Don't get mad with China, get even by initiating tough land and labour reforms
A new, unflattering stance in Chinese media has predictably triggered an angry response from India in the backdrop of an increasingly fractious relationship between two south Asian neighbours. As India grapples with a yawning trade imbalance and struggles to maintain equilibrium with an assertive China's geopolitical ambitions, the 'media war' has added a new dimension to the rivalry.
A new, unflattering stance in Chinese media has predictably triggered an angry response from India in the backdrop of an increasingly fractious relationship between two south Asian neighbours. As India grapples with a yawning trade imbalance and struggles to maintain equilibrium with an assertive China's geopolitical ambitions, the 'media war' has added a new dimension to the rivalry. What has perhaps added to India's discomfiture is the realisation that there is some truth beneath the obvious provocation.
Couple of recent columns in China's state-controlled Global Times and an op-ed written by a Chinese commentator in The Times of India have sought to dismiss India's aspiration of being seen as China's "equal", pointing out that unless New Delhi moves beyond sloganeering and pops the bitter pill of tough reforms, it shall forever remain a laggard in trade and continue to punch way below its weight.
It is an undeniable truth that a country's hard power, the regional influence that it wields and the say it has in the greater world order is derived almost exclusively from its economic ballast. A three-decadal 10-percent plus GDP growth, as Shivshankar Menon pointed out in a recent piece for Brookings Institution, has resulted in China becoming the world's manufacturing hub with a trillion-dollar foreign exchange surplus, the ability to manipulate global commodity prices and a commensurate politico-military clout.
In contrast, India has been scraping the barrel. The data from China's General Administration of Customs, according to Global Times, showed that "India in September exported goods worth $922 million to China, while importing goods worth $5.4 billion. The major imports from China include electronic components, telecom instruments, chemicals and pharmaceutical products, while India's major exports to China include ore, plastics and cotton.
According to figures mentioned by commerce and industries minister N Sitharaman in Lok Sabha, the deficit with China stood around $52.68 billion in 2015-16, up from $48.48 billion in the previous fiscal. What it means is that as China's clout has grown, some of it has come at India's cost. This puts Narendra Modi's ambition of making India a world power with a bigger say in the world economy in direct confrontation with Chinese interest. And unlike in movies, when two unequal players joust on an international arena, the one with the greater clout comes out as the winner.
Therefore, India has noted with dismay how China has continued to stonewall its membership in NSG club, put a spanner in UN declaring Masood Azhar as a global terrorist, prevented the mention of India-specific terror outfits Jaish-e-Muhammad and Lashkar-e-Taiba in Goa Declaration and has even influenced Russia against joining hands with India on cross-border terrorism sponsored by Pakistan.
China's diplomatic manoeuvres have met with weak Indian response beyond an ill-conceived notion of boycotting Chinese goods that have predictably failed. The reason isn't hard to understand.
Carnegie India director C Raja Mohan writes in The Indian Express: "China's GDP today is nearly five times larger than that of India ($11.4 trillion versus $2.2 trillion). China's annual defence budget is more than three times that of India ($150 billion to $48 billion). Although India now has a higher annual rate of economic growth than China (7.6 percent versus 6.9 percent), it will be a long while before India can close the gap."
So what may be the step forward? Harsh as it may sound, Global Times is spot on. India must "upgrade its industrial structure". It is nice and patriotic and equally impossible to stop Indian youth from buying Chinese smartphones or preventing Indian drug-makers from importing APIs from China or "persuading Chinese people to consume more Indian goods".
If, as the newspaper suggests, asking Chinese manufacturers to set up units in India is to succeed to address the imbalance, that must be preceded with simplification of tax regime and initiating crucial labour and land reforms. The NITI Ayog, for instance, has indicated it wants to replicate Chinese growth model and implement land and labour reforms in the proposed coastal economic zones to give manufacturing a boost. But given India's political climate and a perpetual election season, these things are easier said than done.
Much of the problem for Modi government lies in the fact that his central schemes cannot take off unless the groundwork is ready. And since land and labour reforms are among the most politically sensitive, even a government that enjoys such a brute majority has failed repeatedly to usher those in. Everyone knows what the problem is, but the solution has proved elusive.
To quote Hero MotoCorp chairman Pawan Munjal during a recent India Economic Summit: "Land and labour reforms are very, very important for the industry, for manufacturing. Right now, both are inconsistent. For expansion, it is so difficult to get land. For expanding manufacturing, the capacity in labour is extremely important. There are lots of issues... these two are very important."
Despite a stated growth of over seven percent (numbers that have been hotly disputed due to incompatibility with other indices) and a recent 16-point rise in Global Competitiveness index, some indicators still paint a dismal picture of an economy struggling with jobless growth.
In a The Times of India column, CPR Fellow Rajiv Kumar points out that gross fixed capital formation (GFCF) that indicates plant and machinery outlay has declined for the second successive quarter, by (-) 3.1 percent in the April-June 2016 period. This unprecedented negative growth, says Kumar, implies a shrinking of the economy's productive capacities. He also red flags the nosediving of commercial bank credit to the non-food sector which fell to 8.3 percent in August 2016 as compared to its earlier peak of 38.4 percent in 2005-06. This, says the writer, implies that commercial banks have effectively stopped lending to the industrial sector.
Add to this a World Bank research which indicates that increasing automation threatens 69 percent of the jobs in India where, according to labour ministry data, around 1 million youth enter the workforce every month and you won't have to be an economist to figure out the scale of the problem facing Modi.
Moving to a digital economy has been suggested by some experts such as Samir Saran of Observer Research Foundation but that requires, as he says, government moving out of running businesses itself and ending policy inertia.
At the end of the day, India must accept Chinese hegemony in medium to short term, assiduously invest in policies and show iron will in implementing tough reforms. If the economy nears a double-digit growth, much of Chinese manipulation will be automatically blunted. Till then, there is no point whining.
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