Can India Convert Anti-China Fury Into An Economic Revolution?

Last week, in Part One of this article, I had written how India gets nonplussed by China. Little did I know that exactly two days later, triggered by China’s primeval butchery in Galwan Valley, India would be left inconsolably angry and grieving. But anger without action can also become ‘sound and fury signifying rhetoric’. Therefore, it’s critical to harness this fury to demolish policies and constraints that have held India’s economic potential in thrall.

Ironically, this is the moment to get inspired by Deng Xiaoping, who blasted the Chinese economy into an ‘escape velocity’ that took it to another orbit, pulling nearly a billion people out of poverty and converting a moribund communist country into a global superpower. In 1991, China and India had equal per capita income; today, Deng’s escape velocity has made China five times bigger than India, its $15 trillion GDP dwarfing our $2.8 trillion, thereby giving its military a menacing superiority.

China’s ‘Escape Velocity’ Into Superpower Orbit

Tomes have been written about how Deng transformed China’s economy. In my book Superpower? The Amazing Race Between China’s Hare and India’s Tortoise (Penguin Allen Lane, 2010), I have postulated the ‘escape velocity’ model, boosted by two engines borrowed from the Soviet Union and Japan. I shall attempt to summarise my theory in a few lines. Using the extortion power of communism, China extracted massive surpluses through the 1970s-90s:

• From farmers, by expropriating their land at throwaway prices;
• From workers, by keeping wages at sub-human levels;
• From consumers, by keeping the yuan artificially low against the U.S. dollar.

This surplus extraction was on a scale as epic as Stalinist Russia. But then Deng sprung a twist in the tale. Unlike the Soviets, he borrowed a leaf from the Japanese economic revolution, throwing China open to foreign trade and investment. Deng used his ‘communist surplus’ to invest in physical assets and social infrastructure on a scale hitherto unknown to mankind.

He also used a good part of the surplus to woo foreign investors with cheap land, labour, and currency to become the “factory of the world”. The more the westerners exported from China, the greater the surplus they accumulated in the mainland because of the artificially depreciated yuan.

Can India Match China’s Audacious Idea?

Can India ever create an honourable power equation with China? Yes, we can, provided we completely, totally, unabashedly reinvent the Indian state, beginning with its psychological and structural transformation. Frankly, the Indian state’s psyche has to be creatively destroyed – from a control freak, predatory, micro-managing animal, it has to become an enabler of equal opportunity, enterprise, and excellence. It must give up its profiteering, commercial mindset to focus all its might on engineering a social revolution.

How, you might ask, could that happen? In my book, two simple, yet improbably difficult, but not impossible, state actions can achieve this:

• The government gives up control—but to avoid unnecessary controversy, it keeps the economic ownership—of all commercial undertakings; and
• The government completely ‘un-mixes’ itself, to focus its energy solely on five critical areas.

Maruti: Massive Value Created When Government of India Gave Up Control

Maruti Udyog Ltd. was a failed car company until Suzuki Motor Corporation of Japan bought a minority – yes, I shall repeat for emphasis, it was a minority stake - creating a unique/atypical structure:

• The Government of India was the majority shareholder, but Suzuki was allowed to exercise control even though Suzuki owned only 26% in the unlisted company.
• In 1982 and 1992, Suzuki was allowed to increase its shareholding, first from 26% to 40%, and then to 50%.
• But GoI, which had nearly equal ownership, ceded more control to Suzuki, winning several valuable concessions in exchange, including access to larger export markets and the manufacture of global models in the Indian plant. Consequently, the joint venture’s valuation multiplied.
• This was followed by a master-stroke. The company did a hefty rights issue of Rs 400 crore. GoI renounced its shares in favour of Suzuki. With one stroke, the joint venture got a dollop of capital and Suzuki won control. But wait;
• GOI also got a massive Rs 1,000 crore as “premium for shedding control”. And it got Suzuki to underwrite an offer-of-sale to the public at a price of Rs 2,300 per share.
• Eventually, MUL got listed—today it’s a behemoth, India’s most precious auto company—and Government of India made a terrific return on investment – all because it kept the ownership, but gave up control, allowing its entrepreneurial partner to create a huge amount of value in the joint venture.

Booster To Create India’s Escape Velocity: An UN-MIXED Economy

Now that we’ve created the economic surplus, we need the booster fuel required to rev up our escape velocity. And that shall come from ‘un-mixing’ our economy, i.e., by the Indian state shedding all commercial activities to focus its might on only five areas:

• Education – treble state expenditure, upgrade teaching/measurement skills and effectively administer a massive school voucher programme.
• Health – treble the spend, put a massive focus on tuberculosis, malaria, and HIV (now Covid-19), and effectively implement a universal health insurance programme for the poor.
• Treble the expenditure on rural and agriculture infrastructure; wherever possible, spin-off developed assets into local private management and plough back the sales proceeds.
• Set up urban infrastructure on a war footing, but sell completed assets to private management, redeploying the proceeds in newer assets.
• Invest massively in modernising the architecture of state governance and armed forces.

That’s it. This will create our escape velocity out of poverty. This will give us the wherewithal to stand up and be counted, against China and the world

Raghav Bahl is the co-founder and chairman of Quintillion Media, including BloombergQuint. He is the author of three books, viz ‘Superpower?: The Amazing Race Between China’s Hare and India’s Tortoise’, ‘Super Economies: America, India, China & The Future Of The World’, and ‘Super Century: What India Must Do to Rise by 2050’.