Aam aadmi, Hu?

Farm incomes in China grew by around 90 per cent in mid-to-late 1990s. So why did mass consumption relative to GDP fall?

Hu Jintao and Prakash Karat looked remarkably at ease with each other in a photograph published in some newspapers yesterday. The body language, as this newspaper has noted approvingly, can help write a more rational Indian policy on foreign investment from China. But if you follow both the Indian Left and Chinese communists with some seriousness, you have to wonder why high representatives of the CPM and the CPC aren8217;t ill at ease when they meet. For, there8217;s a fundamental political economic divide between the two: our communists are suspicious of economic policies they think will reduce consumption of the poor; their communists have pursued policies that have achieved dramatic decline in mass consumption.

To my mind, this is a far more serious issue for thinking Indian politicians, like those from the CPM, than what American presidents get up to in the Middle East or Latin America. One way to appreciate its importance is through the statistics, familiar to those who do rigorous work in comparative economic development but rarely reported in the mass media: the share of consumption in India8217;s GDP is a little over 60 per cent, for China the figure is around 38 per cent.

This is a staggering difference for two reasons. First, India is in sync with the general pattern. Share of consumption in GDP of the US and the UK is, respectively, 70 per cent and 60 per cent 8212; while China is almost absurdly out of line. Second, the extremely low share of consumption in China8217;s GDP coexists with fabulously high GDP growth. In fact, the share has fallen from around 50 per cent of GDP in the 1980s to below 40 per cent in 2005 8212; a period that saw China posting double digit growth rates. Investment and net exports exports minus imports have led Chinese growth. The relative to GDP fall in mass consumption hasn8217;t mattered.

But the most intuitive and ultimately most valid definition of economic development is that people consume more than before, that the importance of mass consumption in national output increases. By that measure China would seem to have done a remarkably bad job, a failure that becomes more stark when one considers its success in lifting millions out of absolute poverty and its better compared to India health and education indicators. What millions and millions of Chinese buy has mattered less and less over the past two decades even as their country has produced more and more.

How would the CPM have reacted to a similar situation in India, a 12 percentage point fall in GDP8217;s consumption component in 20 years? Well, the party can rest easy. This can8217;t happen in India. Politics won8217;t allow it. Neither should it. The CPC has finally come round to worrying about consumption levels as well, for tactical economic reasons. Investment-led growth in China has been inefficient India is a more efficient user of capital than China and the reliance on export surpluses makes China vulnerable to, among other things, protectionist responses from trading partners. Domestic consumption-led growth could make China both more efficient internally and less vulnerably externally.

But there8217;s a problem. Farm incomes in China grew by around 90 per cent in mid-to-late 1990s. The majority of Chinese, like the majority of Indians, are rural folk. So why did mass consumption relative to GDP fall? Because in the same period taxes on China8217;s rural citizens increased by 800 per cent. Yes, 800 per cent. Until recently, China8217;s farmers were paying more than 300 8212; yes, 300 8212; different kinds of taxes and fees. Many rural Chinese have paid 12 types of official fees just to get married.

Think about India, where a farm tax, even on rich agriculturists, is a political hot potato. Think of the subsidies on power and water use in farming. Think of the political rhetoric on the aam aadmi. And then try to think of what the CPM8217;s reaction would be to an 800 per cent increase in India8217;s rural tax burden and 300 different taxes on farmers. True, there8217;s a stark urban-rural divide in India. But in China, where rural incomes on average have been a sixth of urban incomes, a villager typically pays three times more in taxes than a city-dweller. China8217;s own social scientists have compared their country8217;s urban-rural divide to that of Robert Mugabe8217;s Zimbabwe! That should tell everyone, including our communists, something. Unsurprisingly, by the broad measure of income inequality 8212; statisticians call it the Gini coefficient 8212; India is a more egalitarian country than China.

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The CPC has tried to change things, in its own way. Tax on farm income is being phased out and is supposed to be eliminated by end-2006. But other types of rural taxes have gone up. One estimate quoting China8217;s National Bureau of Statistics points out that the decrease in the tax burden via reform/abolition of rural income tax is more or less matched by increase in rural taxes on land, asset sales and inheritance. There8217;s been no net change in the tax payable by rural Chinese.

So, yes, the CPC is keen to make GDP more consumption-driven. But, no, it is not interested in allowing the largest section of its population to consume more. There are other problems in China8217;s effort to increase domestic consumption, including persuading Chinese companies to pay more dividends and making minimum wage laws work. The single biggest problem, though, is that the CPC, by all available evidence, reckons that keeping the rural masses at low consumption levels is just fine. The CPM says exactly the opposite. And it accuses the BJP and the Congress of not being sensitive enough on this issue.

The next time they meet, CPM leaders should ask CPC leaders the question they reserve for the BJP and the Congress: what about the aam aadmi?