India must not try to copy China


India seems to be trying to copy China's authoritarian free market. That simply can't be done, as Gurcharan Das explained in his book, India Grows at Night.
Here's good advice from John Lee in today's Australian.
Like China, India has an economy that is too big to ignore. But there is no such thing as inevitability when it comes to continued economic growth and reform.
A telling signal of how a country is really faring is what private entrepreneurs are doing with their capital. In the latest figures available (2010-11), outward investment from India more than doubled, while inward investment plunged. If India is well on its way to becoming an Asian economic superpower, the $US20 billion net outflow from an economy that desperately needs investment does not make sense.

A closer reading of why Indian and foreign entrepreneurs are investing abroad rather than in Asia's second fastest growing economy is troubling. India is in a weaker structural position now than it was several years ago. An entrenched socialism, combined with widespread admiration for the Chinese approach, has meant the re-emergence of Indian economic statism, the conviction that the government needs to take the lead in steering economic development into the future.

Why are domestic and international private investors so reluctant to commit? One problem is that regulatory conditions and tendering processes are biased against private firms, while cheap loans generally are offered only to state-owned firms. In proposed public-private partnerships, the government's attitude is skewed towards socialising profits and privatising losses. Partly
Moreover, because the state still dominates – or else limits foreign firms from participating in key industries such as banking, insurance, agriculture, mining and minerals, energy, retail and transport – extremely inefficient and protected state-owned firms allocate and receive far too much capital while delivering far too few products and services at too great a cost.
One consequence of heavy reliance on cheap money (in addition to subsidies, tax breaks and protective tariffs) offered to undeserving firms to drive growth is a government debt-to-gross domestic product ratio of 50 per cent – large for a developing country with a small tax base, and one that spends little on welfare – meaning interest payments absorb more than one-fifth of the annual budget. Another is that the money supply is growing three times faster than GDP, contributing significantly to 7 per cent to 8 per cent annual inflation in the past few years.
India's problem is not its democratic past but its socialist legacy.
John Lee is Michael Hintze fellow and adjunct associate professor at the Centre for International Security Studies, University of Sydney, and a non-resident senior scholar at the Hudson Institute, Washington, DC.