India needs to focus on building a mature market economy, writes Joseph Mariathasan
China’s growth rates have been the envy of many countries for the past couple of decades, but that period may have come to an end. India has now become the fastest-growing economy in the world, with the latest figures showing a growth rate of 7.3% in the fourth quarter of 2015 compared with the same period in 2014. India has been perhaps the biggest beneficiary of the collapse in oil prices, and, with no prospect of oil prices bouncing back for perhaps years to come, it will continue to see the benefits.
India and China are often seen as regional rivals, yet there has always been a flow of goods and ideas between the two countries – the prevalence of Buddhism in China’s history attests to that. Today, of course, trade between the two Asian superpowers could certainly be much greater. But China’s rise and its impact on the global economy have certainly had major repercussions in India. That also means China’s slowdown will have an impact, too.
The slowdown in China is hurting prices and profitability in markets where Chinese companies are significant players. Indian economist and free market advocate Ajay Shah sees two interesting aspects to this for India. First, the problems in China will exert a drag on global tradeable goods prices, which will hit the profitability of tradeable-goods producers in India, while benefiting buyers. Second, Shah asserts that the “China model” will now command less respect in India, which he sees as possibly helping to improve policy formulation in India itself.
The first point is that India will get a surge of protectionist lobbying by tradeable-goods companies. This could threaten the 25-year movement towards greater openness to trade. Reduced profitability in tradeable goods will also reshape the contours of the emerging balance-sheet crisis in the Indian private sector. At the same time, companies and industries that buy these cheap tradeable goods will do well. For people with long time horizons, this is a good time to stock up on tradeable goods. As an example, if a company plans to build an assembly line populated with Chinese machine tools, this is a good time to accelerate those plans, as prices for these machine tools will be favourable in 2016-17.
The second point is through the space of ideas. India has always had a strong vein of socialist thinking, which guided government policies from independence to the 1990s. There is still substantial support for socialist policies among many parties. As Shah states, for many years, China’s success encouraged this socialist streak in Indian policy thinking. But, he adds, China’s success also seemed to suggest there was an alternative to liberal democracy and a market economy. Chinese policy strategies were held up as a model for what India should be doing. Numerous bad ideas in the Indian economic policy discourse are sold on the grounds that “China does it”.
But this was a distraction from the main track India is on: the construction of a liberal democracy, characterised by the rule of law, and a well-functioning market economy. For that, India needs to focus on building a mature market economy. This involves narrowing the work of the state to addressing market failures, embracing the Constitution and the rule of law, and the construction of state capacity for addressing market failures. This involves retreating from government intervention and emphasising the subtlety of policy frameworks that reshape incentives. Shah believes India’s journey is about freedom, the rule of law, institution building and state capacity.
The two-way trade of goods between India and China will surely only increase in the years ahead, as will the exchange of ideas. India’s demographic advantage over China may, however, mean its growth rates going forward may persist in being higher. Deciding on which country offers better investment opportunities for foreign investors, though, is not so easy.
Joseph Mariathasan is a contributing editor at IPE