Paul
Theroux in his book, ‘Riding the Iron Rooster’ has made some fascinating
comments on China which can help us in trying to understand why China is today
an economic power-house and India is still struggling. This book was written in
1988 and describes a series of train journeys that Theroux undertook across
China in trains which were obviously not the new Bullet Trains that China has
now introduced.
Starting
from Victoria Station in London Theroux travels across Europe, Russia, and Mongolia
and then enters China through Inner Mongolia, making landfall at Datong. After
the emptiness of Mongolia Theroux finds Datong and the China it represents to
be shabby, busy, disorderly, very crowded and thoroughly polluted by smog which
was a combination of desert dust, fog and industrial smoke. The shops were full
of goods; there was an air of prosperity, but coal as the source of energy and
manufacture, especially of steam locomotives, created a lasting impression. The
industrial process was not automated, but everyone was busy working. The
guiding philosophy was the three great goals of the workers. To quote Theroux
these goals were, “timing of production, so that no work was wasted; keeping
the right mental attitude; and increasing productivity”
.
I
have begun this paper by referring at some length to the very first impression
that Paul Theroux had when he entered China from Mongolia. It was one of a
country which has industries, whose people had a mindset of production and
whose government obviously had a commitment to manufacturing. After the
revolution Mao Tse Tung deliberately fostered an economic policy which strove
to build a huge manufacturing sector in the country so that China could become
an industrialised nation. Remember the slogan that China would overtake America
in steel production? The huge number of backyard furnaces that came up and
produced very low quality pig iron was a part of this effort to industrialise.
Not much pig iron was produced this way, but the people were weaned away from a
rural psyche to one in which manufacturing became central to the economy. It
must be remembered that in China only ten percent of the total land area is
cultivable and more than sixty percent of the land consists of uncultivable
wasteland. Geology, geography, topography, hydrology and soil morphology
encouraged, in fact mandated, that China could not continue to prosper on the
basis of agriculture alone. The industrial revolution in China was then an
inevitable consequence of the land configuration, though to give Mao credit he
hastened the transition from a basically subsistence rural economy to a very
powerful industrial economy.
Industrialisation
carries with it a number of prerequisites, sequential growth of support
infrastructure, capital requirement and capital formation and research and
development which would lead to invention, innovation and improvement. Industry
cannot survive without power and the development of the power sector becomes a
sine quo non for industrialisation. The development of communications so that
goods, people and services can be transported over long distances is absolutely
essential for industrial growth. Because a country starting from a low level of
economic capability does need assistance for capital formation and for development
of technology, China had to find partners. Therefore, despite the fact that
China is a Communist country whose ideal is socialism and State ownership of
the means of production, China opted for an open door policy in which foreign
investment was welcomed and the off-shoring of foreign industry and its
location in China was encouraged. China provided the land space and labour and
many of the world industries established a base in China. A great deal of
Chinese industrial grown has taken place because of this open door policy. The
Chinese Government at no stage felt that it could not keep the multinational
corporations under control and, therefore, the Chinese had no hesitation in
letting in foreign capital. Despite the handicap of having a one-party rule and
a judicial system which is certainly not Anglo Saxon, China has been able to
reassure the foreign investor that his investment would be safe.
Let
us contrast this with India. We have always been suspicious of foreigners
coming and investing in India because after all the East India Company and its
Dutch, French, Portuguese and Danish counterparts initially came to India for
trade. Because of a succession of wars in Europe in which Britain emerged as
the dominant naval power and also a great military power on land, the French,
Portuguese and other European interventions in India were virtually liquidated
and Britain emerged as the supreme European power. Starting from trading posts
such as Bombay, Surat and Calcutta the British trader gradually grew into being
an arbiter in matters of local, native administration and the East India
Company expanded into an imperial power. These memories are fresh in the Indian
mind and, therefore, the Indian people and the Indian politicians have always
had a deep- rooted suspicion and antipathy towards the successors to the East
India Company, the multinational corporations. That is why there is strong
political opposition to allowing foreigners to come and take over our
companies, our manufacturing units and our trade outlets. Surprisingly China,
which calls itself a Peoples Republic and has the single party rule of the
Communist Party of China, is today most openly capitalist and gives the warmest
possible welcome to foreign investors. India, on the other hand, is a
multi-party democracy in which the word “socialist” used in the Preamble to the
Constitution is more a comforting slogan than a political commitment, but we
are still hostile to the idea of foreigners participating in our economy
because we still feel that Surat may become the base of a foreign empire. That
does explain why there is such strong political revulsion whenever the question
of opening up of our market to foreigners comes up for discussion.
