Facing the ascendancy of China

We are importers of capital — like the US. We are dependent on foreign investment from the US to balance our payments. Only recently the Prime Minister once again asked his officials to work out a mechanism to attract foreign capital. We should know that part of the Foreign Direct Investment coming by US MNCs is only rerouted Chinese investments.We are dependent on China though this is not visible. We are dependent because we are using our limited export earnings to buy fuel oil for running the SUVs, and for importing walnuts from the US and chocolates from Switzerland. Meeting the ascendancy of China will require that we at least cut our dependency on foreign capital if we cannot become exporters of the same. We will need more than rhetoric to face China

India has three advantages compared to China. One, our population is younger. One-half of our population is below 28 years of age against 38 years for China. This means that there is likely to be less infection of Covid-19 in India. Two, India is a warmer country. The average yearly temperature 1961-1990 was 23 degrees Celsius for India against 7 degrees for China. There is likely to be less spread of the virus in India since it is reported to die in warm temperatures. Three. India has a large services sector while China has a large manufacturing sector. Many services like software programming, medical transcription, and online tuitions can be provided from home in lockdown while manufacturing necessarily requires a number of workers to come together.

However, this advantage of India is partly cancelled because we export services like tourism as well which cannot be supplied from home. Moreover, a recent survey has found that American corporates plan to cut down on their Information Technology expenditures. India's strength in the services sector is an asset despite these roadblocks. China's image in the world has taken a hit due to corona pandemic having started there. Yet, China has managed to quickly restart its factories. Its administrative efficiency has ensured that the new cases in China are less than hundred per day while they are more than a thousand per day in India despite it having an older population and colder temperature. China has achieved this by strict implementation of lockdown.

We have failed miserably in doing the same as seen in the migrant workers fleeing to their hometowns in hordes and the difficulties of imposing isolation in places like Dharavi in Mumbai. Thus China's manufacturing is chugging along while ours is at standstill. We have utterly slipped in capturing the opportunity of exporting goods to China by indiscriminately putting all our industries in lockdown. The world will per force buy goods from China because no other country, including India, is in a position to supply them today. The question today is less of the cost of production; it is more of the ability to produce in lockdown.

I am not convinced that the world will tilt against China due to Covid-19. Remember Kedarnath disaster of 2013? The hydropower proponents successfully changed the narrative to that disaster being a one-off event. Geologists have repeatedly warned of more disasters such as earthquakes and cloudbursts to follow but these are being wilfully ignored so that hydropower companies can continue to make merry. Similarly, the world media, which is driven by the multinational corporations, will successfully change the narrative. We shall hear that Covid-19 was a one-time isolated happening. The connection with HIV and SARS will be suppressed. This will be followed by multinational corporations restarting their business with China because globalisation opens the gates for earning global profits. Soon we should see a flood of "paid" academic papers pandering as independent research that will argue that Covid-19 was just a "natural" accident.

The tilt against China is also unlikely because it rules the world financially. He who pays the piper calls the tune. It is the only country with a sizable financial surplus. The United States (US) is a net borrower of capital while China is a net exporter. China has long been using its export earnings to invest in US real estate. It invested US Dollars 53 Billion in real estate in 2019. Thus, if President Trump wants to borrow money from the global financial markets, a good part of it will come from China — directly or indirectly. Indeed, China has been buying less amounts of US Treasury Bills after President Trump has taken over. But that only means that China is investing in, say, the United Kingdom, and the UK is investing the same money in the US. Our position is dismal in comparison. We are importers of capital — like the US.

We are dependent on foreign investment from the US to balance our payments. Only recently the Prime Minister once again asked his officials to work out a mechanism to attract foreign capital. We should know that part of the Foreign Direct Investment coming by US MNCs is only rerouted Chinese investments. We are dependent on China though this is not visible. We are dependent because we are using our limited export earnings to buy fuel oil for running the SUVs, and for importing walnuts from the US and chocolates from Switzerland. Meeting the ascendancy of China will require that we at least cut our dependency on foreign capital if we cannot become exporters of the same. We will need more than rhetoric to face China.

Yet, there is opportunity in the present melee. We must take the following steps. First, we must restart all "enclosed" manufacturing and services sector units as long as they hold the workers within their precincts. The large numbers of government servants in sectors such as education, justice and PWD — who are drawing salaries sitting smugly at home — should be appointed to make sure no violation of this working quarantine takes place24x7. Two, we must increase our savings rate. China saves about 45 percent of her GDP against 30 percent for India. The average salary of our government servants was USD 520 per year in 2015 against the per capital income of USD 1605 per year — or 32 percent of the average income of our people.

The average salary of Chinese government servants was USD 984 per year in 2015 against the per capital income of USD 8033 — or only 12 percent. The salaries of government servants should be cut to one-half, if not one-third, and the savings of Rs 100 lakh crore be used to cut imports of foreign capital. Three, we must focus on prevention of outflow of our money instead of focusing on attracting foreign investment. Globalisation is the camouflage behind which our capital is fleeing abroad. Instead of the Prime Minister honouring Bill Gates, he must honour the domestic businesses —especially small businesses.

That will reduce our dependence on foreign capital and strengthen us versus China. Fourth, we must increase the Excise duty on oil four times. The Central government is collecting about Rs 4 lakh crore every year at the rate of Rs 23 per litre. Let this be increased to Rs 100 per litre and let the price of petrol in the market be raised to Rs 150 per litre. The result will be a drop in our oil imports. We will get a huge revenue and we must use that money to buy US real estate as China is doing. Bold measures beyond bravado are needed in the present times to be able to stand against China.

(The writer is formerly Professor of Economics at IIM, Bengaluru)