Looking at the gross domestic product(GDP) growth rates of China and India for past few decades, we can consider both the economies as miracle economies of this century because they have also been unscathed by the recent global crisis.
At constant international dollars, China’s per capita GDP was 19 per cent of the US level in 2007, as against 3.5 per cent in 1978; the figures were respectively 9 per cent and 5.8 per cent for India. China’s share rose from 0.92 per cent of the US level in 1970 to 1.63 per cent in 1980 and 13.8 per cent in 2006, while the figures for India were respectively 0.65 per cent, 0.68 per cent, and 2.02 per cent over the same years, in net output of manufacturing at constant international dollars. China’s percentage share in global exports of manufactures shot up from 0.8 in 1980 to 13.5 in 2009, and that of India from 0.5 and 1.3 (WTO database).
The industrial reforms of 1991 were some economist such as Joshi and Little, who in their book mentioned that since ‘a good deal of Indian industry, after 40 years of almost total protection and limited domestic competition was in poor shape in 1991 to survive international competition with only very limited protection’. They also agreed to the fact that in case of capital goods there was for some years ‘negative protection in some cases’, and that ‘everyone agrees that time for adjustment was needed—say seven years’.
It is evident that the reformers expected that an abrupt liberalization of imports would cause a collapse of many Indian industries, especially in capital goods. Imports across the board began to surge after a brief period of import compression. The import of capital goods saw a huge jump of about 50 percent more than in the pre-crisis year upto US$8.5 billion. Further, the import duties, as noted by the NMCC and others, remained over the years virtually nil for capital goods required for ‘mega projects’ across the sectors; the domestic player had to pay indirect taxes where as there was no countervailing duties on competing imports which further added to the insult. the compound average annual growth rate of all manufacturing was higher in the 1980s (7.6 per cent) than in the post-reform years, 1990-2009 (6.2 per cent); much steeper was the fall in that of capital goods, from 11.3 per cent to 5.4 per cent over the same years. The shock therapy was quite effective for capital goods with the growth rate plunging to 3.8 per cent during 1990-2000, but it recovered to 7.3 per cent over the next nine years (Reserve Bank of India RBI 2010). The deceleration in manufacturing growth happened because of various other factors apart from import liberalization. The reforms though predicted to acceleration in the labor intensive manufactures after 1991.
United Nations Industrial Development Organization (UNIDO) classifies all commodities into: (a) resource based (RB), (b) low technology (LT), (c) medium technology (MT), and (d) high technology (HT); the number of SITC three-digit products in these groups are respectively 68, 44, 72, and 17 (UNIDO 2009) From the UN Comtrade database, the percentage share of each group in India’s total export was calculated for 1990 and 2008. What is most remarkable is the sharp rise of the RB group from 35 per cent in 1990 to 47 per cent in 2008. The earlier policy of restricting the export of minerals and preserving them for future use in domestic manufacturing was gradually lifted after 1991; this led to large-scale environmental degradation and displacement, especially of the tribal population, and generated sociopolitical tensions. Equally remarkable was the precipitous fall in the share of labor-intensive LT goods from 47 per cent to 28 per cent in those years. However, the share of more capital-intensive MT group went up from 13 per cent in 1990 to 20 per cent in 2008. At the other end, the share of the HT group was quite small and stagnant at 4-5 per cent.
The table below shows that though India’s HT exports during 2000-9 rose impressively by a factor of 7, India remains a minor player with a share of less than 1 per cent of the total for six exporters.
Telecom manufacturing was heavily affected by the 1991 reforms which literally destroyed the domestic industry. A government-funded research and development(R) unit, C- DOT made remarkable progress in designing, developing, and commercializing a range of digital automatic exchanges within five years of its creation in 1984; the total outlay was just Rs 1,000 million, or a tiny fraction of the R costs incurred by MNCs. Further, the fixed cost per installed landline using C-DOT equipment was just onethird of that for imported equipment. After 1991, the government marginalized C-DOT, encouraged private players, domestic or foreign, and permitted duty-free import of equipment. The new policy became a huge success in terms of the number of subscriberbase, fixed line and mobile, which went up exponentially from 5 to 650 million during 1991-2010. There was an exponential increase in the revenue as which went upto US$30 billion. But the local production (mainly, peripherals like telephone sets) accounted for less than one-fifth. It is ironical that India’s major suppliers are Chinese SOEs that were entirely dependent on MNCs up to the mid-1990s. Since software plays a crucial role in manufacturing telecom equipment, and India is still well ahead of China in software development, the C-DOT and similar entities could, with appropriate state support, offer a stiff challenge.
The export oriented software industry was the only major Indian industry that emerged after 1991 and captured the global attention. The information technology revolution fueled this growth in USA, the presence of a large body of Indian expatriates occupying key managerial posts in that country, and the abundance of highly skilled workers in India earning a fraction of their American counterpart. Various tax incentives were provided by the Indian government which was in tune with the international practice; similar concessions were available to Indian exporters even before 1991.
The indian reformers deliberately claimed an ‘industrial policy’ with the overriding objective to ‘lock’ india into the global financial system by moving as fast as feasible towards the free cross-border flow of capital. Thus shortly after 1991, control on current account transactions was removed, and unlimited inflow of foreign portfolio capital with virtual exemption from all domestic taxes was solicited. The big firms started raising equity and debt funds in international capital markets, and Indians started investing abroads using domestic resources. This more or less free mobility of capital is of immense benefit for the large firms and rich individuals; however, whether India as a poor country could gain from such flows has been questioned by many mainstream economists. For a net inflow of capital, the current account has to be in deficit. The import surplus ballooned from $6 billion in 2000-1 to U$119 billion in 2008-9, or about 10 per cent of the GDP. The surge in India’s software exports and sizeable private transfers covered a large part of the trade deficit. There was still an almost persistent deficit in the current account. From 1990-1 to 2008-9, the cumulative current account deficit amounted to US$91.3 billion while the surplus on capital account was as high as US$337.9 billion, and foreign exchange reserves increased by US$248.9 billion. The corresponding figures (in US$ billion) for 2000-1 to 2008-9 were 47.6, 260.8, and 215.9 respectively .