Trade
created an empire in India and, subsequently, this empire systematically
destroyed such manufacturing capabilities that India had so that the
factory-made goods of Britain may be sold in the Indian market and India may
then be reduced to the position of a supplier of primary products to Britain.
Despite this history the Government of India has decided to open up two sectors
of the Indian economy to Foreign Direct Investment. These are retail trade and
the civil aviation sector, the latter named being in absolute shambles because
of mismanagement. Foreign Direct Investment in the retail sector is strongly
opposed by the Left, BJP, Trinamool Congress and several such parties, some of
which are a part of the present Congress led coalition. The argument advanced
by government is that foreigners taking over the aviation industry will pump
necessary working capital into the system and this part of the economy would
revive. Similarly, Foreign Direct Investment in retail trade would cut out
middlemen, create the infrastructure which would enable the supply chain to
reach from the farmer right up to the customer in the retail store and would
bring direct benefit to the cultivators while ensuing good quality of the
produce and a reasonable price for the urban consumers. It is argued that the
present system of agricultural production and marketing is such that there is
considerable wastage of agricultural produce by inappropriate storage, spoilage
and even destruction through putrefaction in the process of transporting the
produce from field to market. The foreign investment retail chains would reach
out directly to the producer, create adequate storage, including cold storage
facilities and build an efficient transport system which would quickly bring
goods to the retail stores. This would put more money in the hands of farmers,
prevent wastage and enable the consumer to buy agricultural products at an
affordable price. The fact that it would throw a very large number of small
vendors, road side hawker and itinerant sellers who carry fruits and vegetables
on hand carts right up to the doorstep out of a job does not seem to bother our
American Business School, World Bank trained or oriented economists and policy
makers.
We
seem to be quite willing to allow foreign investors to invest capital,
including working capital, in airline companies, most of which are utterly
mismanaged. Why do we not encourage foreign investors like British Aerospace,
Boeing, Dassault, etc., to invest in producing aircraft in India? Why do we not
try and have foreign companies invest in building factories for producing the
refrigeration equipment which keeps cold storage plants functional? In other
words, why do we not encourage foreign companies to invest in the secondary
sector in a big way in India? We have had a fair amount of success in the Build,
Operate and Transfer model (BOT model) of road construction and certainly on
highways such as that which connects Bhopal to Indore the BOT model has enabled
a first rate road to be built. If a sufficiency of off-shoring of manufacturing
facilities is done in India we would certainly be able to create more gainful
employment, India would be able to evolve an industrial culture instead of the
present satisfaction with trading and as our manufacturing capacity increases,
we would become a major industrial power, economic power and military power.
Obviously we need to take a fresh look at our policy relating to Foreign Direct
Investment in India. Given the choice I would cut down all FDI in retail trade,
the service sector such as running an airline and in real estate. I would have
an open door policy towards investment in the secondary sector, including the
setting up of hundred percent foreign owned manufacturing facilities in India.
I would certainly give meaningful incentives for investment in physical infrastructure.
My only restriction would be that employment generated by these activities
would go to the citizens of this country so that their earning and welfare are
enhanced.
The
great advantage of having a powerful industrial economy is that it forces the
manufacturing companies to invest in more research and development because if
they do not improve, innovate and invent, their products will become unsaleable
in the market. Therefore, industrial growth will bring about simultaneous
growth in scientific research for the purpose of innovation and invention.
This, in turn, will strengthen our institutions of technology and management
because as industry grows, as the need for research grows, the market for these
disciplines will expand, the research and development establishment will become
stronger and the Institutes of Technology and Management will be forced to
redesign teaching methodologies to keep up with the new demand.
My
final words would be that government must realise that so far as the foreign direct
investor is concerned, he would prefer an activity in which his own capital
investment is miniscule, there is a quick turnover of commodities and,
therefore, profits are earned almost simultaneously with trading. The gestation
period in envisaging, constructing, commissioning of an industrial
establishment and then going into commercial production is quite long and
profit would have to be deferred to an appropriate date in the future. That is
why in India trade is more attractive than manufacture. This would be true of
the foreign direct investor also. We need to break this mindset, to make the
industrialist realise that waiting for profit is not such a bad idea after all
because the production capacity created will yield results year after year after
year and that a well managed industrial enterprise will always be more
profitable than just trade, whilst being less risky because it is unlikely to
be affected by daily market fluctuations which retail trade has to face.
Therefore, let economic reforms be targeted at opening up our economy to
productive investment but not indiscriminately to trade. America and the
developed world want exactly the opposite to happen and this we must resist.
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