The Asia-Pacific Journal | Japan Focus Volume 7 | Issue 16 | Number 3 | Article ID 3126 | Apr 15, 2009

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China and India: Convergence in Economic Growth and SocialTensions?

Nirmal Kumar Chandra

China and India: Convergence in EconomicGrowth and Social Tensions?

Nirmal Kumar Chandra

Do the economic policies orthe “business model”adopted by China and Indianecessarily aggravateinequalities in income andwealth distribution, andthus exacerbate socialcontradictions? While notproviding a definitivea n s w e r , t h e a r t i c l eexamines a wide range ofquant i ta t i ve data onwea l th , pover t y andinequal i ty in the twocounties, noting the risingconcentration of incomeand wealth, the trends inpover ty , inequa l i t y ,e m p l o y m e n t a n dunemployment, and thenature and extent of socialunrest. It also, howeverposes methodologicali s sues inc lud ing thecomparability of Chinese,Indian and internationaldata. The author outlines afeasible alternative centredon deve lopment wi thequity .

Nearly sixty years ago India and China

embarked on planned development of theireconomies. The former opted for a mixedeconomy with a pivotal role for publicenterprises in critical sectors, while there wereminimal reforms in the agrarian set-updominated by feudal or semi - feudallandowners.

Indian farmer

Ch ina adopted a soc ia l i s t mode l o findustrialisation preceded by radical landreforms leading to collectivisation. In 1978China changed track in favour of a ‘socialistmarket economy’, de-collectivisation ofagriculture, and an ‘open door’ for foreigntrade and investment. India in 1991 dismantleda very large part of the previous regulatoryregime and moved towards freer trade in goodsand services and ever fewer controls on cross-border capital flows.

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Chinese farmer

In recent years there has been a majorexpansion in two-way trade and investmentsbetween the two countries. Their ‘businessmodels’ appear to resemble each other evermore. Thanks to high-speed growth over 2 or 3decades, they have become the new paradigmsin the international media in the wake of thecollapse of the East Asian miracle in 1997.China has emerged as the manufacturing hubof the world. Not only have their firms capturedlarge slices of the world market in textiles,footwear, light engineering and so on, but evenin high value-added areas of electronics,telecommunications and machinery they havemarked their presence, often with the help ofmultinationals from industrial countries.

India’s domestic manufacturers successfullyweathered the storm of liberalisation in 1991,dispelling the Washington-inspired myth oftheir inefficiency. Actually, the producers notonly kept ‘competing’ imports at a low level,but also began to export on a larger scale thanbefore in medium- to hi-tech areas. Over thepast few years they have been floating theirshares in Western stock exchanges andacquiring some renowned Western firms.However, India’s major breakthrough has beenin information technology (IT) and IT-related

services like software development, ‘businessprocess outsourcing’, etc. Initially, Indians tookadvantage of the low labour costs here to seizeopportunities that opened up with the ITrevolution in the USA. Over the years theestablished firms and start-ups moved into evermore complex areas of software engineering.

The rise of China in the ‘hardware’ ofmanufacturing, and that of India in thesoftware segment have worried many in theWest who apprehend a loss of America’sposition, not only in manufacturing, but also asthe world’s ‘innovation capital’ as financereplaced industry as the premium profit sectorof the US economy. A good part of America’shighly skilled ‘knowledge workers’ may becomeredundant as the global firms in their drive toreduce costs relocate their research anddesigning activities in low wage countries.

Much of what has just been stated is commonknowledge and there is no need to substantiatethem at length. But there is another side to thesaga of development. The media in India andChina has highlighted the achievements. However, there are many signs of acute, if notincreasing, social tension in both countries.This leads to an important question. Do theeconomic policies or the ’business model’adopted by the two countries necessarilyaggravate inequalities in income and wealthdistribution, and thus exacerbate socialcontradictions? This paper does not provide adefinitive answer, but examines some of the‘growth-oriented’ measures and speculates onan alternative path.

Section 1 highlights the comparative growthrates in the two countries and explores theimperatives behind the reform in each case.India and China not only differed in the ‘initial’(pre-reform) conditions, but also in the natureof macroeconomic policy constraints after thereform. Yet both pursued broadly neoliberalpolicies with a similar, though far fromidentical, outcome in many spheres. Section 2

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provides evidence on the rising concentrationin income and wealth in the two countries. Thenext two sections take up the trends in poverty,employment and unemployment. The natureand extent of social unrest is explored insection 5. The analytical side of the story,namely how the rich are getting much richerwith considerable help from the fiscalauthorities is explored in section 6. I then lookcritically at the logic behind fiscal concessions.Some alternatives are outlined in the finalsection.

Growth Rates and Reform Imperatives

To comprehend why reforms were undertaken,it is useful to look at the growth story. I useGDP per capita at purchasing power parity(PPP) from 1952 to 2005, all at constant pricesof 2000, taken from the widely used PennWorld Tables (PWT) version 6.2. As against theofficial data for China, there are substantialrevisions for the years prior to 1980 when thecountry began to use the UN system of nationalaccounts; as India followed consistently the UNsystem, her official statistics were used in PWTwith minor changes. However, the base year(1952) estimate in PWT for China indicating aper capita income barely 40% of India’s, washardly credible. The revision proposed byMaddison and Wu (2006) putting them at par,seems much more plausible. Both series arepresented in Table 1. Following Maddison &WU, China took a small lead over India by1978, and the gap widened since then; by 2003China was almost 2.5 times richer. Further, vis-à-vis the USA, India’s per capita income stoodat 6.3% in 1952, 6.0% in 1978, and 8.6% in2003, according to PWT. One may draw thefollowing conclusions. (a) China’s growth allthrough the years, before and after the 1978reform, was greater than that of India. (b) Indiamanaged to grow at almost the same rate asthe US during 1952-78, a period often calledthe ‘golden age of capitalism’ in the West. Even

China failed to ‘catch up’ with the US over thisperiod. (c) Growth accelerated after the reformof 1991 in India, and after 1978 in China.

Table 1. India and China: the ratio of Indian toChinese GDP per capita at PPP

1952 1978 1990 2003 PWT 2.43 1.97 1.13 0.6Maddison & Wu 1.00 0.91 0.69 0.42

Source: Heston (2008).

What could be the rationale behind China’sreform? It can be explained by ‘economicimperatives’ to a considerable extent. Herindustries had developed along Soviet lineswith new factories coming up with technologiesmodified only at the margin. The drawbackwith this ‘extensive’ growth was that a greatdeal of scarce raw materials and fuel were‘wasted’ in production, compared to theprevailing standards in the West. Owing to asuperabundance of resources the Soviets couldignore the problem for a long time. But China ispoorly endowed, and could face an acuteshortage of resources if she continued with theold pattern for another couple of decades. Itfollowed that she needed huge imports ofWestern technology and equipment just tomaintain the tempo of growth. In the 1970s and1980s the USSR also felt the same need, tookbig loans from Western banks, and fell into adebt trap from which it could not recover. TheChinese leaders scrupulously stuck to the Mao-era policy of national self-reliance and decidedto finance import through expanded export.

Geo-political developments offered anunexpected opportunity. By the early 1970s,Sino-Soviet hostility aggravated, reaching apoint of no return. At the same time, theVietnam War stretched US military capabilityto its limits, heightened by a vigorous domesticopposition to the war. President Nixon came tomeet Mao in Beijing in 1972, laying the

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foundation for a de facto Sino-Americanentente against the Soviets. As the experienceof post-war ‘miracle’ economies of WesternEurope, and later of Japan, South Korea andTaiwan show, the key factor in their successwas access without reciprocity to the USmarket for export, and to import of USt e c h n o l o g y a n d e q u i p m e n t f o r t h emodernisation of industries. (Chandra 2004)Just as the US was earlier eager to foster theeconomic growth of her strategic allies as abulwark against the USSR (and China), in thenew situation China became the beneficiary. Itwas in this context that Deng Xiaoping’s ‘opendoor’ policy took shape with its stress on exportof Chinese manufactures and import formodernisation. (Chandra 2005)

While US support was crucial, China neversurrendered political or economic sovereignty.In foreign trade a neutral or positive balancewas maintained to pay for a rising volume ofimports. To facilitate exports, central allocationof resources to firms had to be altereddrastically to enable the latter to seizeopportunities abroad; hence an increasing rolefor market forces became unavoidable. Sinceexport prospects were brightest in textiles andlight engineering, businessmen from theChinese Diaspora in Southeast Asia who hadcaptured large slices of the market in the Westduring the Cold War era, had to be coaxed tooperate from China. That explains why theoverwhelming bulk of foreign direct investment(FDI) into the country was export-oriented andcame from these sources. For FDI catering tothe domestic market in high- or medium-techareas, China welcomed Western multinationals,provided they entered (as a minority partner) ina joint venture (JV) with state-ownedenterprises (SOE), and helped Chinesepersonnel to assimilate the new technologies.Over the years many restrictions were removedas the SOEs began to prove their mettle inforeign markets. (Chandra 1999) Nevertheless,even after joining the WTO in 2002, Chinamaintained an aggressive industrial policy. I

shall cite just 3 examples. In telecom Chinesefirms are now in the forefront globally and haveestablished their own standards for 3Gtelephony. Most automobiles in China tillrecently were produced in JVs with leadingWestern and Japanese multinationals, and thelatter used China’s cheap labour to ship backthe output to their domestic markets; nowChinese cars are launched in global markets.Power generating equipment that was importedin large quantities in the 1990s, is nowexported from China.

