Monday, October 19, 2009

this was published in the Hindu on Tuesday, Aug 12, 2003 so accordingly read it......
Alok Ray

The democratic system in India makes for slow and sometimes tortuous progress as it has to rely on consensus building. But this may turn out to be more stable and irreversible than what has happened in China, says Alok Ray.

THE recent visit by the Prime Minister, Mr Atal Bihari Vajpayee, to China has rekindled interest of the world in the economic performance of the two most populous countries in the world. Apart from the fact that these two giants together comprise about 40 per cent of global population, they are also the two fastest growing economies in the world today. But the similarities end there. The differences are equally, if not more, striking.
The level of China's per capita income today is nearly double that of India. The same is true for the growth rate of China's GDP per head relative to that for India over the period 1992-2002. Compared to India, China attracts more than 20 times foreign direct investment.
In terms of the standard indices of social and human development, too, China is well ahead of India. For example, whereas more than 30 per cent of the population in India live below the officially-defined poverty line, the figure is less than 5 per cent in China. The under-5 mortality rate per 1000 is 37 in China while it is 90 for India.
Why is this so? Some would point to the early start of economic liberalisation in China that officially started in 1978 while the Indian experiment started in 1991 — more than 13 years later. Yet, others would like to take comfort in the `overstated' official statistics in China. True that Chinese official growth rate figures are considered suspect as even the regional growth rate figures do not add up to the official national figures. Yet, most China experts believe that the required adjustment may at best take away two percentage points from the official growth rate.
That would still make the Chinese per capita growth rate of GDP substantially above India's. Sceptics also point to the huge volume of `rountripping' (money from mainland going out illegally to Hong Kong and then coming back to China as FDI) of investment into China. Some estimates put it at nearly 50 per cent of Chinese official FDI figures.
The Chinese definition of FDI is also broader as it includes (unlike India's) foreigners' reinvested profits, the proceeds from sales in foreign stock markets, trade credits, intra-company loans, and so on. One careful research study, after making adjustments for all these factors, finds that for 2000, FDI into China amounted to about 2 per cent of China's GDP. The corresponding figure for India was 1.7 per cent. Thus, as percentage of GDP, the difference is not very significant. In absolute terms, however, FDI into India is only about 40 per cent of that into China.
Some would attribute this to the role of overseas Chinese as more than 70 per cent of FDI into China has come from them. Indian NRIs, because they are mostly professionals and more risk-averse, prefer to keep their money in safe bank deposits wherever the interest rates are higher.
Some would also point to better infrastructure, superior labour productivity and discipline, and a more focussed and responsive administration as the crucial differences between the two economies.
That, in a sense, amounts to regarding the difference in political regimes as the basic cause for the differing economic and social performances of the two countries.
Is, then, India's democracy the villain? The Economist, the London-based respected weekly, has also raised this question in a recent issue. Its answer: This is not necessarily true. Its basic point is that India is not a true democracy and hence its failures cannot be blamed on democracy.
In other words, there are different varieties of democracy practiced in different parts of the world. The Indian style democracy is not a particularly good one, according to The Economist. Rampant corruption prevails among political leaders and administrators.
The slow-moving judicial system stymies the rule of law. The Congress Party, when it had a strong absolute majority in Parliament, continued with its policy of licence-control raj and protection of domestic industry for too long.
Though the economic reforms started with the minority Narsimha Rao Government, its subsequent progress has been stalled due to the imperatives of a coalition government of 20-odd political parties headed by a party which came to power on the strength of non-issues such as mandir-masjid controversy and polarisation of people along religious lines.
The main opposition party, the Congress(I), is headed by an ineffectual leader like Sonia Gandhi and it has lost its zeal for further reforms. The continuing proxy-war with Pakistan is taking a heavy toll of resources in wasteful Defence expenditures. But, according to The Economist, these problems are not endemic to democracy. As Rao-Manmohan Singh duo proved, reforms are possible within the democratic system. It requires leadership and vision.
The Economist also thinks that, in some respects, India has performed better than China. The most notable is the success in software. This again shows what the talented Indian manpower can do, if provided the right kind of infrastructure and incentives.
The Indian banking system is in a far better shape than the Chinese one which is overburdened with non-performing assets. The state-owned enterprises in China suffer from massive over-manning problems. Any significant reforms would create huge layoffs and social unrest.
A recent CII-Mckinsey Report suggests that the most important reason why China can produce its manufactured goods at substantially lower cost than India is the significantly lower burden of indirect taxes in China. This accounts for some 15 per cent of the price difference between the two countries. This is fixable by changing government policy within the current democratic political system.
There are a few other things which The Economist has not mentioned but, nonetheless, are very important while choosing between competing political systems.
First, democracy is not just a means, it is also an end in itself. Despite all the chaos and shortcomings of democracy in India, it (along with its associated free press) has given people a voice and has saved the country from a lot of trauma experienced in neighbouring countries such as Pakistan or Burma.
Their economic and social achievements are also not anything to write home about. So, why should we give up democracy, even in its current flawed form, when a dictatorship cannot even guarantee a superior standard of living, not to speak of the freedom to dissent?
According to independent researchers (endorsed by people such as Amartya Sen who have otherwise acclaimed the many social achievements during the Maoist era) somewhere between 20-30 million people perished due to famine in China during the Great Leap Forward. And this stupendous fact could be kept hidden from the general public for a long time.
By contrast, though many people in Independent India have remained chronically undernourished, there has not been a single famine after Independence. Noise in media and Parliament has prevented isolated starvation deaths (such as in Kalahandi in Orissa) from blowing up into a major famine-like situation. This is a big achievement of Indian democracy, despite all its faults.
The Chinese success in raising the mass standard of living owes a lot to their success in controlling the population growth, unlike India. But the methods used for forcing the single-child family policy by devices such as denying jobs or state housing to families not adhering to the norm would have very few takers, if given the freedom to choose. The kind of furore that erupted in India when some cases of sterilisation by coercion came to light during the Emergency era, cannot be forgotten. It is morally questionable whether the state should have the right to determine the individual family size.
In other words, some trade-off between conventional economic development indicators and social and political freedom may become inevitable.
The democratic system makes for slow and sometimes tortuous progress as it has to rely on consensus building. But this may turn out to be more stable and irreversible than what has happened in China. Only posterity will be able to judge whether India's choice has been a wise one from a long-run perspective.
(The author is Professor of Economics, Indian Institute of Management, Calcutta. He can be reached at

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