The Indian economy has grown fast and poverty has reduced considerably since the “opening up” of the economy and the International Monetary Fund’s bailout in 1991.
Could India have done better? More importantly, should it do better? These were questions Manmohan Singh posed to me when I joined the Planning Commission in 2009.
I was surprised by his invitation to become a member of the Planning Commission and asked him if he might have made a mistake. I pointed out that I was not an economist, nor an academic and I had no experience of working in government – qualifications which seemed necessary for a country’s apex policy-making body.
On the contrary that was why he wanted me, he said. The country already had eminent economists in the Planning Commission and other advisory roles. Moreover, he himself was considered a good economist, he admitted shyly. Yet, the country’s economic policies were failing to create enough employment though its gross domestic product was increasing fast.
My perch in India’s governance cockpit gave me a perspective of India’s complex socio-economic system. I had been a consultant to organisations in many countries on how they could accelerate their learning to reach their aspirational goals.
The special task the prime minister assigned to me required learning how other countries governed their economies. With the World Bank’s support, I was able to consult with the best economists in industrial policy. They also provided me with insights into the economic development processes of other countries, including the United States, China, Japan and other developing countries. Experts in these countries explained the histories of their progress and the evolution of their planning processes.
“Development” and “progress” are processes of learning. Countries, organisations in them, and teams and individuals within those organisations must learn to do what they could not do before.
In a competitive world, those individuals, organisations, and countries who learn fast can catch up with others ahead of them, and if they keep up their pace of learning and progress, even overtake them. I asked the World Bank’s experts who assisted me to compare pairs of countries who were in similar positions in 1991 and whose paths of progress had diverged since then.
An obvious pair was India and China – both their economies were comparable in size and per capita incomes in the 1980s. By 2009, per capita income and GDP was five times higher in China, its manufacturing sector eight times, and its high-tech sector 50 times larger than India’s.
American capitalism, Chinese socialism
The 20th century was a historical test of competing economic ideologies – socialism and capitalism; and competing forms of governance – liberal democracy and authoritarianism.
When the Soviet Union collapsed in 1991, victory was declared for the Washington Consensus of free market capitalism and liberal democracy. Washington’s ideology was forced onto socialist Russia with a “big bang”, with disastrous consequences for its economy and society.
China did not yield. It stayed its socialist course with single-party governance. India’s reformers adopted the Washington formula in 1991. They abandoned industrial policies for growing domestic industries, which China continued with, and opened the market for foreign companies without requirements to transfer technology.
The growth of China’s economy is a miracle, economists say. The US has been alarmed by China’s remarkable economic growth and industrial strength, despite China not following Washington’s economic formula. The Washington Consensus is cracking within Washington: ideological divisions have appeared within the US where inequalities have increased and working people have become restive.
The US is threatened by China’s rise. China straddles India’s northern borders where their armies continue to skirmish. The US is pressing India to come closer to it. India is wary. It must become self-reliant and stronger much faster than it has so far. Reforms must increase incomes faster for India’s masses and build stronger domestic industries.
India is at a crossroads. Both, political Left and Right agree the economy needs substantial reform but disagree on what direction it should take. The progressive Left wants more socialism and more liberal democracy; the conservative Right, more free-market capitalism and is willing to tolerate curbs on liberty. The Middle is muddled. India’s leaders should study China for lessons before pushing harder with economic policies based on the West’s failing free market model.
Three recent books offer insights into how socialism and capitalism have been combined to achieve China’s inclusive fast growth.
China’s leaders are good learners, says German political economist Isabella M Weber, in How China Escaped Shock Therapy: The Market Reform Debate. Like Mohandas Gandhi, they kept their minds open, allowing ideas to come in from all directions without being blown off their feet. They listened to Western economists but applied only what suited China.
She says, “The famous Harvard development economist Dani Rodrik represents the economics profession more broadly when he answers his own question of whether ‘anyone [can] name the (Western) economists or the piece of research that played an instrumental role in China’s reforms’ by claiming that “economic research, at least as conventionally understood” did not play “a significant role”.
Chinese economist Keyu Jin, a professor at the London School of Economics, who grew up in China and experienced the Chinese system from inside, explains how the socio-economic-political system works in The New China Playbook: Beyond Socialism and Capitalism.
She outlines why Western economic models, which strip out cultural and social forces from economics, cannot comprehend how China works – or even how Western economies work. She makes visible the “invisible hand” that free market economists cannot explain. She explains why the Chinese government keeps financial markets and the private sector reined in to ensure the market produces welfare for all, especially the poorer and least powerful citizens.
“The number of financial crises in China is exactly zero. It is also an oddity (from a Western perspective) that despite the nation’s prenatural economic growth, its stock market has been one of the worst performing in the world,” she says.
