Why India Will Not Repeat China’s Success

I have been looking for books which cover the post-independence political economy of India, and its failure to successfully industrialize and develop as its neighbour China has done. Ashoka Mody’s India Is Broken A People Betrayed, Independence To Today provides many great insights into this failure. Vivek Chibber’s Locked In Place State-Building and Late Industrialization In India provides additional political-economic depth by addressing the class background of those involved and the position of the Indian capitalist class.

Mody’s fundamental criticism of the Indian leadership of the past seven and a half decades is the inability to implement the reforms that communist China successfully implemented within the post-WW2 decades: land redistribution, universal literacy, public health and agricultural development. As he sees it, without these reforms any attempt at industrialization would be fundamentally handicapped. He sees Nehru, India’s first Prime Minister (1947-1964) as not pushing the reforms hard enough to overcome capitalist elite resistance and obstructionism, while being more interested in industrialization focused on heavy industry. Chibber moves beyond such surface phenomena to address the political-economic position of Nehru and the Indian National Congress (INC) Party.

The Indian business class was never truly supportive of a developmental state, acting strongly to protect its freedom from state control. When the Quit India movement for full Indian independence started in 1942, not supported by the business class, accelerated the departure of British capitalist interests from India it opened up major domestic growth for the Indian business class. Why attempt the much harder job of export growth when you can pick up the low-hanging profitable fruit at home? This was in contrast to the South Korean business class in the 1960s which had aligned with a Japanese business class that facilitated the export expansion of South Korean businesses; as Japanese businesses moved up the manufacturing value chain. At the same time, the Indian capitalist elite managed to make much of the land redistribution efforts ineffective.

Unlike Mao who came from peasant stock, Nehru was the son of a prominent lawyer and was educated at Harrow and Trinity College Cambridge in England; spending his childhood and young adult years within core British establishment institutions and surrounded by the British elite rather than Indians. He then became a barrister in India for a short time before joining the INC and becoming its leader. The INC represented the Indian elite, who wanted Indian independence on elite terms (very much like the US colonial elite who wanted to replace the authority of the British crown with their own). It was Gandhi who made it a mass party from the 1920s onwards, but his leadership of the lower classes was not revolutionary as he staunchly supported private property and wealth and he acted as a blockage to true subaltern class representation within the INC. Faced with radical independent unions in the immediate post-WW2 period, the INC moved to stifle and demobilize the very organizations that would have greatly aided it in any struggle with the business class; showing its true elite nature. Nehru had also moved from his former vague socialist notions to a more conservative position, showing his true nature. The following retreat from nationalization and the lack of any attempt to significantly reduce the power of the business class then turned the import substitution industrialization (ISI) strategy toward crony capitalism, making “it possible to garner high profits and state largesse with no real need for innovation” (Chibber, p. 193); with capitalists remaining “wedded to their preference for domestic markets” (Ibid., p. 194). In addition, foreign corporations invested in India to exploit the domestic market predominantly, in contrast to the Japanese corporations that were using South Korea as an export base for lower value products as they moved up the value chain.

In 1957 India experienced a massive foreign-exchange crisis as large-scale state-subsidized industrialization sucked in capital imports and a partial liberalization of consumer goods imports exacerbated the demands for foreign exchange in the absence of a growth in exports. The result was severe cuts to state subsidized projects and ongoing foreign-exchange issues that were solved in the short-term by increased borrowing from foreign sources, producing an increasing debt servicing need that had to be paid in foreign currencies, and Western financial aid. The usage of import controls and state industrial licensing, intended to manage the demand for foreign exchange, was also greatly manipulated by big business to keep out competitors; the start of the infamous License Raj.

It was at this time that Taiwan set forth on its state-led export-led industrialization strategy, focused to begin with on labor-intensive textiles rather than capital-intensive heavy industry; exploiting the competitive advantage of a poorer nation while gaining the foreign exchange required to fund higher level industrialization. By the late 1950s, female primary school enrolment was close to 100% in Taiwan and 90% in China, while it was only 20% in India; the latter only reaching 90% in 2000. China had far outstripped India in life expectancy and general health as well, with the death rate in the worst year of the Great Chinese Famine (1959-61) equalling the normal Indian death rate of that period. Both Nehru and Mao can be said to have cults of personality, with both idolized by the general population, but the latter greatly outperformed the former with respect to economic development and the quality of life of the masses; in direct contrast to how both are viewed in Western mainstream circles. Nehru was an abject failure because he would not challenge the elites (which had collaborated with the British colonial authorities) of which he was a member and refused to focus on the development of the masses, while Mao succeeded because he overthrew the elites and focused on the development of the masses from which he had emerged. Mao also turned to Soviet Russia for help in industrializing his country, which paid dividends until the Sino-Soviet-split of 1961.

After the death of Nehru in 1964, things worsened rapidly as foreign financial aid rapidly fell with the assassination of JFK and the fallout from the India-Pakistan war of 1965, together with bad harvests and increasing sectarian violence that was significantly driven by the lack of improvements in the lives of the masses. The reign of the progressive and uncorrupted Shastri who had succeeded Nehru was ended by his untimely death in 1966. What followed was what Mody describes as an enormous missed opportunity with the leadership of an Indira Gandhi who had little interest in economic policy and development state building; preferring vague slogans, and the extension of her own power, which ended in increasing civil violence, a police state autocracy and her assassination. Adding to the economic damage was Gandhi’s use of the state to munificently support her spoilt, destructive, incompetent son Sanjay; corruption escalated during the Indira Gandhi years (1966 to 1977 and 1980 to 1984). The deeply problematic side of Sanjay was shown in his management of the cruel slum clearances of many millions and forced sterilizations, and this significantly contributed to the defeat of the INC by the Janata Party in 1977. That party descended into graft and infighting though, with little or no real focus on economic development, allowing Indira Gandhi to return in 1980. Just as China was experiencing its economic take-off with the policies of Deng, which were dependent on the economic and social strides made under Mao. With her overwhelming electoral victory, Gandhi dropped the “socialist” rhetorical cover and openly aligned with the capitalist elites; with corruption reaching new heights. India was saved from the possibility of an utterly ruinous and savage multi-decadal Sanjay autocratic leadership by his own arrogance that led him to crash a plane to his death at the age of thirty-three.

