Arun Shourie, Tuesday, November 07, 2006
India’s growth story must generate confidence, not complacence. We must learn from China the ability to move on from momentary success or failure, keep the focus on reforms, take a decision and execute it
China’s banking sector has been notorious for its non-recoverable loans — till a few years ago, some estimates had placed these at almost half the total outstandings. By contrast, “non-performing assets” of Indian banks are placed at just about 5 per cent of their outstandings.
That is a difference you would expect us to capitalise on. In practice?
The Industrial and Commercial Bank of China is China’s largest personal bank. It has more than 150 million customers. But its portfolio was so weak that, last year, the Chinese Government had to pump $ 15 billion into the bank to help bring its bad loans to what an expert calls “a controllable level”.
Yet last month, the ICBC raised over twenty two billion dollars through an IPO. This became the largest ever IPO in financial history. Upon listing, the bank’s market capitalisation amounted to $ 143 billion — that is almost twice the market capitalisation of the entire financials universe of India, which is around $ 85 billion. Its market capitalisation makes the ICBC the fifth largest bank in the world.
But there is a more telling index. Guess what the offers for subscription to the IPO amounted to? Over five hundred billion dollars.
And remember, the IPO brings down the government holding in the bank by just 10 per cent. That is, the government retains full and complete control over the bank — even after the IPO, it will have 70 per cent of the bank’s equity.
A typical episode, with so many lessons for us in India:
• The confidence that China has been able to generate in its growth story — even in banking, its weakest sector, it can orchestrate a flood of investment.
• Its ability to take a decision and execute it.
• The funds can now be used for rehabilitation, modernisation, expansion.
By contrast, in India we have been debating whether government holding in our nationalised banks should be reduced for at least ten years. By now, what with everyone having enough power to block every proposal, we have given up even talking about reducing government equity in the nationalised banks. As a result,
• The banks continue to perform well below their potential.
• Resources that could be raised for development remain untapped — in three years of disinvestment, we raised $ 9 billion by selling just 1.6 per cent of government equity.
• Our reputation as a country that will not eventually be able to carry through on its announcements is reinforced.
The current self-congratulation
Two features always strike me as special to us. One, we are too easily swept off our feet by momentary success, and too easily plunged into dejection by momentary defeat. Two, we rush to appropriate that victory — even when we personally have done nothing to contribute to it; and, with equal alacrity, we rush to distance ourselves from a setback — even when we have in some sense contributed to it. Just take a look at how our commentators declaim when our team wins a cricket match and what they say when the same team loses.
There is much self-congratulation about, and much appropriation of, our growth rates these days. Much of this congratulation is warranted. Our economy is today the second fastest growing economy in the world. (Incidentally, remember how our commentators used to deride us with, and distance themselves from, the “Hindu rate of growth”. Who is accounting for the 8 per cent growth today? The same Hindus! You can bet that those who were calling that “the Hindu rate of growth” will never but never call this “the Hindu rate of growth”!) The achievements of the services sector are well known. The lesser noticed story is about the Indian manufacturing sector: it has been reinvented on the shop floor. You go to the manufacturing plant of a company like Bharat Forge — it is what we used to read about Japan: a “lights-out factory”. The entire process is CAD-CAM: Computer-aided Design, Computer-aided Manufacturing.
This reinvention and the consequential confidence are showing up in the results: Indian companies have acquired close to 250 companies abroad — this year, what with the Tata’s spectacular acquisition of Corus, India is liable to be the largest foreign investor in Britain!
But there is a central point to this growth. The trigger for it has been that because of reforms — of the first two and half years of Narasimha Rao’s government and of the six years of Vajpayee’s government — the dead hand of the state has been lifted from large swathes of our economy. This has created the space for the long-suppressed entrepreneurial and middle class professional classes of India to work more to their potential.
But reforms are not an once-over switch that, once turned on, can be forgotten. Governments have to keep at them. New impediments arise — often, the very developments that reforms have triggered foment new impediments. These have to be removed. The process has to be extended to ever new areas. But look around. What has happened in the last two and half years? Apart from two areas — civil aviation and railways — reforms have come to a complete standstill. In several areas — for instance, the reversion to the administered price mechanism in the petroleum sector — there has been regression. The result is predictable: in little time, entrepreneurs and professionals will reach the edges of the space that has been cleared for them, and be blocked by walls again.
Many things account for the progress China has made — the incredible 49 per cent high investment rate, for instance — contrasted with our 28 per cent; the strictly hire-and-fire/no strikes/no unions/freedom to retrench labour laws, for another: no wonder, the World Economic Forum’s Competitiveness Report for last year, ranked India as 111 out of 117 countries, and China as 26th. But the main factor has been that, unlike us, China has transformed the nature of the Chinese state.
As for reforms, the first thing to remember is that China began them in 1978; we waited till the bankruptcy of 1991/92. That single fact has made such a difference: when things are not changing much, if we fall behind by a few years, we can catch up — the other fellow wouldn’t have got far; but when things are changing rapidly, being late by 14 years makes it almost impossible to catch up.
Second, China has kept at reforms relentlessly — in our case, even since 1992, we have pushed reforms only by fits and starts; and even then, there were more feet on the brakes than on the accelerator. The third difference, of course, is execution: China has actually, and mercilessly, implemented what it decided; we have been halted by our processes — land acquisition, court proceedings, changes of government; and just as much by thoughts of brilliant alternatives — “Why not this way?” — and second thoughts. There is a telling index of this: even after the figures are put on comparable basis, China has been receiving seven times the foreign direct investment that we have been getting; and this, even though in the manufacturing sector, for instance, the ceiling for foreign investment has been 100 per cent for several years now.
