Opinion Out of My Mind: Puff the magic dragon

From now on China will be like any other economy.

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Meghnad Desai

August 30, 2015 12:00 AM IST First published on: Aug 30, 2015 at 12:00 AM IST

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India had long been a trading economy and even had a world-class textile industry at its start.

During the last month, tectonic plates have shifted in the global economy. For 25 years, the world has been in awe of China’s ability to deliver double-digit growth — to the envy of Indians. They asked whether India could do better were it a dictatorship like China.

During the last month, the Shanghai Stock market crashed. It was a bubble long due to burst. But then the attempts by the authorities to revive the market by pumping liquidity worth $200-300 billion and put restrictions on selling showed that they had no idea of how a modern stock market works. So the market crashed again and the economy slowed down. Communist parties are used to being in control with a single objective, and technical certainty in any task. Present them with choice and complexity and they get flummoxed. This is why the Soviet Union collapsed.

It has been clear for a while that China could not go on growing along the export path. After 20 years of growth exploiting cheap labour (rural migrants given no health cover and no job security), wages were rising and the markets in developed countries were drying up. China had to make a transition to an economy based on domestic demand and be like everyone else at a middle-income level. This means providing choice and credit, building entrepreneurship which can meet new demands. It means letting go of control, and freeing citizens. Communist parties are incapable of doing that. Until now, saying that looked like right-wing ideology. China has proved its truth.

From now on China will be like any other economy. It has to be in a learning mode till the transition finishes. Expect low growth, may be 4 to 5 per cent, for the next 20 years. China won’t fold up like the USSR but it has stopped being a miracle economy. The Dragon has lost its puff.

India had long been a trading economy and even had a world-class textile industry at its start. But it chose the Soviet model which was Statist, capital-intensive and failed to use India’s strength — its large labour force. It stagnated. In 1991, India changed course and moved to a market-friendly policy which revived growth.

Even so, India cannot relax. India’s growth during 1998-2007 was high thanks to global growth. Developed countries are going through a phase of secular stagnation — low growth and low inflation. India cannot rely on a foreign boom.

India can become a powerhouse. Its leaders need to understand modern complex economics. They need to shed their fascination for Statist Socialism. Indian politicians take pride in being anti-business, especially if it is foreign. Abandon this hostility. Remember the largest private sector is our agriculture. The kisan is a businessman.

Now is the time and the opportunity for the PM to openly embrace a business-friendly model of growth. Forget jibes about suit-boot. It is not being a crony of the capitalists to harness them for taking India to the top. It is the only people-friendly policy there is.