The Green Revolution and good weather that led to good harvests, together with increasing government deficits produced a spurt in economic growth that was not combined with any improvement in India’s export performance. India was now falling behind the South East Asian nations of Malaysia, Thailand, Indonesia and the Philippines. After Indira’s assassination in 1984, her other son Rajiv became Indian Prime Minister; extending the Nehru dynasty across four decades of failure. He managed some level of deregulation, but also relied heavily on state subsidies and tax cuts with the government deficit ballooning and the increased demand for goods being significantly met with imports; driving India into a deeper and deeper trade deficit. His attempt to manipulate Hindu-Moslem tensions to his advantage only aided the Hindutva BJP and he lost the 1989 election to V.J. Singh and his Janata Dal Party (in coalition with other parties). Political paralysis and a deepening economic crisis followed (made worse by the fallout from Iraq’s invasion of Kuwait), which lead to new elections in 1991 during which Rajiv Gandhi was assassinated. The INC won the election with a new leader, who faced with immediate economic crisis significantly devalued the Indian currency and engineered a massive sudden liberalization of the economy, ending the License Raj.

The results of massive liberalization in a highly corrupt crony capitalist economy with more than four decades of a lack of development in basic infrastructure, health and education were as would be expected; a burst in productivity as investment moved from low-efficiency to high-efficiency uses combined with a huge concentration of wealth and income and a financial bubble, followed by a plateau in efficiency gains. The required massive investments in human capital and infrastructure to sustainably provide ongoing increases in productivity were not carried out. Even the foreign investors were only interested in financial portfolio gains rather than investments in new industrial plants that predominated among foreign investments in China. While China became the workshop of the world, India became the call centre and off-shored IT service centre of the world. Both of these latter service industries provide little of the economic multiplier effects of industrialization, nor provide the vast numbers of jobs required to productively employ the Indian masses. In 1998 the Hindu nationalist BJP won elections under the leadership of Atal Vajpayee and stayed in office until 2004, with continued policies of liberalization and privatization; with the latter matching the corruption of 1990s Russia. The main sectors of economic growth were finance and construction, not manufacturing. The Hindutva tendencies of the BJP were held back by the coalition nature of the governments This was not the case in BJP-dominated Gujarat where the future Indian PM, Modi, was in power during escalating Hindu violence toward Muslims.

In the first decade of the new century, Indian growth did accelerate toward 7% annual GDP growth, but this has to be compared to the much more rapid growth of China (from a significantly higher per capita GDP base) and the general strong growth of developing nations (e,g, Brazil) during this period. In 2004 the INC under Sonia Gandhi (Rajiv’s wife) won the most seats, and their coalition came to power led by Manmohan Singh (with Sonia Gandhi as the power behind the thrown); who had been instrumental in the 1990s liberalization policies as Minister of Finance.  During his time in office from 2004 to 2014, Singh did drive some investments in rural education and health services, but also resided over repeated corruption scandals and increasing inequality as the benefits of growth predominantly trickled upwards rather than downwards; greatly aided by widespread corruption. There was also an extensive level of loan forgiveness and acceptance of loan defaults that mostly benefitted corporations and large farmers that had over-extended themselves; all financed by the state. Large Indian corporations also invested US$ tens of billions abroad which is highly atypical for a developing-nations such as India; the lack of a skilled workforce and good infrastructure made it more profitable to invest abroad. As Mody puts it:

Put simply, India’s ultra-rich only invested in India under carefully secured insider knowledge and favorable regulatory treatment; otherwise they took their money overseas. (p. 326).

In 2014 the BJP was voted back into power, with Modi as its leader, significantly in response to the corruption of the Singh years. The government has followed a heavily neoliberal policy agenda, cutting social spending including to education and health services, cutting taxes for the wealthy, privatizing government functions, liberalizing foreign investment policies and increasing regressive sales taxes. At the same time import tariffs have been raised, sheltering domestic businesses from foreign competition. With a GDP per capita at purchasing power parity (PPP) of US$7,242 in 2021, India has fallen far behind a China with a GDP per capital at PPP of US$19,338. Both nations are seen as growing at about the same rate of 5.5% in 2023, maintaining the wide economic chasm between the two. With China possessing a developmental state focused on economic upgrading, while India experiences more growth without real development. In 2020 Vietnam, with a population below 100 million, equalled India’s share of global manufactured exports and seems ready to accelerate past it; India’s share of manufacturing exports has remained stagnant for a decade and China’s share is 10 times that of India and growing. At the same time power has become more centralized within India, and the Hindutva RSS become more evident within the BJP.

A quite colourful account of the growth of India’s Billionaire Raj during the 2010s is contained in James Crabtree’s book of that title. With the BJP looking like the probable winner of the 2024 Indian general elections, India will spend this decade experiencing growth without much development, widening economic inequities, and a further centralization of power by a BJP with a significant religious-supremacist wing. Not a recipe for a repeat of China’s success.