We are often carried away by figures of inflows these days. We should remember that in the last five years, only 17 per cent of foreign inflows into India has been in the form of FDI, 83 per cent has been FII inflow. That 17 per cent compares with 68 per cent for other emerging economies.
We should temper our self-congratulation by reflecting on the difference that these factors have made. An excellent study by Steve Roach, Chetan Ahya and their colleagues at Morgan Stanley, points out that, as recently as 25 years ago, the per capita incomes of China and India were about equal. Today, China’s per capita income is two and a half to three times that of India. During this period, China’s average growth rate has been 9.5 per cent. Ours, 5.8 per cent. Its GDP has grown in this period by 7.5 times. Ours by 4.5 times. Its economy is now close to three times ours.
Its exports have grown to 41 times what they were — they are now close to $ 850 billion. Ours to 13 times — they are $ 155 billion. Our foreign exchange reserves are $ 160 billion — a great achievement compared to where they had fallen in early 1992. But China’s are one thousand billion dollars — and we shall soon see the clout that these give it. Compared to our total reserves of $ 160 billion, China added to its reserves last year more than $ 250 billion. Its trade surplus with the US alone exceeds $ 100 billion a year.
China’s achievements in health and education have put an even greater distance between the two countries — in China, one of every 32 children born dies in the first five years; in India, one in every 12. In India, 45 per cent of children under 5 are estimated to be undernourished; in China, 8 per cent. Gross enrollment ratio is estimated to be more or less the same in both countries — but the drop out rate in India is 21 per cent, in China it is 1 per cent.
Last year China is estimated to have spent $ 201 billion on infrastructure. We spent $ 28 billion — that is, one-seventh of China. We spent about $ 6 billion on roads last year; China spent about $ 68 billion. And that is just the difference in expenditure — as for execution, the Indian Express has been reporting how the actual implementation of the programme has been mauled here. The costs of this difference are manifest: we produce around 565 billion kWh of electricity; China produces close to 2.3 trillion kWh. Our industry has to pay double of what Chinese factories pay for power; for ferrying freight by railways, our industry pays three times what Chinese factories pay.
The same pattern mars every sphere. We are the second largest producers of cement — a fine achievement. But against our production of 142 million tons, China produces 1.06 billion tons. We produce 43 million tons of steel, a great leap compared to how things used to be in the socialist era. And in Tisco we have the least-cost producer of steel in the world. But China produces over 450 million tons...
Nor is the difference confined to manufacturing and infrastructure. Arthur Kroeber, who has watched India and China for twenty years, points out that agricultural yields in China have been much higher than those in India, and that the difference in absolute terms between them has been growing. In 1980, China grew 4100 kg of rice per hectare; India, 2000. In 2005, China grew 6300 kg, India 3000 kg. The difference in yields had increased from 2100 kg to 3300 kg per hectare. For wheat the comparable figures were 1900 kg versus 1400 kg in 1980; and 4200 kg versus 2700 kg in 2005. For seed cotton, 1700 kg versus 500 kg in 1980; and 3200 kg versus 800 kg in 2005. For vegetables, 14500 kg versus 8300 kg in 1980; and 19300 kg versus 11300 kg in 2005.
By no means is the race over
Of course, the race is not done. On the one hand, we have just begun to exploit our potential. On the other, China, like other societies, has many problems — what with a displaced, “floating population” of 120 to 140 million; environmental degradation to such an extent that the effects of their coal burning reach far-away California; extreme water shortages — government spokesmen announce that this is afflicting 600 cities and that in 100 of them it is now “acute”; a near-breakdown of the health and educational infrastructure in the rural areas; growing regional disparities; corruption as endemic as it is in India; the lingering inefficient governmental enterprises; the inefficiencies of much of their industry — their steel mills use 15 to 30 per cent more energy and 2.5 times more water than mills in developed countries, their dust emissions are 10 times higher...
But we should remember three things. One, we have several of the same problems, and, the fact that China has problems is not going to solve ours. Two, China has shown that when it directs its attention to a problem it does something about it: so, when the new Plan announces that it will focus on reducing income disparities between rural and urban China, between coastal areas and the inner provinces; on improving efficiencies in the economy; and on instituting more environmentally friendly methods of production — when their Plan announces these goals, the likelihood is that the country will advance towards them. Nor will it be prudent to wait, Micawber-like, in the belief that something will turn up — that China will be drowned by its problems.
Three, the massive growth that China has already secured gives it formidable power. So, instead of drawing comfort from the fact that China too has problems, we should reflect on what the strength that it has acquired through this growth implies for us.
A good example is Gandhiji’s reaction to that scurrilous book, Katherine Mayo’s Mother India. Gandhiji nailed her exaggerations and falsehoods. But his advice was, “No foreigner should read it, but every Indian should.” For, it was liable to mislead the foreigner. As for Indians, we would see through the eyes of a critical foreigner what we are apt to ignore as it is so familiar.
The same goes for China’s growth. China should think about the problems that confront it. We should emulate the reasons for its successes:
• Sustained pursuit of goals
And reflect on the power which that growth gives China.(To be concluded)