The country with the biggest gap between its economic potential and its economic performance today is India. India’s Gross National Product (GNP) today is US$2.6 trillion. It should be at least 10 or 20 times larger.
If we look at what ethnic Indians have achieved in the most competitive human laboratory in the world – the United States of America – and elsewhere, it is clear that Indians are naturally competitive economic animals and thrive in economic competition.
In this regard, they are very similar to the Chinese. The economic fortunes of the Chinese turned after the key reformist leader of China, Deng Xiaoping, opened up the Chinese economy in 1980 and allowed all Chinese, 1.4 billion of them, to compete.
In 1980, the size of the Chinese economy (US$191 billion) and the Indian economy (US$186 billion) were about the same. Today, the size of the Chinese economy is US$15 trillion, over five times the size of the Indian economy at US$2.6 trillion.
By contrast, the 1.3 billion Indians have been deprived of economic competition. Since they have been deprived of economic competition, they cannot thrive. Hence, India’s economy has fallen behind other regions and countries, including Southeast Asia.
Of the 10 states in the Association of Southeast Asian Nations ( Asean), nine have an Indic cultural base. Hence in some ways, they are cultural satellites of India. The total population of Asean is 650 million, half that of India’s. But the combined GNP of Asean in 2020 was about US$3 trillion, slightly larger than that of India (US$2.8 trillion).
Another statistic is more shocking. In 1971, when India helped Bangladesh to become an independent country, many commentators said Bangladesh was a hopeless country. Indeed, when I was ambassador to the United Nations from 1984 to 1989 and from 1998 to 2004, Bangladesh was a member of the Least Developed Countries (LDCs). India was never a member of the LDCs. Yet, by 2020, the per capita income of Bangladesh (US$1,968) became larger than that of India (US$1,900).
So why have the Asean countries and Bangladesh outperformed India in the economic realm? The simple answer is that Asean and Bangladesh plunged into global economic competition. India didn’t.
To become the largest economy in the world, India needs to unleash the vibrant animal spirits of the 1.3 billion Indian people by exposing them to global economic competition. It will not be easy. Indeed, China didn’t have an easy time either. I was present at the World Economic Forum, Davos, meeting in 2017 when President Xi Jinping admitted that the process of opening up the Chinese economy was a difficult one.
He said: “There was a time when China also had doubts about economic globalisation, and was not sure whether it should join the World Trade Organization. But we came to the conclusion that integration into the global economy is a historical trend. To grow its economy, China must have the courage to swim in the vast ocean of the global market. If one is always afraid of bracing the storm and exploring the new world, he will sooner or later get drowned in the ocean. Therefore, China took a brave step to embrace the global market. We have had our fair share of choking in the water and encountered whirlpools and choppy waves, but we have learned how to swim in this process. It has proved to be a right strategic choice.”
Like China, India will also struggle to swim when it plunges into the ocean of globalisation. What will make it even more difficult is that India will have to follow two contradictory principles in trying to open up its economy to global competition. The first principle is to have a radical change of mindset and decide that an open Indian economy will do better than a closed Indian economy. The second principle is that when opening up the Indian economy, India should do it carefully and pragmatically. It should try neither a big bang approach nor shock therapy as the experiences of Russia and East Europe have shown that big bang approaches don’t work.
The radical change of mindset is important because the general assumption in India is that the best way to protect the poor in India is to keep the Indian economy as closed as possible. However, the record of recent history shows that poverty reduction happens faster when economies open up faster. The best evidence of this is provided by Vietnam which had a typical Soviet style protected economy. However, as soon as the Cold War ended, it joined its fellow East Asian countries in opening up its economy and the results in poverty reduction were spectacular. As then-World Bank president Jim Yong Kim pointed out in 2016, Vietnam’s average annual growth rate of nearly 7 per cent over the previous 25 years had enabled the country “to leapfrog to middle-income status in a single generation”. And during the same period, Kim noted, Vietnam had managed the “especially remarkable achievement” of reducing extreme poverty from 50 per cent to just 3 per cent.