On the Left, Hinton (1990), a critical, observerand chronicler of the land reform and CulturalRevolution, characterised Deng’s open doorpolicy as a ‘great reversal’. He castigated thedismantling of the communes, Deng’strickledown theory (let some people get richfirst), and the entry of FDI that wouldnecessarily re-create a comprador class as inpre-revolutionary China. On the trickledowntheory, the evidence presented in later sectionssharply contradicts it. On the other hand, someLeft leaders within the Chinese party wrote toPresident Hu in October, 2004, admitting that‘there have been gains economically in the pasttwenty-six years of reform and opening up,[but] the price for these moves has beenenormous.’ (Letter 2004) They did not call for areturn to the pre-reform system.

As for the re-emergence of a comprador class,there is some corroborative evidence. Foreign-owned firms account for the bulk of China’sexports. In a large swathe of Chinese industriessuch firms have a dominant position in thedomestic market. Overall, the private sector,more precisely the non-state firms, accordingto a widely quoted OECD (2005) survey,account for more than half the industrialoutput; the share of foreign firms is large. Asagainst this, Business Week (2005) had anumber of reports comparing India and China;one was captioned: ‘The State's Long ApronStrings: China's multinationals, powerful asthey seem, are still beholden to the Party.

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That's both a blessing and a burden’. Thecompanies listed were Lenovo, Haier, MaytagCorp., CNOCC, Huawei Technologies and ZTE.Der Spiegel (2007) in a provocative piece, ‘RedChina, Inc.’ described how the State Counciland agencies under it, especially the planningagency, the National Development and ReformCommission in Beijing, have played a key rolein supervising over the entire gamut ofeconomic policies and closely monitor theperformance of all major SOEs, acting as ‘thecentral nervous system’. When Hart-Landsberg(2008) asserts that the accumulation process inChina is ‘now dominated by private (profit-seeking) firms, led by foreign multinationals,whose production is largely aimed at marketsin other (mostly advanced capitalist) countries’,the author is plainly wrong on several counts.One, he ignores ‘Red china, Inc’. Two, China’sown industrial policy, backed by enormousoutlays on R&D financed by the state, the state-owned banks and the SOEs, is again passedover. Three, Geng Xiao (2004) showed that agood part of FDI inflows into China was hardly‘foreign’; the percentage of round-tripping byChinese SOEs in FDI inflows stood somewherebetween 26 and 54 percent in the early years ofthe century. China’s Central Bank reported,according to Reuters, that one-half of FDI intoChina in 2004-05 was owing to round-trips bydomestic firms through Hong Kong and theCaribbean off-shore centres to avail of tax-breaks. (The Hindu Business Line, 10 August2005.) In short, FDI may not mean ‘foreigncapital’ in the usual sense. Four, China’s SOEsare buying up some of the iconic Western firms.Five, China’s foreign exchange reserve is nowso large ($1.9 trillion) that the US depends onChina’s goodwill in many spheres. For instance,Fanny Mae and Freddie Mac, the housingmortgage firm, was nationalised in the wake ofthe recent financial crisis by President Bushunder Chinese pressure, according to severalreports.

As for India, there was no compulsion behindthe reforms. The myopic political leadership of

both Congress and the coalition of oppositionparties that ruled from 1985 to 1991 allowedthe fiscal and external payments situation todeteriorate. In both respects a crisis could beeasily averted with minor changes in the fiscalregime, and temporary control over imports.Yet, ignoring its pre-poll manifesto, the newlyelected Congress government approachedWashington for a bailout, and a package ofeconomic reforms was mandated. Indeed, nosignificant section in India had called for suchreforms, and big business in particular wasinitially lukewarm, if not hostile. However, GDPgrowth did accelerate a few years later, andmany industries progressed, as noted earlier.How far the reform as such made any positivecontribution is open to question that cannot bediscussed here. On one point there is no doubt.The new regime, by privileging foreign capital,especially capital flows into the stock market,has lost a great deal of autonomy in policymaking, and the country remains perenniallyvulnerable thanks to unabated fiscal deficitsand reliance on capital inflows.

Inequalities of Income and Wealth

Since the turn of the century there has been agrowing concern about the excessiveconcentration of income and wealth in mostcountries and at the global level. One may citeamong many others the studies by Milanovich(2002), and by Davies et al. (2006) fromWIDER. These are based on household incomesurveys for developing countries and incometax returns in industrial countries, and all pointto a rising Gini coefficient, currently at above0.4 – generally reckoned as a ‘danger’ mark forsocial stability, in many countries.

A dramatic picture emerges if one looks at thetop of the pyramid. As part of globalisation,world financial markets have become evermore integrated. Global Asset ManagementCompanies (AMC) have sprung up to helpclients, rich individuals and firms, move their

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financial assets from one location to another tominimise tax payments. Boston ConsultingGroup, a leading firm, estimated that the globalwealth of the ‘affluent’ individuals (minimumassets of $100,000) and large firms in differentcountries rose from 85.3 to 97.9 $ trillionbetween 2004 and 2006. (www.bcg.com(http://www.bcg.com/)). No country-widestatistics are available. The total may becontrasted with the CIA estimate of world GDP(at the nominal exchange rate) of $51.0 trillionin 2006. (www.cia.gov (http://www.cia.gov/))Thus private wealth was nearly twice as high asworld income.

Since 1996, Capegimini, an associate of MerrillLynch, has been putting out an annual WorldWealth Report on HNWI (high net worthindividuals with assets of at least $1 million).The number of such persons increased duringthe 11 years, 1996-2007, from 4.5 to 10.1million, and their aggregate wealth rose from18.6 to 40.7 $ trillion over the same years. TheHNWI are mostly in the US and West Europe,though emerging countries have become moreprominent in recent years. In China theirnumber increased annually by about 15% ayear since 2000 to reach 415,000 in 2007; Indiahad a similar growth rate, though the numberwas smaller at 123,000 in 2007. The size ofwealth is not revealed for individual countries.Assuming a lower average wealth of $3.0million for India and China as against the worldaverage of $4.0 million, the HNWI wealth in $billion for the two countries comes to 369 and1,245 respectively. Allowing for a modest 10%rate return on assets, the annual income of theHNWI would be 3.6% of India’s GDP in 2007,and 4.1% for China. On the other hand, theaverage HNWI income as a multiple of percapita GDP was 302 for India, 122 for China,and only 48 for the world. By this measure, thedegree of inequality in India is extremely high,and that in China, though much lower than inIndia, is almost 2.5 times that in the world as awhole.

More frequently cited in the media is theannual list of the global rich published byForbes. In 2005, it reported 920 billionairesacross the world who had a net worth of $4.38trillion; Davies et al. (2006) found it close totheir econometric estimate. For 2006, Forbesidentified 49 billionaires resident in India withan aggregate wealth of $280 billion; this isconsistent with Capegimini’s estimate citedabove. However, for China Forbes listed only40 individuals for 2006 with a total wealth ofjust $80 billion; almost certainly, this is anunderes t imate . The Hurun Repor ts(www.hurun.net (http://www.hurun.net/)) forChina 2008 listed as many as 106 billionairesfor 2007 with a total wealth of $243 billion – farhigher than that of Forbes for the previousyear. Moreover, the Hurun Report contained800 names, each owning at least $105 million,with a total wealth of $457 billion. This figure iscompatible with that of Capgimini. In China, itis not only that the number of millionaires isrising at a fast pace, but their average wealth isincreasing faster. (For India comparableinformation is lacking.) According to the HurunReports, the assets of the 50th rank-holderwent up steeply from $6 million in 1999 to$145 million in 2002 and $525 million in 2006,while the richest person in the last year wasworth $3.4 billion.

