Why India Can’t be the Next China, And Shouldn’t Try

By Ruchir Sharma

When Narendra Modi became prime minister in 2014 one hope was that he would do for India what he had done as chief minister in the state of Gujarat: build a fast-growing economy like China’s, with an efficient bureaucracy and advanced factories attracting billions in investment from multinational corporations.

Five years later, with Modi seeking a second term in India’s general elections, it’s clear that he won’t make India the next China, because it’s not possible.

Comparing these two giants is a popular thought experiment, but they have nothing in common other than populations of a billion plus. China is a one-party autocracy that mobilised its homogeneous Han and Mandarin-speaking majorities behind a decades-long campaign of radical reform. India is a diverse multi-party democracy that will always struggle to rally its hundreds of ethnic and linguistic minorities behind any single goal.

What Modi proved in Gujarat was that a strong leader can command change in India, but only one state at a time. In Modi’s first-term as chief minister between 2002 and 2007, Gujarat’s economy grew at a nearly 12% a year pace, the fastest rate ever recorded in any major Indian state, under any chief minister.

As prime minister, Modi has been unable to generate the same kind of performance for the Indian economy as a whole; it has rumbled along at a rate of 6 to 7% — far below the double-digit pace recorded by China in the 1990s, when it was at the same level of development as India today.

Fed up with the stagnation and chaos China suffered under Mao, its communist bosses began loosening their control over the economy in the late 1970s. They freed rural Chinese to till their own land or leave the interior provinces in search of work. They created economic zones free of heavy bureaucratic control in coastal cities, where new jobs flourished. The authorities also closed thousands of rusting state factories, which threw tens of millions out of work. With no social safety net, many were forced to find new livelihoods in the burgeoning private sector, which was responsible for the subsequent decades of double-digit growth.

India has never risked anything like mass firings and large-scale migration to promote growth, in large part because its democratic leaders fear voters would punish them for the short-term upheaval and pain. As a result, India has seen a much more gradual shift from rural to urban, farm to factory, state to private sector, than China has. Most Indians still live and work on the farm. The population is 70% rural. Booming new cities are as rare in India as they are common in China. Many business sectors remain largely owned and operated by the inefficient state.

India has tinkered with free-market reforms, but only under pressure from economic crises, not as a steady long-term strategy like China. In his first term as prime minister, Modi continued on a path of gradual change, acceptable to the countless communities in India’s fractured electorate. He has for example pushed no broad privatisation, not even in the bloated state banks, which are a major obstacle to faster growth.

Already, one outcome of the 2019 election is entirely predictable, based on the party manifestos recently released by Modi and the main opposition parties. It will not lead to the easing of land acquisition laws or labour market rules, or the downsizing of state companies — the kinds of reforms that unleashed years of miracle growth in China, and in Korea, Japan and Taiwan before it. Instead, the manifestos offer dole-outs that will leave the overburdened state less money to invest in roads, ports and electricity plants.

The world’s most populous nations are evolving along very different paths – China toward freemarket communism, India toward state-dependent democracy. The contrast can be quite striking.

Consider how China created a cashless society by freeing its tech giants to create the software platforms that made it possible; within the last few years cash has virtually disappeared as a medium of exchange in big cities like Shanghai or Beijing. Modi tried to promote the same goal by state fiat; suddenly withdrawing all big bills overnight in late 2016. The result was not a sudden shift to digital forms of currency; it was a shortage of the old kind that is still weighing on the economy today.

Does this suggest that India would have been better off under an autocratic government? Not at all. For every authoritarian success story, like China, there are multiple failures like Cuba, Venezuela or North Korea. China got lucky with good leadership. It is an exceptional case, not a model for India and other developing economies to copy.

More importantly, strong, centralised rule is particularly ill-suited to India, where many of the 29 states see themselves almost as separate countries. Whenever the prime ministers try to centralise more power in Delhi, as Indira Gandhi did in the 1970s, they have triggered a backlash, often led by state leaders.

India is more a continent than a country, its states more varied in language, culture and ethnicity than the nations of Europe. Its economy is best-managed one state at a time, by a democratic leader close to local conditions, not by an authoritarian regime at the Centre.

As recently as five years ago, the hope for China was that economic freedom would lead to political freedom, but that dream has been dashed by the tightening of the communist party rule under President Xi Jinping. The hope for India, which became a democracy when it was still very poor, was that political freedom would lead to economic freedom, but that dream has been undermined by a long line of statist prime ministers.

There is still reason to believe in India’s economic prospects, but hope won’t come from prime ministers in Delhi, it will come from dynamic chief ministers in state capitals. These figures often double as leaders of their own regional parties. Right now the conventional wisdom is that Modi and his party are likely to return to power but with fewer seats in the Parliament, which would leave him more dependent on regional leaders.

That would not be a bad outcome. India is better off accepting its exuberantly diverse and democratic nature, and giving its state leaders more authority to govern themselves, than trying to be the next China.

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