One More Indian Problem

Its not at all the China I knew, he said and gave me longish lecture on how much China had transformed itself. We then began the obvious follow-up, comparisons with India.

But hard as we tried to defend our beloved motherland, it was obvious to both of us that we were talking nonsense. The simple truth is that change in India has been glacial, whereas in China, in some respects at least, it has been torrential.

We were then joined by a former bureaucrat from the industry ministry and he wanted to know how the Chinese had managed to change their attitude to foreign capital after such a deep antipathy to it. In India, he said, there has been virtually no change and Indian attitudes towards foreign capital have remained static since the mid-1960s.

It was a good point and I waited for an answer from the diplomat. But he hadnt really thought about the matter, at least not in the way it had been posed. So he kept giving credit to the late Deng Xiaoping and the ruthless way in which he ran the communist party. Predictably, he also quoted the Deng aphorism about the colour of a cat not mattering as long it caught the mice.

Over the next few weeks, I tried to find a sensible answer to the bureaucrats question. Mostly, there were the usual explanations about post-colonial reaction to foreign capital and the manner in which, thanks to Nehrus fabianism, the Left had hijacked the intellectual debate.

But this is not really the whole explanation because the antipathy to foreign capital didnt begin in real earnest until the Indira Gandhi period. Before that, especially during Nehrus rule, India was pretty relaxed about it. So much so that except in foreign policy, there wasnt much anti-colonial rhetoric.

As I looked at the issues and discussed them with civil servants of the 1950s and 1960s and a couple of economists, it became clear that resistance to foreign capital is very much a post-1970 phenomenon. Even during the freedom movement, said one of them, there was no real resistance to foreign capital, only to foreign goods. Gandhiji, he said, knew that investement here would create jobs here, and that it made no sense to resist such investment.

Nor does there appear to be a historic or religious tradition in India of making a distinction between domestic and foreign capital. As far as the ancients were concerned, capital was capital and it didnt really matter who owned it as long as it was useful to the sovereign and his subjects, in that order.

Indeed, this was the European tradition as well. Until the middle of the 19th century, when Bismarck united Germany and Cavour united Italy, no clear distinction was drawn between domestic and foreign capital. Capital controls were thus, one must assume, the consequence of 19th century nationalism. To which one should add 20th century trade unionism, says an economic historian.

The story in Britain is somewhat different. There the government began to protect domestic capital not because of an upsurge of nationalism but because the change in the composition of parliament. The rise of the middle class and gradually increasing represenation of trading and industrial interests did influence government policy in some measure. But the distinction was never as sharp as in other countries. This could be one reason why Thatcherite reforms were so quickly accepted.

China, too, in spite of its brutal colonial experience, has a similarly pragmatic approach to foreign capital. But one wonders what this would have been if it had opted for democracy with its interest groups, instead of an authritarian regime. If China moves towards democracy, will domestic capital and labour oppose foreign investment and, if so, what will the Chinese government do about it?

What is intriguing is that the Indian tradition is also equally pragmatic. But it has been upstaged in recent times by the politics of populism and pseudo-nationalism, on the one hand, and trade unionism, on the other. If you look at it closely, it is the espousal of one or the other of these two causes which has brought the BJP and the Left so close together on economic issues.

It is also interesting that neither domestic capital nor labour has served the interests of either the people or the sovereign. Trade unionism has created a labour aristocracy which keeps unorganised labour out of jobs; and domestic capital, especially public, has failed to yeild adequate returns, thus forcing the sovereign to retreat.

The space vacated by this retreat ought to have been filled by domestic capital. But for well known reasons, of paucity, incompetence and dishonesty, it hasnt. Even Telco, of the mighty Tatas, is to bring down its equity in the Mercedes joint venture to 26 per cent).

So the only real alternative is foreign capital, not only because it is in relative abundance but also because it is accompanied by management skills and technology. Both are in short supply in India, which is why, in spite of a high savings rate of 26 per cent, so much investment tends to be unproductive.

This much is fairly self-evident. What is not, is the inabiility of the sovereign to identify its own self-interest or identify it so spectacularly wrongly (like letting in foreign capital in colas but not in infrastructure). This feature, in spite of its completely different political system, is not peculiar to India, witness the way the USSR collapsed.

Does such a fate await India as well?