The Hurun Report revealed that in 2006 one-third of the 500 richest Chinese wereCommunist Party members; of the top 100 asmany as 19 were delegates to the NationalPeople’s Congress (as against 5 in 2005), while19 were members of China People’s PoliticalConsultative Congress (as against 16 in 2005).Clearly, the rich are getting more deeplyentrenched in the policy-making organs of theParty and the state. Another report claims that90% of China’s yuan billionaires are thechildren of senior cadres in the party orgovernment.1

The Indian capitalists have been playing amajor role in the formulation of policies by

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major Indian parties even before independence,and have continued to do so. One need not citereferences to substantiate this proposition.Immediately after 1991 there were somecritical voices. But the government managed toregain their confidence through a variety ofconcessions. In recent years there is has beenintimate collaboration between governmentand big business.

Mumbai

One must add that the wealth of the rich hasnosedived in the wake of the financial crisis.Forbes (website 29 October 2008) reportedthat the combined wealth of the 400 richestChinese dropped from $288 billion to $173billion during the past year. Similarly, theassets of the 40 richest Indians crashed from$351 billion to $139 billion over the sameperiod.( Forbes, 12 November 2008.) However,the income of these groups need not have comedown to the same extent. Many companies inIndia have shown higher profits than last year.Thus the rich continue to corner an undulylarge part of national income.

Shanghai

Trends in Poverty

In India rural poverty, i.e. the percentage of thepopulation below the poverty line, has officiallydeclined significantly from 36.0 in 1993-94 to26.1 in 1999-2000, and 22.0 in 2004-05. (ES2006-2007, p.14.) Using the same survey data,Dev and Ravi (2007) concurred broadly. Bycontrast, Sen and Himanshu (2004) andHimanshu (2007) concluded that the povertyratio had hardly changed from 1993-94 to1999-2000, though it fell subsequently. Theofficial poverty line is defined as that level ofper capita consumption in 1962 at which thedaily food intake had a calorific value of 2400in rural, and 2100 in urban, areas. Since theappropriateness of the price index is contested,while the data on the calorie intake for eachexpenditure group are available, one studyused the latter to find that in rural India 75% ofthe rural population consumed less than 2400calories in 1999-2000, as against 56% in1973-74. 2 If this is startling, The Economist,3

wrote that 60% of the Indians were ‘poor’without defining the term. My reading is thatthese families have to devote their entireincome to the purchase of goods and services‘necessary for survival’, leaving little scope fordiscretionary purchases.

The National Commission on Enterprises in theUnorganised Sector (NCEUS) made a valuable

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contribution by extending the poverty calculusto two new groups, namely the ‘marginallypoor’ and the ‘vulnerable’; the consumptionlevel of the first group is in the range 1.0-1.25PL, and that of the second is in the range1.25-2.0 Pl, where PL is the official povertyline. These two groups spend the overwhelmingshare of the meagre total on ‘essentialconsumpt ion ’ , l eav ing jus t 15% for‘discretionary’ items; it is only a shade higherthan that for those classified as ‘poor’. Whilethe percentage of the ‘poor’ declined from 30.7in 1993-94 to 26.1 in 1999-2000 and to 21.8 in2004-5, that of the ‘poor and vulnerable’ wasmuch higher and fell marginally from 81.8 to80.7 and 76.7 over the same years. (Senguptaet al. 2008) Clearly, The Economist figure citedearlier was an underestimate.

China claims to have virtually abolished ruralpoverty with the number reduced from 250 to26 million during 1978-2004. Recently,however, a Chinese Minister, using the WorldBank norm of $1/day, measured at thepurchasing power parity of yuan per dollar, putthe number of poor for 2004 at 90 million.4

China’s threshold for rural poverty is a dailyfood intake of 2100 calories, significantly lowerthan in rural India; further, the need for non-food items is estimated in a non-transparentmanner from the household income data onrural China. Had the food ‘norm’ been relatedto consumption expenditure, and not tohousehold income, the incidence of povertywould have been higher, according to Khan(2005), who has collaborated with Chineseacademics and officials of the National Bureauof Statistics over many years.

Yao et al. (2004) made their own estimate ofthe ‘ food poverty l ine ’ ; on non- foodexpenditure, they allowed for two values andthus came up with two poverty thresholds.Their estimates for rural China ranged from79.6 to 196.8 million in 1995, and from 103.1 to187.0 million in 1998, out of a population in1998 of 936 million. Other Western estimates

gave comparable figures.

Further, Gustafson and Li (2003) found fromsurvey data that for the bottom decile, outlayson health and education as a percentage ofincome more than doubled from 5.7 to 11.8during the three years, 1995-98. This resultcalls into questions the appropriateness of theprice index, and hence the reliability of thepoverty estimates in recent years.

Equally doubtful is the claim that 250 millionpeasants in 1978 had a food intake of less than2100 calories. Since they lived in communeswith their ‘iron rice bowl’, and China’s percapita daily calorie intake averaged 2330during 1979-81 (FAO 2005, table E.0.1), onecannot accept the official figure untilindependent experts can look at the raw data.Thus one is sceptical not only about the currentofficial estimates, but also about the extent ofpoverty reduction in post-reform China.

Nevertheless, a seasoned critic of post-reformChina and correspondent of The Observer,Watts (2006B) on a remarkable 5000 kmjourney across China, found that, after years ofdeprivation, even the poorest provinces aresharing in a new-found prosperity, and that forthe majority of people he met their livingenvironments had improved. The evidencesuggests that poverty in rural or urban China ismuch less than in India. On the other hand,many developing countries, poorer than China,have a better record on poverty. Particularlydisturbing is the fact that although China had ascorching pace of GDP growth over the past 25years, and energy intake from foods averaged2940 calories during 2001-03, the ‘high’estimate by Yao et al. put rural poverty at 25%in 1998.

Yao et al. (2004) corroborated the officialposition that poverty among the ‘urbanresidents’ was rare. What about the 150-200million rural migrants? Compared to theformer, the migrants work far longer hours,receive barely one-quarter of the hourly wage,

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often much later than the contract date, andhave no social insurance.5 Their real earningshave hardly increased in the last decade. Itwould be surprising if they were all above thepoverty line.

Trends in Employment and Unemployment

Both in China and in India there is a severedeficit of jobs, although the media highlightlabour scarcities in some segments. China in2006 was facing the ‘country's worstemployment crisis ever’, according to theNat iona l Deve lopment and Re formCommission; against 25 million young peoplelooking for jobs, only 11 million vacancies wereexpected.6 Employment in SOEs shrank by 48mill ion from 113 to 65 mil l ion during1995-2005, and that in collectively-owned firmsfell by 28 million from 36 to 8 million between1991 and 2005. 7 Two years later, of 10.2million who lost their jobs from January toOctober, less than half found new jobs. (Xinhua,21 November 2008.)

It is true that laid-off workers in urban Chinareceive assistance in different forms overvarying periods. The official figure onunemployment covers only the ‘registered’urban residents with various entitlements,including unemployment benefits from thestate. Consequently, many jobless persons arele f t ou t o f the f igures . The o f f i c ia lunemployment rate is quite low; the percentagefell from 5.3 in 1978 to 2.6 in 1989, and thenrose to 3.1 in 1997 and 4.2 in 2004. (SYC 2005,table 2-5.) However, using the ILO definition ofunemployment, and data from a uniqueunemployment survey conducted in five largeChinese cities in 2002, Giles et al. (2005)estimated that unemployment rose from 6.1%in January 1996 to 11.1% in September 2002.Based on a 2001 survey of five cities includingShanghai and Wuhan, Giles et al. (2006) foundthat the unemployment rate rose from 7.1 to

12.5 percent between January 1996 andNovember 2001. The problem may be graverstill, if one reckons that some of the more than100 million migrants in urban areas areemployed intermittently.

