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Business News/ News / India/  The $5 trillion blast from the past

The $5 trillion blast from the past

India focused on import substitution for a long time. So, it never got an export strategy going
  • If the Indian economy, like the Chinese, had grown at 9.5% per year since then, the Indian GDP in 2018 would have been $11.4 trillion, almost $600 billion more than that of China
  • India never got an export strategy going, especially for labour-intensive exportsPremium
    India never got an export strategy going, especially for labour-intensive exports

    In 1960, the Chinese gross domestic product (GDP, constant 2010 USD) was at $128.3 billion. That same year, the Indian GDP was at $148.8 billion, or 16% more. This trend of the Indian GDP being higher than the Chinese GDP continued nearly for the next two decades.

    In fact, until 1977, the Indian GDP continued to be higher than the Chinese GDP. As surprising as it may sound to those born in the eighties and the nineties, only in 1978 did the Chinese GDP overtake the Indian GDP for the first time.

    In 1978, the Chinese GDP was $293.6 billion in comparison to India’s $293.2 billion. Since then the gap between the GDP of the two countries has exploded.

    In 2018, the Chinese GDP was at $10.8 trillion. The Indian GDP at $2.85 trillion was a little over one-fourth of the Chinese GDP. The Narendra Modi government now aims to make India a $5 trillion economy by 2024.

    What led to this huge difference? It all started in December 1978, with China announcing an open-door policy for foreign businesses wanting to set up shop in China. India arrived at this point only partly in 1991.

    China became a factory for the world. Meanwhile, India hung on to the policy of import substitution introduced by Jawaharlal Nehru and tightened by Indira Gandhi.

    As economist Arvind Panagariya, a former vice-chairman of NITI Aayog, writes in his 2008 book India—The Emerging Giant: “The key element in Nehru’s thinking on trade policy was that India needed to be independent of the world markets. He saw this independence as essential to maintaining political independence...While Nehru did want domestic production to eventually replace imports, there are no statements in his writings or speeches to suggest that he wanted to achieve this by erecting import barriers."

    India kept concentrating on import substitution for an inordinately long period of time and, in the process, never developed the ability to produce quality products that were needed to compete in the international market. Thus, the country never got an export strategy going, especially for labour-intensive exports.

    But India did have an opportunity in 1977, around the time China got rid of its socialist past and tried embracing capitalism.

    In the Lok Sabha elections held in March 1977, the Congress party lost power for the first time. The Janata Party government did have the opportunity to change track on the economic front, but it was as socialist as the Congress, if not more. In fact, the then industries minister George Fernandes ordered American multinationals IBM and Coca-Cola to leave the country.

    Nevertheless, here is an interesting counterfactual. What if the Janata Party government, like China, had opened up the Indian economy for foreigners in 1977? What if India had tried to become a factory for the world? How would have things played out?

    The Chinese GDP in 1977 was $264.2 billion. More than four and a half decades later in 2018, the Chinese GDP stood at $10.8 trillion.

    This means that the Chinese economy grew at a rate of 9.5% per year on average between 1977 and 2018.

    In 1977, the Indian GDP was at $276.5 billion, just a little more than the Chinese GDP.

    Now, let’s assume that like China, India had also started an open-door policy in 1978 and, at the same time, concentrated on exports rather than import substitution. How would things have looked in 2019, more than four decades later?

    If the Indian economy, like the Chinese, had grown at 9.5% per year since then, the Indian GDP in 2018 would have been $11.4 trillion, almost $600 billion more than that of China.

    But here we need to take into account the fact that India is a democracy and China is not. Hence, in the Indian case, a single-minded focus on economic growth at the cost of everything else simply wouldn’t have been possible. If we discount for this and assume that India had grown at the rate of 7.5% per year since 1977, the Indian GDP in 2018 would have stood at $5.4 trillion. We would have already achieved what we hope to achieve in the next few years.

    Even at 6.5% per year, the Indian GDP in 2018 would have been at $3.7 trillion, which is considerably more than the $2.85 trillion in reality.

    Of course, the current government can’t be blamed for this.

    The trouble is that in the last two years, the government has been encouraging protectionism and import substitution all over again. This is a strategy which failed miserably in the past and held back economic growth.

    But as far as Indian economics is concerned, the economics of Nehru and Indira Gandhi never seems to go out of fashion.

    Vivek Kaul is an economist and the author of the Easy Money trilogy.

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    Published: 14 Aug 2019, 10:19 PM IST
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