The other day, at a dinner, I met a foreign service officer who had served in China in the mid-1970s. He told me that he had returned to Beijing after a gap of 20 years. I asked him whether things had changed much since he had last been there.

Its not at all the China I knew, he said and gave me longish lecture on how much China had transformed itself. We then began the obvious follow-up, comparisons with India.

But hard as we tried to defend our beloved motherland, it was obvious to both of us that we were talking nonsense. The simple truth is that change in India has been glacial, whereas in China, in some respects at least, it has been torrential.

We were then joined by a former bureaucrat from the industry ministry and he wanted to know how the Chinese had managed to change their attitude to foreign capital after such a deep antipathy to it. In India, he said, there has been virtually no change and Indian attitudes towards foreign capital have remained static since the mid-1960s.

It was a good point and I waited for an answer from the diplomat. But he hadnt really thought about the matter, at least not in the way it had been posed. So he kept giving credit to the late Deng Xiaoping and the ruthless way in which he ran the communist party. Predictably, he also quoted the Deng aphorism about the colour of a cat not mattering as long it caught the mice.

Over the next few weeks, I tried to find a sensible answer to the bureaucrats question. Mostly, there were the usual explanations about post-colonial reaction to foreign capital and the manner in which, thanks to Nehrus fabianism, the Left had hijacked the intellectual debate.

But this is not really the whole explanation because the antipathy to foreign capital didnt begin in real earnest until the Indira Gandhi period. Before that, especially during Nehrus rule, India was pretty relaxed about it. So much so that except in foreign policy, there wasnt much anti-colonial rhetoric.

As I looked at the issues and discussed them with civil servants of the 1950s and 1960s and a couple of economists, it became clear that resistance to foreign capital is very much a post-1970 phenomenon. Even during the freedom movement, said one of them, there was no real resistance to foreign capital, only to foreign goods. Gandhiji, he said, knew that investement here would create jobs here, and that it made no sense to resist such investment.

Nor does there appear to be a historic or religious tradition in India of making a distinction between domestic and foreign capital. As far as the ancients were concerned, capital was capital and it didnt really matter who owned it as long as it was useful to the sovereign and his subjects, in that order.

Indeed, this was the European tradition as well. Until the middle of the 19th century, when Bismarck united Germany and Cavour united Italy, no clear distinction was drawn between domestic and foreign capital. Capital controls were thus, one must assume, the consequence of 19th century nationalism. To which one should add 20th century trade unionism, says an economic historian.

The story in Britain is somewhat different. There the government began to protect domestic capital not because of an upsurge of nationalism but because the change in the composition of parliament. The rise of the middle class and gradually increasing represenation of trading and industrial interests did influence government policy in some measure. But the distinction was never as sharp as in other countries. This could be one reason why Thatcherite reforms were so quickly accepted.

China, too, in spite of its brutal colonial experience, has a similarly pragmatic approach to foreign capital. But one wonders what this would have been if it had opted for democracy with its interest groups, instead of an authritarian regime. If China moves towards democracy, will domestic capital and labour oppose foreign investment and, if so, what will the Chinese government do about it?

What is intriguing is that the Indian tradition is also equally pragmatic. But it has been upstaged in recent times by the politics of populism and pseudo-nationalism, on the one hand, and trade unionism, on the other. If you look at it closely, it is the espousal of one or the other of these two causes which has brought the BJP and the Left so close together on economic issues.

It is also interesting that neither domestic capital nor labour has served the interests of either the people or the sovereign. Trade unionism has created a labour aristocracy which keeps unorganised labour out of jobs; and domestic capital, especially public, has failed to yeild adequate returns, thus forcing the sovereign to retreat.

The space vacated by this retreat ought to have been filled by domestic capital. But for well known reasons, of paucity, incompetence and dishonesty, it hasnt. Even Telco, of the mighty Tatas, is to bring down its equity in the Mercedes joint venture to 26 per cent).

So the only real alternative is foreign capital, not only because it is in relative abundance but also because it is accompanied by management skills and technology. Both are in short supply in India, which is why, in spite of a high savings rate of 26 per cent, so much investment tends to be unproductive.

This much is fairly self-evident. What is not, is the inabiility of the sovereign to identify its own self-interest or identify it so spectacularly wrongly (like letting in foreign capital in colas but not in infrastructure). This feature, in spite of its completely different political system, is not peculiar to India, witness the way the USSR collapsed.

Does such a fate await India as well?