MARKET PERSPECTIVE

By J Mulraj

Sep 30- Oct 6, 2023

Yes, but it will take many years, a disciplined work ethic, and a crackdown on corruption

The Chinese dragon has a huge lead over the Indian elephant. Today, China’s GDP is 5.3 times India’s. Up until the ’70s India and China had similar levels of per capita income. In fact India’s was slightly higher, at $225 compared to $184 of China’s in 1979. Deng Xiaoping, China’s leader, started economic reforms in Dec 1978, which propelled China’s economic growth significantly. India started its economic reform journey only in 1992.

And what was India doing when China was growing at a furious pace? During the decade after China started economic reforms in 1979, India went through 4 Prime Ministers, had a textile strike led by Datta Samant, whose wage hike demands were resisted, resulting in the closure of textile mills in Mumbai and the loss of a quarter million jobs, saw an uprising in Punjab culminating in the assassination of Indira Gandhi, and, at the end of the decade, saw the release by PM V P Singh of the Mandal report, which further divided the people along caste lines. So, while Chinese leadership was busy building its country, our leadership was busy tearing it apart for so-called political gains. A travesty of democracy!

In this video, Cyrus Janssen, a geopolitical analyst, argues why India is not the next China. Some of his arguments are valid, some can be debated.

Cyrus says that the size of China’s manufacturing sector, at $ 5 trillion in 2022, is more than 10 times that of India’s, at $ 450 b. True, that. China has built up huge manufacturing capacities in basic industries. It’s steel capacity is 935 million tpa, 8 times India’s, and its cement capacity is 2500 million tpa, also 8X. It has a dominant global share of 35% in clothes, 50% in furniture and in toys, 65% in footwear and others. It is going to be tough to catch up.

Cyrus says that, as China’s manufacturing output is 10X that of India’s, a shift of just 10% of its capacity to India would result in a doubling of India’s manufacturing output. The last time India managed to double manufacturing output, it took 13 years to do so, from 2009 to 2022. True, that. So, the argument goes, that at this rate, it will take a long long time for India to replace Chinese manufacturing prowess.

But remember, the 2009-2022 doubling was a result of India’s domestic investment, and, in a capital starved economy, with little FDI, Foreign Direct Investment. But today we are talking about FDI fleeing China as a method to de-risk the supply chain. The investment in plant and machinery has already been made by foreign companies, and the incremental investment in land and logistics will be made by them, too. So, if India has a welcoming environment (our PLI, or production linked inventive scheme, is welcoming), and if we have a good work ethic, India can attract FDI and close the gap faster.

It is the work ethic that is a problem. Watch this video which says that the IPhones made in India are of poor quality, and Apple has restricted sales of India produced IPhones to the Indian market. That does not augur well. If India’s work ethic is so poor that it results in products of unacceptable quality, it will not attract a large enough shift from China to be able to bridge the gap. So our Government must enforce labour and managerial discipline and focus on total, six sigma, quality control. We have to jettison, immediately, our ‘chalta hai’ attitude towards work. Can a political party show such tough love in a multi party democracy, as chaotic as India’s?

India has neglected its manufacturing sector and focused on IT services, in which it has done well. In 2004 China’s share of global manufacturing was 8.7% compared to 1.5% of India’s. But by 2022 China reached a global share in manufacturing of 30.6%, while India’s grew to only 2.8%. During this period, defaulters like Vijay Mallya, Nirav Modi and Mehul Choksi, fled India, without repaying bank loans. Efforts to bring them back to face justice, have failed. The fact that they managed to flee, despite red corner notices being issued, is indicative of corruption and dismal governance.

So, if India has to hope to catch up with China, the government must ensure

1. Workforce discipline

2. A proper work ethic focused on total quality control, and

3. Better governance, without fear or favor.

If the Government is unable or unwilling to do that, let the poor elephant rest. Give up the race.

Another reason pointed out by Cyrus, to conclude that India cannot be the next China, is because of the Chinese ecosystem , which allows it to control the entire value chain, plus its use of technology. India’s cotton crop is a close #2 to China’s, the world’s largest producer, producing 6.6 million tonnes. China land use is a quarter of India, due to mechanization of cotton farming; it uses cotton harvesters made by John Deere. Indian farm holding is fragmented, often too small to tun a tractor or harvester through. As a result, farm income is around 17% of total income, but supports over 50% of the population. The BJP Government attempted to correct the unfavorable terms of trade by passing a law, opposed by farmers, who weren’t properly informed of its benefits for them.