Since 1990 there has been a big chasmbetween output and employment growth inChina as shown in Table 2. Rural employmentin the secondary sector increased by as muchas 93 percent during 1990-2004, but urbanworkforce shrank by 13 percent, and totalemployment rose by a mere 22 percent whilenet output multiplied by an astonishing factorof 5.3. Since rural workers earn far less thantheir urban counterparts, the wage share hasfallen drastically, as noted below. The tertiarysector was more ‘balanced’ with net output andemployment growing at 228 and 92 percentrespectively over the same period. Even thenthe workforce expanded 2-1/2 times faster inrural than in urban areas. The primary sectorhas been a laggard in both output andemployment. This shift of workforce from highto low wage sectors is contrary to the historicalpattern of industrialisation. Unless themacroeconomic policies are radically altered,the unemployment crisis is likely to beaccentuated over the years.

Table 2. China: Percentage rise in employmentand output, 1990-2004

1 9 9 0 - 0 4 1995-04 2000-04

Secondary sector:

Employment: Total 22.1 8.1 4.3

Rural 93.4 43.0 29.8

Non-rural -12.9 -14.7 -14.0

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Value-added 430.0 137.8 49.0

Tertiary sector:

Employment: Total 92.1 36.3 16.1

Rural 158.9 57.4 23.0

Non-rural 58.9 23.0 11.1

Value-added 228.4 104.3 37.6

Source: SYC 2005, tables 3-4 and 5-2.

That China has been pursuing a highly capital-intensive pattern of development over the pastfew years is brought out clearly by Kim andKuijs (2007). Annual growth rate in labourproductivity (at constant prices) in the ‘coremanufacturing’ sector was 21.4% during2003-06, while labour cost as a proportion ofgross output at current prices fell from 10.7%in 2002 to 6.3% in 2006. Over the same periodlabour productivity at current prices increasedannually by 22.9%, while nominal wages roseby 12.7%.

In a study for the US Bureau of Labour,Banister (2007) looked at Chinese official datafrom different sources; total manufacturingemployment, urban and rural, declined from123.01 million in 1995 to 104.60 in 2004. Forlarge enterprises (‘at and above designatedsize’) the fall was quite sharp from 71.9 to 56.7million or by 20% over these years, andsomewhat less for other enterprises. Theaverage real wage in large enterprisesincreased 2.66 times over the 9 years, but therise was much slower elsewhere. Thus in 2004,the average monthly wage at large enterpriseswas 18,043 yuan, as against 9079 in other

establishments, and just 6343 in self-employedand household manufacturing units.

The sharp r ise in nominal wages andcomplaints about labour shortage by numerousemployers led many observers, inside andoutside China, to believe that the era of‘surplus labour’ is over. The Economist (4September 2008) wrote: ‘the real wages of low-skilled workers barely rose during the 1980sand 1990s, despite big productivity gains; onlyrecently have they increased rapidly’. Further,‘to attract migrant workers, urban employershave to pay more than rural income, which hasincreased in recent years, thanks togovernment policies and higher food prices.’ Itconcluded that labour surplus ‘may eventuallydry up, but it still seems some years away.’

The employment situation in India is as graveas, if not worse than, in China, though forsomewhat different reasons. There has been nomassive retrenchment of workers comparableto that in China’s state-owned and collectively-owned enterprises. However, the workforce inIndia’s ‘organised’ sector (coveringadministration, the public sector enterprises,registered factories, mines, plantations,construction companies and incorporatedprivate enterprises in the tertiary industries)has been remarkably static at between 26 and28 million since 1990; in manufacturing thetotal number actually fell from 6.5 to 5.6million during 1981-2004. (ES 2006-2007,tables 3.1–3.3.) In any case, the organisedsector is a small island comprising less than10% of the nation’s workforce.

According to the Censuses, ‘main workers’(‘gainfully occupied’ for more than one-half ofthe usual working year) as a percentage of thetotal population stood at 33.5 in 1981, rosemarginally to 34.1 in 1991, and fell sharply to30.5 in 2001. By contrast, the percentage of‘marginal’ workers in the population increasedfrom 3.2 to 3.4 and 8.7 over the same period.(EPWRF 2003) If one counts a marginal worker

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as one-half of a main worker, the adjustedparticipation rate seems to have fallenmarginally over the past two decades.

The quinquennial reports on employment andunemployment by the National Sample Survey(NSS) tell a broadly similar story. Theproportion of ‘principal and subsidiary’ workersin the population over the years 1973-2004fluctuated in a narrow band; it fell from a highof 42% in 1977-78 to a low 40% in 1999-2000,but recovered to 42% in 2004-05. It follows thatthere was no clear long-term trend.

The NSS provides some insights intounemployment that are rarely availableelsewhere. The employment status of eachperson in the survey is determined not justannually (as in the Census), but also on aweekly and a daily basis. Indeed, the number ofworkers (unemployed persons) decreases(increases) as the reference period isshortened. In 2004-05, for instance, theunemployment rate for rural men jumped from1.6% on the annual basis to 8.7% on the dailybasis. This is an indicator of underemploymentamong those who are employed on an annualbasis. Over the past three decades the dailyunemployment rates showed an irregularpattern within a narrow range. For 2004-05,NSS collected information on three aspects forthe first time. Though there are data for eachgender in both rural and urban areas, I focuson rural men, aged 15 years or more, who areemployed on an annual basis: (i) 11.0% ofthem did not work regularly throughout theyear; (ii) 10.7% of them sought or wereavailable for additional work; and (iii) 9.2% ofthem sought or were available for alternativework. One should not add up these percentagesand claim that nearly 31% of the ‘employed’were ‘underemployed’. The figures just citedmerely corroborate the general impression thatunderemployment is a very significant issue.

Far more important is the fact that India has avery low work participation rate compared to

many other countries. A very high proportion ofworking age women remain out of the labourforce in each NSS survey. Thus in 2004-05 theratio of women to men workers (annual basis)was only 44% in rural, and 24% in urban,areas. It is misleading to attribute the low ratefor women to ‘tradition’, ‘culture’, ‘attachmentto children in the family’ and so on. For, amongagricultural workers at one end, and urbanprofessionals and business families at theother, women are often economically as activeas their men. It is more likely that the lowparticipation rate for women is primarily due tothe absence of appropriate job opportunities,keeping in mind their domestic and othercompulsions. In that case, the number of‘potential’ workers, not actually employed, isseveral times greater than the number ofunemployed, as currently defined.

Unemployment in a more ‘inclusive’ sense is farmore widespread in India than in China wherethe overall work participation rate is muchhigher. Subjectively, however, the Indiansalways faced it and adjusted themselves. But inChina memories of full employment, though ata rather low level of remuneration, in pre-reform years are still vivid, leading to strongresentment about the current scene.

In India one observes the same phenomenon asin China of an increasing proportion of workersin low paid jobs. It is worth quoting Unni andRaveendran (2007) in this context:

Overall, while there hasb e e n a g r o w t h o femployment particularly inurban areas, the nature ofthis growth and the qualityof employment generatedneeds probing. There hasbeen a substantial growthin self-employment in therecent period, 1993-94 to2004-05. However, much oft h i s w o r k i s p o o r l y

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remunerated. The sharpgrowth of regular salariedw o r k a m o n g w o m e nparticularly in urban areasalso appears to be in poorquality work. In fact, forthe first time in decades,there has been a decline inthe real wage rates ofregular salaried workersand urban casual workers.The growth of employmentin the unconventionalplaces of work and ofhome-based work amongw o m e n i s o n e m o r ei n d i c a t o r o f t h einformalisation of work,which has implications forthe levels of incomes andsecurity of the workers.

Lastly, while spokesmen of IT and ITESindustry in India have highlighted itscontribution to employment, the employeestrength was just 1.28 million in 2005-06.(Chatterjee 2006.) That was less than 5% of thetotal for the ‘organised’ sector, or barely 0.3%of the national workforce.

Nature and Extent of Social Unrest

In China today social unrest, sparked by publicanger over issues ranging from land grabwithout proper compensation, arrogance ofauthorities towards ordinary citizens, andextortion by corrupt officials, to the yawningwealth-cum-income gap, has reached heightsnot witnessed since the Communist Party cameinto power. In January 2006, Xinhua put thetotal number of ‘public order disturbances’during the previous year at 87,000 withoutgiving further details. In 2004, there were74,000 ‘mass incidents’ compared with 58,000in 2003.8 In the last couple of years comparable

figures have not been published, but BBCMonitoring has been gleaning information fromChinese and Hong Kong newspapers and puts itout on its website, most recently in November,2008.

