improving the appointment, speed and performance of the judiciary. The political and bureaucratic system has a vested interest in the status quo and has stalled all such reforms. The status quo enables them to accumulate undreamt of wealth. This prevents fundamental change in governance in India, an imperative for faster and more equitable growth.

India has fallen far behind China on almost all economic and human development indicators. It is unlikely to catch up unless there is a revolution in governance.

The author is former director general, National Council of Applied Economic Resear

A race to the future