India China Border Conflict: How Anti China Anger Can Be Used By India to Come Out Of Poverty

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, on 15 June 2020, 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 USD15 trillion GDP dwarfing our USD2.8 trillion, thereby giving its military a menacing superiority.Unless Prime Minister Modi can craft India’s ‘escape velocity’ to near-economic-parity with China, our desire to ‘get even’ will remain a Bollywood dialogue.1962-2020: How US Played a Role in Escalating Indo-China ConflictChina’s ‘Escape Velocity’ Into Superpower OrbitTomes 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 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 pricesFrom workers, by keeping wages at sub-human levelsFrom consumers, by keeping the yuan artificially low against the US dollarThis 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. At one stage, China was investing nearly half – I will say that again – almost 50 percent of its GDP in infrastructure. 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.That, in a nutshell, is how Deng Xiaoping created China’s ‘escape velocity’, riding on twin Soviet-Japanese engines, roaring its way to prosperity and awesome power. Why India-China Border Conflict Is Music to Pakistan’s EarsHow India, Like China, Can Roar Its Way to Power & ProsperityCan 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 undertakingsThe government completely ‘un-mixes’ itself, to focus its energy solely on five critical areasLet’s begin with the most fundamental question – how can India generate the trillions of dollars of economic surplus required to create its ‘escape velocity’ out of poverty? Being a democracy, we cannot cynically exploit farmers, wage earners, and consumers like China did. But we are sitting on a mountain of potential wealth created from the taxes and savings of India’s citizens. I am talking about our hugely diversified public sector banks and corporations, unfortunately holding billions of dollars of underperforming assets. If suffused with animal spirits, these can grow exponentially in value. Here’s a spectacular case study which can become a ‘politically palatable’ template:Why Does India Get Nonplussed by China?Maruti: Massive Value Was Created When Govt Gave Up ControlMaruti Udyog Limited (MUL) 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:Government of India (GOI) was the majority shareholder, but Suzuki was allowed to exercise control even though Suzuki owned only 26 percent in the unlisted companyIn 1982 and 1992, Suzuki was allowed to increase its shareholding, first from 26 to 40 percent, and then to 50 percentBut 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 multipliedThis was followed by a master-stroke. The company did a hefty rights issue of Rs 400 crore. The GOI renounced its shares in favour of Suzuki. With one stroke, the JV got a dollop of capital and Suzuki won control. But wait...GOI also got a massive Rs 1000 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 shareEventually, MUL got listed (today it’s a behemoth, India’s most precious auto company), and GOI made a terrific ROI (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 ventureThe Maruti Model Is Neither An Exception Nor a One-Off SuccessNeither is Maruti an exception nor is it a one-off success. A similar story was repeated in BALCO and VSNL, where the government shed control, but retained plenty of economic ownership to ride a steeply climbing value curve. Such a model of privatisation is politically sellable too. The government can easily claim that it’s not selling family silver. Instead, it’s continuing to own the asset economically; all it’s done is brought in a partner who converts the silver into diamond-studded platinum, enriching India’s citizens more than anybody else. If you go by the multiples created in Maruti, BALCO, and VSNL, the few hundred billion dollars of current value residing in India’s public sector assets could multiply into trillions of dollars of re-investable surplus over the next decade.India’s ‘Escape Velocity’ Out of Poverty: An ‘UN-MIXED’ EconomyNow 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, that is, 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 programHealth – treble the spend, put massive focus on TB, Malaria and HIV (now COVID-19), and effectively implement a universal health insurance program for the poorTreble the expenditure on rural and agriculture infrastructure; wherever possible, spin off developed assets into local private management and plough back the sales proceedsSet up urban infrastructure on a war footing, but sell completed assets to private management, redeploying the proceeds in newer assetsInvest massively in modernising the architecture of state governance and armed forcesThat’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.

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C’mon India, Convert Anti-China Fury Into An Economic Revolution

Can India ever create an honourable power equation with China? Yes, provided we totally reinvent the Indian State.

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Topics: Indian Economy Poverty India-China dialogues