The Party, for its part, adopted in 2004 the twoslogans of ‘harmonious development’ and ‘anew socialist countryside’. However, thesituation has changed little since then.

Land acquisition for ‘development’ is anexplosive issue. A Xinhua reporter observedthat agrarian China today resembles in manyways the ‘old China’ depicted by JohnSteinbeck in his classic depression era novel,Grapes of Wrath. (i) Forty million farmers havelost their land over the past decade owing tourbanisation, and another 15 million await asimilar fate over the next five years. (ii) Thearea of land seized illegally for ‘development’jumped 20 per cent in the first five months of2006. Over the past seven years, the countrylost about 6.7 million ha of farmland, or 5% ofthe country's total. (iii) Farmlands confiscatedin Fujian Province were valued at 7,000 yuanper mu (1.0 mu = 0.067 hectare); if reclassifiedas development land, they could be worth up to500,000 yuan per mu,. (iv) Those sums oftenlined the pockets of local officials. According toWatts (2006A), the director of law enforcementin the Land Ministry , Zhang Xinbao,acknowledged ‘more than a million cases ofillegal land use in the past six years.’ In June,2006 National Auditor-General Li Jinhuaobserved that, for 21 out of 34 highwayprojects reviewed in 2005, officials had violatedgovernment regulations by not paying farmersproper compensation, and that localgovernments had siphoned off 1.6 billion yuanin land compensation funds to meet budgetshortfalls or pay bonuses to staff.9 In January2007 China announced the enforcement of aland appreciation tax of 30 to 60 per cent onnet gains made from all property developmenttransactions. The new rules, it was hoped,would slash the real estate developers' profits

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by half. 10 Reuters (10 September 2008)reported that Beijing has directed localgovernments to replace farmland designatedfor development with equal-sized plots offarmland elsewhere; the directive is to takeeffect in 2009 and is part of an effort tomaintain an arable land area of at least 121.0mha by 2010. But where will the land comefrom to fulfil this mandate?

Public opinion polls tell a similar tale. A Beijingsurvey of December 2002 reported that 80%considered income inequality was ‘a majorsocial problem’; in the list of ‘the most serioussocial problem this year’, income inequalitytopped (19.3%). To the question, ‘Whatconcerns you most?’, the first response wascorruption (18.2%), followed by excessiveincome inequality (16.1%), unemployment(14.7%), and so on. (UNDP 2006, p. 19.) The2001 survey of five cities by Giles et al. (2006)noted above, also revealed that among theunemployed, 51% felt that their condition hadworsened since 1996 ; the corresponding ratiofor those working was somewhat less at 21%.

Social unrest in India is characterised by amixture of armed revolutionary struggle inlarge parts of the country to usher in a newpolitical order, socio-political movements toremould the traditional balance of caste andclass forces within the parliamentary system,and resistance across party lines to the state’sneoliberal policies.

According to The Economist12,

Naxalism now affects some1 7 0 o f I n d i a ' s 6 0 2districts—a “red corridor”down a swathe of centralIndia from the border withNepal in the north toKarnataka in the south andcover ing more than aquarter of India's landm a s s . T h i s s t a t i s t i c

overstates Naxalite power,since in most places theyare an underground, hit-and-run force. But in theBastar forest they are well-entrenched, controlling alarge chunk of territory andstaging operations acrossstate borders into AndhraPradesh and Orissa. In thetiny, dirt-poor villagesscattered through theforest, the Indian state isalmost invisible.

The question of reservation of (up to 50% of thetotal) jobs in civil services and in large privateestablishments, and of seats in institutions ofhigher education funded by the state, for the‘other backward’ castes (OBC) and the dalits,the most oppressed sections of the population,has convulsed the nation over the past twodecades, especially in the last couple of years.

Simultaneously, citizens in different parts ofthe country have protested vehemently againstlarge-scale acquisition of fertile agriculturalland for the benefit of private investors,domestic and foreign. After independence,millions of acres of land were taken over fornew projects in various sectors, but the majorpart of it was for ‘public purposes’ like buildingdams, roads, factories and so on. ‘Fairness’requires that in all such cases, the losers mustbe ‘adequately compensated’ – with cash orassets that can help them maintain, if notimprove, their living standards. Actually, asFernandes (2007) pointed out, a whole series ofstudies found that 60 million persons weredisplaced, of whom a vast majority was notproperly rehabilitated over the period,1947-2000; among those displaced, 40% weretribals, and 20% each of dalits and OBC.

In the current phase of land acquisition, severalfactors have combined to rouse popular anger.(i) Owing to the job deficit and scarcity of

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cultivable land, farmers are most reluctant topart with land. (ii) As in China, compensation isgiven for ‘agricultural’ land, although itsmarket value soars the moment it is reclassifiedas ‘non-agricultural’. (iii) The state as theacquirer and the eventual private buyer of theland makes huge profit. (iv) In addition, theprivate buyers are showered with enormoussubsidies for the development of industries(with a lean workforce), commercial real estatefor the use of the affluent who in turn benefitfrom numerous hidden subsidies (see below). Inshort, the state seems to promote ‘primitiveaccumulation’ similar to the ‘land enclosure’Acts of 18th century England. Resistance incontemporary India has been so strong inOrissa, West Bengal and elsewhere that thegovernments at the Centre and the states findthemselves in a quandary, slowing down thereform process.

At the moment an uneasy truce prevails. The‘reformers’ have not abandoned their goals.The opponents are equally determined tothwart every new move in that direction, butare not strong enough to impose their agendaon the state.

How the Rich Are Getting Richer

India’s Budget, 2006-07, presented for the firsttime tentative estimates of ‘tax expenditure’, ortax revenue foregone as a result of various‘exemptions’ during 2004-05 as follows.

Tax Tax

expenditure* revenue*

( R sbill ion) (Rs bil l ion)

C o r p o r a t e i n c o m e t a x 576 819

P e r s o n a l i n c o m e t a x 119 477

Co-operative sector 15 n.a.

E x c i s e d u t y 305 788

C u s t o m s d u t y 926 405

L e s s e x p o r t - c r e d i t r e l a t e d -354 n.a.

T o t a l 1587 2258

As against GDP, the actual revenue was only7.3%, while exemptions amounted to 70% ofthe revenue. Further, owing to businesslobbies, lower tax rates are fixed for similaractivities or products that are hardly justified.Thus corporate profits on the construction of‘small’ houses (up to 1,000 sq. feet in area) areful ly exempt from tax, but most suchapartments can be easily turned into luxuryapartments just by demolishing the partitionwalls. Again, the excise duty on small cars wasonly 16% or 1/3rd less than on other cars,though not even 5% of the population can ownor maintain a small car. These and many otherloopholes are not counted as ‘exemptions’.

In 2002 the Central government announced formanufacturing firms undertaking newinvestments or substantial expansion in hillystates of the north like Uttarakhand, HimachalPradesh and so on, full relief from excise dutyfor 10 years, and from income tax for 5 years;income tax relief at 50% would continue for thenext 5 years. Through substantial expansion,

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the investors can enjoy similar benefits for anindefinite period. As many leading firms headedfor these states, other state governments beganto offer equivalent relief in respect of state-level taxes such as VAT, stamp duty, and so on,while giving away land at a low cost.

The budget for 2006-07 added another majortax relief for the rich. Earlier, short-termcapital gains from transactions in shares,mutual funds, etc. were added to currentincome, and attracted a maximum of 33% tax atthe top level; it was reduced to just 10%. Long-term capital gains were taxed at 10-20%; now,one pays just a ‘transaction’ tax of 0.15% onthe sale value. By examining the volume oftransactions on the stock exchanges fromMarch 2005 to January 2007, Bagchi (2007)estimated the loss of revenue on this score atRs 200 billion, or 10% of the actual revenue in2004-05.

Coming to China, personal income tax rates(payable by urban residents only) areprogressive, ranging from 5% on an annualincome of 6000 yuan (far below India’sthreshold of Rs 100,000) to 45% on income of1.2 million yuan (against India’s top rate of33% for an income of Rs 500,000). Forbusinesses, the rate varies from 5% on annual‘net income’ of less than 5000 yuan, to amaximum of 35% for income above 50,000yuan. () Income tax actually collected byCentral and local governments in 2004amounted to 174 billion yuan from individualsand 396 billion from businesses. (SYC 2005,table 8-12.). Together, these two taxesamounted to just 3% of the current GDP(against 11% for India in 2006). The averageannual disposable income per head of theurban population of 550 million was 9422 yuanin 2004, yielding an aggregate income of 5182billion yuan.13 Thus personal income taxcollected constituted a mere 3.5% of post-taxincome or a little less as against pre-taxincome. The collection is undoubtedly low.