When India opens up its economy, there will be “creative destruction” (as pointed out by the famous economist, Joseph Schumpeter). And “creative destruction” is good. It destroys the inefficient parts of the economy and strengthens the efficient part of the economy. This is exactly what happened to China. Before China joined the WTO in 2001, its State-Owned Enterprises (SOEs) made up two-thirds of China’s economy. Now it’s down to one-third. In short, there was a lot of “creative destruction” of Chinese SOEs.
The theoretical direction that India should take to make its economy stronger is clear. But theory is one thing and practice is another. Russia and a few East European countries thought that they were doing the right thing by opening up their economies with a “big bang”.
The Chinese reformers were wiser. They heeded the advice of Deng, who advised that China should “grope for stones to cross the river steadily”. However, the most important point here is not that the river must be crossed cautiously but that the river must be crossed and India must reach the other side.
There are three concrete but cautious steps India can take to start the process. The first: join the Regional Comprehensive Economic Partnership ( RCEP) immediately. By joining RCEP, India will be betting on the future – with a total population of 2.3 billion and a combined GDP of US$38 trillion, RCEP can provide the biggest markets for Indian products.
The second concrete step that India can take is to make the South Asian region (including all the South Asian Association for Regional Cooperation or SAARC members) as open as the Asean region. Most countries grow by opening up their economies to their neighbours. Just look at the European Union (EU) and the North American Free Trade Agreement (NAFTA). Now, South Asia can never be as open as the EU or Nafta. These are very high-level and complex agreements. However, there is no reason why South Asia cannot be as open as Southeast Asia.
India can pick up a copy of the Asean Free Trade Area agreement and share it with all its neighbours. After doing so, India should make a commitment to work with its neighbours and agree to sign a similar agreement among all the SAARC members.
Let me add here that I am aware that there are problems between India and some of its neighbours, especially between India and Pakistan. The two countries do not even have normal trade with each other. Here too one Southeast Asian story is relevant. India and Pakistan fought their last major war in 1971. China and Vietnam (who have been suspicious of each other for 2,000 years, longer than India and Pakistan) fought their last major war in 1979. Yet, after Vietnam joined Asean (with whom it had been quarrelling for decades) in 1995, it then also joined the China-Asean FTA in 2002. Since the mid-1990s, trade between Vietnam and China has grown 3,000 times. Therefore trade between India and Pakistan can also grow 3,000 times. The biggest beneficiaries of this increased trade will be the poor people of India and Pakistan.
Job losses hit Indian women disproportionately during Covid-19 pandemic
Job losses hit Indian women disproportionately during Covid-19 pandemic
The third concrete step India can take is to open the doors to Foreign Direct Investment (FDI) as much as the Asean countries have done. Here is one statistic that Indians should reflect on. The combined GNP of the three dynamic North East Asian economies (China, Japan and South Korea) is US$21 trillion. By contrast, the combined GNP of the relatively poorer 10 Asean economies is only US$3 trillion. Logically, since US$21 trillion is more than US$3 trillion, there should be more American investment in Northeast Asia than in Southeast Asia. Instead, the figure is the opposite. In Northeast Asia, it is US$287 billion and in Southeast Asia it is US$335 billion.
Given the growing tensions between the US and China, many American manufacturers are looking for a ‘China Plus One’ investment destination. Many want to invest in India for geopolitical reasons. However, as soon as they arrive in India and encounter Indian bureaucracy, they get discouraged. There is a simple solution. Many of the Southeast Asian countries, including Indonesia and Vietnam, Malaysia and Thailand, have produced simple and clear investment brochures. Each state in India should compete to produce investment brochures as good as those in Asean. Then they will find that the best and easiest way to boost economic growth is to attract FDI.
In short, it will not take rocket science to make India’s economy the largest in the world and larger than even that of China and the US. It will take only simple common sense. There is no need to invent anything new. All India has to do is to copy and learn from Southeast Asian countries who have had close relations with India for two thousand years.
Kishore Mahbubani, a Distinguished Fellow at the Asia Research Institute at the National University of Singapore, is the author of ‘Has China Won? The Chinese Challenge to American Primacy’ (2020). This is an edited excerpt from his K R Narayanan Birth Centenary Lecture, organised by the Institute of Parliamentary Affairs established by the Kerala state government, on August 5, 2021