Opinion
Arun Maira: India’s economic strategy must keep the big picture in view
Summary
- A comparison of our economy’s emergence with China’s would explain the value of a sharp industrial policy for domestic manufacturing. Till 1990, we had an export edge in many fields but it was largely lost after 1991, when Asia’s big two diverged in their approach.
US President Donald Trump has declared war against the world to ‘Make America Great Again.’ Its ‘reciprocal tariffs,’ currently paused till early July, have been imposed on all countries that treat the US ‘unfairly’ according to Trump. These include a 49% tariff on imports from Cambodia and 37% on those from Bangladesh, countries whose per capita incomes are 3% of the US’s. High tariffs have even been imposed on tiny Pacific island-nations. However, America’s real concern is the remarkable growth of China’s economy.
The history of wars for ideological hegemony was supposed to have ended in 1991 with the collapse of the Soviet Union and weakening of Russia. The economic ideology of free markets and privatization had defeated the strategy of central planning and industrial policy for building domestic capabilities. To comply with the winning order, Russia pursued ‘big bang’ reforms, with disastrous consequences for its economy. Russia’s GDP shrank by nearly 40% between 1991 and 1998; industrial output dropped; and poverty rose, with 30% of the population living below the poverty line by the mid-1990s.
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China and India took different paths after 1991. India was compelled to take a loan from the International Monetary Fund (IMF) in 1991 with conditions attached. It was forced to abandon industrial policies. India also joined the World Trade Organization (WTO) when it was formed in 1995; China joined later, in 2001. India signed the global Information Technology Agreement in 1997 to reduce import duties on IT products to zero; China signed up only in 2003. But Beijing did not succumb to US pressure. It pursued a centrally guided ‘socialist market economy’ to build its capabilities before joining the global game.
As philosopher George Santayana said in The Life of Reason: The Phases of Human Progress, “Those who forget history are doomed to repeat it." A comparison of the economic histories of India, China and Vietnam since 1990 should give India’s free-market reformers pause.
In 1990, India’s per capita GDP, at about $370, was comparable with China’s $318, while Vietnam was much poorer, with a figure of $130. India’s GDP has increased by an impressive 1,000% or so between 1990 and 2024; China’s by roughly 4,500% and Vietnam’s by 6,800%. India’s GDP per capita has increased 7.7 times since 1990, China’s 41.8 times and Vietnam’s 48 times.
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Per capita GDP is what matters to citizens. Incomes have grown much faster in China and Vietnam, and their currencies have remained stronger—China’s much more so. They did not succumb to US pressure to give up their socialist moorings and policies to build domestic industries when they joined the global trade system. History suggests that India gave up too soon on industrial policy and moved too fast to liberalize trade.
India, the world’s largest electoral democracy, has a difficult relationship with the US. The US seems to expect India to consistently side with it against any authoritarian country unwilling to toe its line. The US was displeased with India’s neutrality between the Soviet Union and the West during the Cold War. Trump now seems willing to make up with Russia, but not with China, which has caught up with the US in advanced technologies and become the world’s second- largest economy.
The US and China are India’s largest trading partners, with trade worth over $100 billion with each. Whereas India runs a large trade deficit with China, it has a merchandise surplus with the US, which is also India’s largest market for software services. New Delhi must tread carefully not to annoy either the US or China. Given the latter’s disposition towards India, on territory for instance, it has become imperative for us to create our own industrial capabilities, regardless of any US pressure to abandon ‘Make in India.’
In 1990, the manufacturing sectors of India and China were similar. India had acquired better capabilities in the production of machinery, electrical equipment, commercial vehicles and other capital goods. India-made trucks and power equipment were exported to many countries. After India turned to the IMF for financial assistance, however, the Washington Consensus formula came to bear. While China resisted US ideology, India embraced market principles. Now India, like the US, is importing a large range of manufactured products from China, including high-tech ones.
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Trump wants Indian duties reduced across the board, which would enable US companies and farmers to export more to India. America’s highly subsidized large-scale farmers have been eyeing India as a market. We must resist this because millions of much poorer Indian farmers and workers need higher prices for their produce to improve their standard of living. The India-US trade negotiations underway have a stated aim of $500 billion in annual trade by 2030. This must not be achieved through a huge influx of imports from the US.
Indian manufacturers hope that US restrictions on Chinese imports, which face a three-digit tariff barrier, will make space for them to replace China in US supply chains. Other countries, meanwhile, fear that Chinese manufacturers will aggressively sell their products in their markets instead.
Some Indian businesses want to re-export Chinese wares. To import and sell is easy. Learning to make in India is harder. India’s manufacturers and government must withstand American bullying on behalf of US business interests and work harder together to build India’s own industrial capabilities.
The author is a former member of the erstwhile Planning Commission and the author of ‘Reimagining India’s Economy: The Road to a More Equitable Society’.