Following Capegimini reports, in 2004 Chinahad 240,000 dollar-millionaires having a totalwealth of $750 billion. With a modest 10%return, their annual income would be $75billion or over 600 billion yuan. If their averagetax rate is put at 30%, the potential revenuewould be 180 billion yuan, exceeding total taxcollected. China’s authoritative China Taxationpublished the names of the top 100 taxpayersof 2004. The list included only 12 of the 200richest Chinese appearing in the Forbes list of2004. 14 In 2006 it became obligatory forpersons with high income to file tax return byApril 1, every year. According to the StateAdministration of Taxation, just 1.37 millionpersons had filed returns by April 2, 2007, oronly 16-19% of the 6 to 7 million high-incomeearners. 15

On corporate tax breaks, I have no reliableinformation. Examining the savings-investmentbalance from a macroeconomic perspective,Kuijs (2006) provides some insight:

Enterprise saving fromr e t a i n e d e a r n i n g sconstitutes a large andincreasing source of savingin China. In recent years,as enterpr i se sav ingincreased to around 20percent of GDP, it hasovertaken household savingas the largest source offinancing…. The saving-investment def ic i t o fenterprises is estimated tobe around 11-13 percent ofGDP in recent years. Of thedeficit in 2002, 4.5 percentof GDP was financed bycapital transfers from thegovernment [to the SOEs].The remaining 6-8 percentof GDP is f inanced byoutside financing, mainly

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bank loans and foreigni n v e s t m e n t … [ F ] o rhistorical reasons SOEs payonly limited dividends toshareholders, and none atall to the state, their largestshareholder, although theincrease in profitability inrecent years has stimulateda policy discussion on thed i s t r i b u t i o n o f S O Eprofits… Profits in industry,as a share of value added,inc reased f rom 10 .6percent in 1995 to 17.3percent in 2000 and 21.6percent in 2005.

In addition, it is widely known that the SOEsobtain very big loans from the banks at lowinterest. As for the private sector, they not onlyenjoy high profit rates but also pay, it isgenerally believed, too little in taxes.

Unlike in other countries, local taxes constitutea great burden on the Chinese peasantry,though it has not been quantified at thenational level. It was intensified after the 1994fiscal reforms that made local governmentsresponsible for their own expenditure without agrant from the centre; simultaneously, theauthority of local governments to grant rebateson central taxes was drastically reduced. ThusMobo Gao (2005) notes that up to 100 differentkinds of taxes were imposed on the peasantsfor development work, salaries of schoolteachers, interest on debts incurred by localgovernments, and even the extravagantlifestyle of the local leadership. Indeed, onemajor factor behind rural unrest was the heavytoll of legal and illegal taxes. Many of the legalones were abolished by Beijing from 2004, butit remains an open question whether theburden has decreased significantly. Besides,peasant land was literally expropriated (seesection V) on a large scale. This supports the

contention of Mobo Gao and many others thatthe boom in the country is financed to aconsiderable extent by various exactions fromthe peasantry.

The Logic Behind Fiscal Concessions

In the early years of reform China had somesolid reasons to privilege FDI in manufacturing,especially in exports. As noted in section I,without higher export the country could notimport Western technology and capital goods toreduce fuel and other resources used per unitof industrial output. In a quasi-market economy(even the US and the EU fal l into thiscategory), special incentives are needed to coaxfirms to invest in certain sectors. Consideringthe imperatives of modernisation, a largenumber of industries, including those cateringto domestic demand, received incentives.

The scenario in China today is vastly different.Not only has GDP growth been superlative,China has modernised many of her industriesas noted earlier, though a fairly large chunkremains backward. Now, Allaire (2006) hasestimated that energy-intensity has come downsharply per unit of industrial production froman index of 100 in 1980 to 45 in 1990 and 20 in1998. The fall was due partly to greaterefficiency and partly to a change in industrialstructure from heavy to light industries. Chinacontinues to make progress (Xinhua, 15 July2008), but even now in many factories energyuse is significantly higher than in richcountries. (c) With domestic savings well above40% of GDP and in excess of the investmentrate, and a huge and barely productive foreignexchange reserve of over $1,800 billion, orabout 40% of GDP, there is no dearth of capital.Since up to 50% of FDI in recent years isactually ‘round-tripping’ by Chinese firms toavail of the tax benefits for foreign firms,capital has not really been scarce for quitesome time. (d) Most disturbing is the sharp fallin the percentage of private consumption in

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GDP from 47 in the early 1990s to just 36 in2006. In parallel, the share of wage income inGDP fell over the past decade from 53% in1998 to 41% in 2005. These percentages areprobably the lowest in the world. It is ironicthat the neoliberal weekly, The Economist (11October 2007) captioned a piece, ‘A Workers'Manifesto for China: How workers in China arelosing out and why it matters for the rest of theworld’. The resultant inequality in income andwealth (see section II) is not what worried theweekly. The sustainability of China’s growthmomentum is implicitly questioned. Moreover,a slow down in China could have seriousrepercussions, not only in East Asia but also inthe global economy.

Actually, over the past decade the Chinesegovernment, the IMF, the World Bank andindependent scholars have underlined the needto expand domestic consumption as the engineof GDP growth. But state policies worked in theopposite direction, as Kuijis (2006) pointed out.Household savings rate, which was around 5%of income around 1978 before the reform, roseto 30% in the mid-1990s for a variety ofreasons, including the withdrawal of the statefrom social services like education and health.The proportion fell to 20% in 2000 and stayedthere. The high saving rate is basically‘precautionary’, and not an indicator ofaffluence. The savings are put into bankdeposits with a low (negative, adjusted forinflation) rate of return, while the SOEs andprivileged private firms borrow from banks at alow, often negative, rate of interest. In addition,the SOEs benefit from a massive capitaltransfer to the extent of 4-5% of the GDP fromthe state. As a result, production becomeshighly capital-intensive across the sectors frommanufacturing to infrastructure, andemployment stagnates

India has evolved somewhat differently. Thenew industries since 1950 were set up withSoviet as well as Western technology. TwoWorld Bank (1975; and 1984) studies had

shown that the capital goods industries wereinternationally competitive; as the conclusionran counter to the theology of the Bank and itsconsultants, both reports were suppressed. Theabrupt liberalisation of imports and foreigninvestments in 1991 did cause hiccups initially,but most domestic firms, public and private,weathered competition from the TNCs, andquite a few emerged as world-class companies.

As in all countries, Indian exporters ofmanufactured goods have always beenexempted from paying indirect taxes on goodsprocured domestically or tariffs on importedinputs. A new incentive was added in themid-1980s when profits earned from exportsbecame tax-free to encourage domesticinvestment and exports in non-traditionalareas. However, even today the latterconstitute a quarter of total export, though theabsolute value of ‘engineering goods’ rose from$1.2 billion to $21.5 billion during 1987-88 to2005-06. Currently, 40% of these exports comefrom labour-intensive small and mediumenterprises that do not have access to foreigncustomers. Hence this incentive enriches theintermediaries in the export business thathardly invest in fixed assets. The overallincentives are so high that many Indian firmsoverstate export earnings!

India’s success in information technology andrelated services is now an acknowledged fact.Whether for call centres or more complexsoftware engineering, low cost (in comparisonwith the West) of skilled labour is the drivingforce, and the industry exports 75% of itsoutput. Some of the leading Fortune 500companies like TCS, Infosys, and Wipro pay acorporate tax of no more than 12% on their netincome.

Too many exemptions for the corporate sectorhave greatly reduced the effective income taxrate. For the corporate sector as a whole, itwas estimated by the official Task Force onDirect Taxes (2003) at around 20%, while the

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statutory rate stood at 40%.

In industrial policy, the scheme of reservationof product lines for small industries has beenwhittled down after 1991. At the same time,there was a reduction in bank credit to smallfirms, withdrawal of preference in governmentpurchases, and so on. All this led to the‘unorganised’ (or non- corporate) sector losingits percentage share in the GDP from 63.8 in1990-91, to 56.7 in 2002-03, while its share inthe national workforce remained steady ataround 92.0-93.0. (NCEUS 2007, table 1.1.) Inmanufacturing output, the unorganised lost itsshare from 41% in the 1970s to an average of32% during 1999-2005.