Worse still is the tax free status of agricultural income. Ostensibly meant to reward small farmers for their toil, it has morphed into a laundry to wash unaccounted, or ‘black money’ for the benefit of those who generate it. Namely politicians, power wielding bureaucrats, industrialists, high earning professionals and the like. This tax free status needs to be done away with. It can be done easily, by simply raising the threshold for taxable income, (which is Rs 7.5 lacs per year for the non- farmer) and making income upto, say, Rs 24 lacs tax free for the farmer, with normal tax rates above that. Then, the black money generated by those mentioned above, cannot be easily whitewashed, making it a tad easier to reduce corruption.

But Indian startups in agriculture and seeking to usher in change, not only helping farmers increase their income, but some are even helping provide a measure of social security, which is the job of the State. Watch this video.

So if the Indian elephant has to win the race, in addition to the things mentioned above, the tax free status of agricultural income must be removed or tweaked, as suggested.

In that event, the pachyderm may have a sliver of hope to beat the dragon. Interestingly, four Chinese markets have seen a simultaneous decline, which rarely happens. It’s equity, bond, real estate and currency markets are all down, at the same time.

Meanwhile, a lot is happening elsewhere. In USA, with the help of the Republican Speaker of Congress, Kevin McCarthy, the house agreed on a continuing resolution, a 45 day bill, to avoid a shutdown of the Government (after excluding further financial aid for Ukraine). As a result of McCarthy not insisting on further expenditure cuts, hard line Republicans successfully removed him as Speaker, a legislative McCatharsis, if I may!

The hard liners are right. In just 15 days, USA added $ 500 b. in debt, or $ 1.4 b an hour, for 15 days, non stop! This is a new level of insanity!

Biden’s logic of extending further financial aid, even when USA is hitting the debt ceiling, is Kafkaesque! In essence, the US is borrowing money from China, to gift to Ukraine, to fight a war against Russia, which is an ally of China, the lender! The inanity of such logic would find an entry into Ripley’s!

Other countries, basically European, are also war weary, and perhaps, if they, too, stop financial support, the war may end. In essence, the sad truth is that the collective west outsourced the war, including the deaths and injuries of its citizens, to Ukraine. For no ultimate gain. The collective West has egg on its face and blood on its hands.

In China, as per this Joe Blogs video.  Evergrande, a large real estate developer, has defaulted. It’s foreign debt is $340 b. and it made losses of over $80b. in two years 2021 and 2022. The largest developer, Country Garden is on the verge of default, and as many as 34 out of the top 50 developers are currently in default (see 2:03). What this means is that foreign institutional investors, including pension funds, have funded the Chinese real estate boom; in other words, pensioners in USA have lost their savings to provide housing for Chinese citizens. It would take a long time to gain back the trust of such institutional investors.

Last week the BSE Sensex gained 166 points to end at 65995.

Brent crude prices have fallen from $100/ b to 84, thanks to the strength of the US $. High interest rates are giving decent yield on 10 year bonds, attracting money from other markets. But the same high interest rates add stress to banks and to corporate borrowers. Goldman Sachs estimates that $ 790 b. of corporate debt is set to mature in 2024 and $ 1 trillion in 2025. The renewal will cause interest outgo to increase by 5%. Small businesses, unable to service, would fold, putting further downward pressure on commercial real estate (CRE). That, in turn, would cause a failure of some community banks, which lend for CRE. High interest rates have also pushed down the price of gold to attractive levels.

The dragon is not the Aesop hare which will go off to sleep. So, for the Indian elephant to catch up, it will require a strong Government, a tough crackdown on corruption, a bringing down of the shameful backlog of pending judicial cases, a removing /tweaking tax free agri income, stringent introduction of work ethic and similar steps. If we aspire to become a developed economy we must develop the mindset for it. ‘Chalta hai’ days are over.

Can you promise all that, Mr Modi?

Comments may be sent to jmulraj@asiaconverge.com