Balasubramanyan and Sapsford (2007) havemade a telling comparison between India andChina. Measuring output in US dollars at thepurchasing power parity of the nationalcurrencies in 2002-03, and utilising UNIDO’sIndustrial Statistics Database 2006, they foundthat per million labour units, aggregatemanufacturing output was 0.919 in China and0.589 in India; the corresponding averageswere 0.762 & 0.453 for hi-tech products, and1.261 & 1.011 for low-tech products. Similarly,China utilised $39,406 worth of assets per unitof labour in ‘all manufacturing’ as against$72,051 for India; the gap was particularlylarge for hi-tech industries—$68,542 in Chinaand $290,272 in India. In my view, thecomparison in respect of hi-tech industries maybe misleading, as China assembles these goodsfrom imported components to a far greaterextent than India. However, the two authors’argument that a labour surplus country likeIndia has adopted more capital-intensivetechnologies than China remains valid. Thefiscal incentives in India presumablycontributed to this anomaly.

Most of the post-1980 tax cuts and tax sops forindividuals and corporations across the world,including India and China, follow from twointer-related neoliberal premises. First, the

lower the tax rate, it is argued, the greater isthe incentive for tax compliance, and hence thetax yield goes up. It is doubtful if thisproposition has been empirically proved for anymajor country. Indeed, in all countriesdesignated as ‘miracle’ economies after 1945,namely West Germany, Japan, South Korea andTaiwan the marginal tax rates for the topearners until the end of the 1970s were 80% ormore.

The second premise is that a firm’s investmentdepends on its post-tax income. This has neverbeen true. In the years of high-speed growth,the typical profit rate of firms in the samemiracle economies was quite low, but that didnot impede a high rate of investment througheasily available loans at a low interest.Currently, in mergers and acquisition acrossthe world, the acquirers rely heavily onborrowed funds rather than their ownaccumulated funds. Thus a large stock ofundistributed profits is neither necessary norsufficient for corporate investment.

Alternative of Development with Equity

In defence of the current economic policies inChina or India, one may argue that inequalitiesmay have risen but this is essentially transientin nature. If GDP growth is maintained, themarket forces will automatically redress theimbalances, as the ‘trickledown theory’,consistently promoted by the Washingtonconsensus.

There is an apparent support for it in the worksof Kuznets. He showed for the US thatinequality increased from around 1880 till the1920s, and a ‘levelling’ process started duringthe World War II, gaining momentum after1945. Broadly similar was the story in Britainor France. What is missing in the conventionalnarrat ive is the pol i t ical factor. Theintroduction of welfare capitalism in WesternEurope was, to a great extent, a response to

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the ideological threat from the Soviet Unionthat won the hearts and minds of the workingclasses and large sections of intellectuals afterWorld War II; in Italy and France, CommunistParties came close to winning postwarparliamentary elections. Even before the war, aparallel development was taking place in theUS under the impetus of Roosevelt’s New Deal;m a n y o f t h e l e a d i n g M a r s h a l l A i dadministrators and economists from the USA,as agents of the donor state, took an active partin the creation of the welfare state in Europe.The US, too, took several strides in the samedirection. (Chandra 2004.)

If the welfare state was the logical outcome ofcap i ta l i sm a t an advanced s tage o fdevelopment, how does one explain the retreatfrom welfare policies and the sharp increase ininequality since 1980 in all industrialcountries? The proponents of trickledowntheory have no answer. My own hypothesis isagain political. The ‘oil shock’ of 1973 seemedto threaten the average living standards in richcountries; the militancy of the trade unionsalienated the middle classes in these countries;and economic stagnation in the USSRcombined with widespread pol i t ica ldisenchantment with Soviet socialism, createdfertile ground for the emergence of the radicalright in the Anglo-Saxon countries.

In the end, it is not the market but thealignment of political forces and their relativestrength that determine the degree ofinequality in a country. Suppose thategalitarians take the reins of power in India orChina. If tax concessions are withdrawn, therights of labour, including migrants, anddispossessed farmers are respected, and so on,would the aggregate investment rate and theGDP necessarily fall? So long as the freedom tomove cap i ta l abroad remains (as incontemporary China or India), the privatecorporate sector and rich individuals wouldincreasingly seek opportunities abroad. Ifcontrols are imposed on capital mobility at the

same time, the capital outflow can be stemmed.The increase in tax revenue should raise publicinvestments and social welfare expenditure.The latter, in turn, should reduce privateexpenditure on health and education thatconstitutes a significant part of total householdexpenditure of the non-affluent sections. Thistransfer of income from private producers ofthese services to the poorer consumers shouldboost the aggregate consumer demand forgoods and services with a Keynesian multipliereffect. Since the domestic savings rate is high,capital would be compelled to find avenues ofdeployment domestically even at a reduced rateof profit . The nature and structure ofinvestment would, of course, change. But thereis no reason to believe that GDP wouldnecessarily fall.

The level of GDP, it is increasingly felt indifferent circles, is a poor guide to the ‘well-being’ of a country. Recent studies bybehavioural economists have demonstratedthat an individual’s well-being depends not onlyon the person’s income but also on those of theneighbours. (Luttmer 2004.) A person with afixed income has a higher level of enjoymentliving amidst people at a similar or lowerincome level, than as a neighbour of muchricher people. Thus the case against a highconcentration of income is not a socialistdogma, but reflects the aspiration of people indi f ferent mi l ieu. Indeed, the humandevelopment index in the annual HumanDevelopment Reports of the UNDP has gainedwide currency because the index gives weightto other factors like the Gini coefficient ofincome distribution, the health status andeducational attainment of the average citizen,beside per capita GDP.

Somewhat ambitious is the ‘genuine’ progressindicator (GPI) of Talbert et al. (2007) for theUS economy from 1950 to 2004. While percapita GDP over the period increaseddramatically from $11,672 to $36,595, percapita GPI has stagnated in the $14,000-

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$15,000 range since the late 1970s. ‘Thisimplies that since the late 1970s, the benefitsof economic growth have been entirely offsetby r i s ing inequa l i ty , deter iorat ingenvironmental conditions, and a decline in thequality of our lives.’ For 2004, the positivecontribution to GPI comes from personalconsumption (adjusted downward for greaterinequality since the best year of 1968), servicesof consumer durables, services of streets andhighways, net capital investment, and also the‘imputed values’ of housework, highereducation, and voluntary work, totaling$11,603 bn. From the total are deductedvarious social and private costs like those ofcrime, unemployment, commuting, autoaccidents, and pollution of different types; lossof wetlands and farmlands; net foreignborrowing; and so on. Deductions amounted to$6,45 billion Thus GPI came to $4,419 bn asagainst the GDP of $11,734 bn. Most notably,$600 billion spent on wars are not countedeither as a positive or a negative contributionto GPI.

One may not agree with the fine details of theGPI. Still, if some corrections are made alongthese broad lines in the GDP time series forChina or India, much of the shine is likely toevaporate, strengthening the case fordevelopment with equity.

Postscript: Response to the Global Crisis

When the US financial crisis erupted inmid-2008 and quickly spread to Europe, manybelieved that India and China were de-coupledfrom the global economy and would thusescape with minor bruises on the trade front.The two governments ma inta ined atriumphalist posture, claiming that theireconomic ‘fundamentals’ were strong, and thatthe financial system was sound; hence GDPgrowth would at most be tweaked.

By November 2008, China began to feel the

tremor and announced a large package of taxcuts and additional expenditure amounting to$586 billion over the next 2 or 3 years, or about5% of GDP each year. Shortly thereafter itcame to light that some 20 million migrantworkers had returned to their villages asnumerous factories closed down owing to asharp fall in exports that accounted for about30% of the GDP. Other main economicindicators like imports, industrial output, saleof real estate and urban employment, becameincreasingly worrisome. Equally disturbing wasthe plight of China’s main trading partners(Japan, Taiwan and South Korea as well as theUS).

As noted above, China in recent years has beentrying, though with little success so far, to relymore on domestic demand than on export asthe engine of growth. This goal has beenreaffirmed in recent discourse. ‘Objectively’,with a huge foreign exchange reserve, a bigtrade surplus and a low ratio of governmentdebt to GDP, China can afford, for instance, toboost the wages of lowly paid workers, andguarantee a minimum income for all citizens;further, by stepping up sharply fiscal outlays onhealth and education, the state can raisesignificantly the disposable income of themasses and hence their purchase of othergoods and services. The government under HuJintao had in fact earlier taken some steps inthis direction, and more are promised underthe stimulus package. The biggest one is theoutlay on health services by an additional $123billion over 3 years, or by 1.2% of the annualGDP. A minor item is the one-time dole of $1.3billion to 74 million poor people in urban andrural areas. The coverage of anti-povertyprogrammes has been extended to 43.2 millionrural residents at an outlay of 16.7 billion yuan.However, all these amount to a small part ofthe stimulus package. The bulk of freshexpenditure is to be channeled into investment,already running at nearly 50% of GDP. Theother main item, apart from export tax rebates,is a cut in many indirect taxes to enhance

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domestic demand for industrial goods. Thus thesubsidy of 13% on household appliances boughtby rural households or the scheme for 150,000rural stores would no doubt benefit affluentrural consumers. However, these constituteonly a small part of the stimulus package.

Beijing has taken other bold measures. Itdoubled the fiscal expenditure over theprevious month to $243 billion in December2008, a rare feat for any government. Fiscaldeficit for 2009 is projected at 3% of GDP – thehighest level in six decades. No less dramaticwas the rise in commercial bank lending to 4.6trillion yuan during Q1 2009 (as against 1.3trillion yuan in Q1 2008), or 90% of the annualtarget for the current year. Clearly, China hasthe administrative capability to augmentgovernment outlays and bank credit over ashort period. The lion’s share of incrementalexpenditure has gone into infrastructure andother investments that boost GDP in theprocess creating jobs. The fiscal concessions,however, for the most part benefit the SOEsand private firms. Hence elements of thestimulus package seem unlikely to raise theshare of household consumption (currently atan unusually low 39%) in GDP.

Global crisis first hit the Indian stock market asforeign investors had till then been the majorplayers. The Sensex (index of equity prices)nosedived 25% during the month of October2008, and stood at less than one-half of its peakin January 2008; the value of transactions inequities in two major Stock Exchanges fell instep. The financial sector is in deep turmoil.

Most big firms in manufacturing and serviceshad of late become highly dependent on thecapital market, domestic and foreign.According to ProjectToday, an online database,from March to September 2008 investmentprojects totalling Rs 5790 billion (nearly 10% ofthe GDP) were announced, but the figure fell bymore than one-half to Rs 2840 billion duringthe next six months, owing to a cut in private

investment. (The Hindu Business Line, 12 April2009.) Examining the CMIE data base, EPWRF(‘Stimulus Packages Facing InstitutionalConstraints’, EPW, 24 January 2009) observedthat the amount of investment shelved orabandoned exceeded the level of investmentimplemented.

High-speed growth in recent years has beenfuelled by private corporate investment inmanufacturing, services, infrastructure andreal estate. Among other major drivers ofgrowth have been the ‘modern’ financial andservice sectors, and export of goods andservices – especially the ITeS (informationtechnology and related services); these sectorscreated many new jobs with high levels ofremuneration. Severe retrenchment in theseareas led to a ripple effect on professionalmanpower across the sectors. Thus the realestate sector, for instance, lacks customers forboth residential and commercial projects.Demand for many consumer goods hasstagnated or fallen. Most damaging is thesituation for exports; monthly figures(compared to the previous year) show sharpfalls reaching 25% in March 2009. An officialsurvey indicated a loss of one million jobs inexport-oriented industries.

India’s stimulus package has generally beenfound to be inadequate. It consists of handoutsto affected exporters, cuts in indirect taxes,sops for home loan borrowers, etc. amountingto barely 0.5% of the GDP; the borrowing limitfor capital expenditure by state governmentshave also been raised by another 0.6% of GDP.The Reserve Bank has injected huge amount ofliquidity into the financial sector, and reducedthe bank rate as well. But banks are reluctantto lend. Out of new deposits collected in the sixmonths to mid-March 2009, banks have lentonly one-third, keeping the rest in safegovernment paper. (H. Damodaran, ‘Bankspark only a third of fresh monies in commercialcredit’, The Hindu Business Line, 30 March2009.) Official targets on loans to farmers,

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small industries and the weaker sections weremissed by a big margin as such credits mightlower banks profits.

At one level the contrast between the policyresponses of India and China is striking. Thefiscal stimulus package of India as a proportionof GDP is quite small compared with that ofChina. As for bank credit, India (like mostindustrial countries) lacks the institutions toensure that higher liquidity is transformed intoproductive outlays in the economy.

At a more fundamental level, the stimuluspackages of the two countries are consistentwith important elements of the currentneoliberal policy frame. Incentives are aimed atexporters, manufacturers, service providers,and their domestic clients. China hasmarginally stepped up social welfare and healthoutlays and sought to create jobs. The IndianPrime Minister has cautioned against anysignificant rise in fiscal outlays on socialsectors in view of the burgeoning fiscal deficit.Thus even if the two countries succeed inmaintaining comparatively high rates of GDPgrowth in an era of global recession, the goal ofinclusive growth (India) or harmoniousdevelopment (China) is likely to remain achimera, exacerbating social tensions.

I am grateful to Sushil Khanna for many usefuldiscussions and to Rajani Desai for commentson an earlier draft.

Nirmal Kumar Chandra (nirmal@iimcal.ac.in)retired as a teacher in economics from theIndian Institute of Management, Calcutta.

This is a revised and updated version of anarticle that appeared in Economic and PoliticalWeekly, Vol. XLIV, No.4, 24 January 2009.

Recommended Citation: Nirmal Kumar

Chandra, “China and India: Convergence inEconomic Growth and Social Tensions?” TheAsia-Pacific Journal, Vol. 16-3-09, April 19,2009.

Notes

1. P. Midler (2008), ‘The 2,900 Club: 90%of China’s billionaires are children ofs e n i o r c a d r e s(http://thechinagame.com/2008/02/27/the-2900-club-90-of-china%e2%80%99s-bi l l ionaires-are-chi ldren-of-senior-cadres/)’, 27 February. ()

2. ‘The Response of the Government of Keralato the Approach Paper to the Eleventh Plan ofthe Planning Commission, 2006’, obtainedprivately. The World Bank has found an extra400 million people below the poverty line indeveloping countries in its new estimates.(Chen and Ravall ion 2008) The AsianDevelopment Bank (2008) has also published anew study on poverty in Asia, excluding China.Some of the methodological issues arediscussed in three papers by M. Ravallion,Himanshu and S.G. Reddy respectively, allpublished in the Economic & Political Weekly,25 October.

3. ‘India's economy: India on fire’, 1 February2007.

4. ‘Minister says 90 million under poverty linein China’, Xinhua, 27 May 2005.

5. ‘Chinese expert calls for better pay,conditions for migrant workers’, Renmin Ribao(People's Daily) website, 31 October 2005.

6. ‘NDRC issues jobs warning for 2006’, ChinaEconomic Review , 20 February 2006.(post@chinaeconomicreview.com),

7.’Chinese official says economic growth does

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not solve unemployment’, Xinhua, 29 August2006.

8. Reuters, ‘China reports rise in public orderd i s t u r b a n c e s ’ , 1 9 J a n u a r y 2 0 0 6 .(http://www.alertnet.org/thenews/newsdesk/PEK137255.htm)

9. ‘Chinese agency comments on rural landrights issue’, Xinhua, 1 September 2006.

10. ‘Chinese people seek "affordable housing"in wake of land tax enforcement’, Xinhua, 18January 2007.

11. ‘House prices rise in 70 cities’, ChinaE c o n o m i c R e v i e w , 2 4 J u l y 2 0 0 7 .(post@chinaeconomicreview.com)

12. ‘Maoist rebels are fighting a brutal low-level war with the Indian state’, 17 August2006.

13. ‘Report on China's economic and socialdevelopment’, Xinhua, 15 March 2006.

14. ‘Are r ich Chinese tax evaders? ' ,( w w w . c h i n a n e w s . c n(http://www.chinanews.cn/index.shtml)), 12September 2005.

1 5 . S o u t h C h i n a M o r n i n g P o s t(http://china.scmp.com/chimain/ZZZQMQWTYZE.html), 20 April 2007.

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