The Chinese government has added citizen satisfaction and environmental sustainability to GDP to measure its own performance, and as measures of performance of all local governments. Though private firms grew nine-fold in China from 2000 to 2019 (their number now exceeds the US by far), “A more striking fact”, says Jin, “is that private owners with state connections owned about a third of the capital registered by these companies showing how pervasive equity linkages between state and private businesses has become in China’s corporate sector”.
While the government has reduced the numbers of state-owned enterprises and pushed the remainder to add profits to their social objectives, it also demands that private firms comply with societal needs. Large, private, property and technology firms that have strayed from the socialist path have been cut down.
Power to the people
Three distinctive features of China’s governance are:
1. The purpose of the state, throughout China’s long history from Imperial times to the Communist era, has been the provision of welfare to citizens. The best Emperor is the one who provides the most welfare to all citizens, not the one who wins the most wars. The leadership of the Communist Party has continued this role, says Chinese political scientist Zheng Yongnian, in The Chinese Communist Party as Organizational Emperor: Culture, Reproduction, and Transformation. Jin explains (in The New China Playbook) how commitment to this role has shaped the Communist Party’s socio-economic policies, resulting in widespread support for the Communist Party, even from young people born in the 21st century.
2. The governance of China is highly decentralised. Local communities are given freedom to create solutions suited to their needs; the performance of local party officials is measured by the satisfaction of their communities with progress. The Party-government structure is meritocratic, continuing a centuries long Confucian tradition. All who rise to the top of the Communist Party and government must first prove their mettle by managing a large city or state successfully. There are no “professional politicians” in China, unlike other multi-party democracies where citizens are becoming increasingly disenchanted with their political systems and even with liberal democracy.
3. China’s leaders and its economists are “systems thinkers”. They see the economy as only a component of a complex social system. For them the purpose of economic growth is the production of societal well-being, especially for less powerful people. Whenever the economy begins to fail this purpose, reforms are made to bring it back to its socialist moorings.
India is a remarkable country.
It took an unusual path at its birth in 1947. It chose to follow a democratic path for its development. There were concerns inside and outside India whether so diverse a country, formed of peoples with many religions, many languages and many ethnicities, would be able to hold itself together.
Independent India was a very poor country at its birth. The Indian economy, which was the richest in the world in the 18th century, had been exploited by its imperial coloniser to provide resources for its own economic growth and to fight its wars. India had become one of the poorest countries in the world when the British finally left India to Indians to govern themselves.
Some economists believe that development must precede democracy. Poor countries must be managed autocratically initially to build their economic infrastructure, they imply. They also think that when income levels have increased to a higher level (though economists are no longer sure what that level is) democracy will emerge automatically.
History tells another story.
China was equally poor as India 70 years ago. Now, China’s economy is five times larger. This may prove the theory that dictatorship should precede development. But it does not support the thesis that democracy, in the Western version, will follow development. On the contrary, there is increasing concern that rich Western countries are becoming undemocratic.
India’s own path to its destiny
When I joined the Planning Commission, my brief was to suggest ways to accelerate the growth of industry and employment. China’s planners had done much better than India’s. Starting at similar levels 50 years ago, China’s GDP and per capita incomes are now five times higher. I was invited by a Western economic journal to debate a Chinese economist. The subject was, “Should dictatorship precede democracy for economic development?”
The host of the debate contrasted China’s and India’s economic progress. His first question was to me. Did I think India had made a mistake in setting out to be a multi-party democracy when it became independent, and should it have followed the Chinese one-party, authoritarian model instead?
Before I could reply, my Chinese counterpart intervened and told our host he was asking the wrong question. China and India’s journeys could never be the same and should not be compared, he said.
He explained Chinese statesman Deng Xiaoping’s metaphor of economic development as a process of crossing a turbulent stream by feeling the stones underfoot. There is no map to follow. A path must be found step by step. Each step should enable one to take the next. Sometimes one will wobble and may have to pause. Development, he said, is a process of experimenting and learning in action.
He contrasted India’s and China’s journeys. Both India and China had entered the same turbulent stream, on the same side, and at the same time. Both wanted to reach the same place on the other side of the stream, to become nations in which the welfare of all citizens is improved, and to become self-confident nations. They had entered the stream from different places on the bank, therefore they would have to find their own paths by feeling the stones their feet will encounter as they step forward.
China and India had acquired their freedoms to chart their own courses in different ways, he explained. China’s independence came with a violent revolution with the power of the gun. He even quoted Mao Zedong – “power springs from the barrel of a gun”. India’s independence was obtained by a non-violent revolution, and with aspirations to progress democratically. If India wants to follow China’s path, it will have to turn back mid-stream to return to shore and start again from the place China started. He would not recommend such a dangerous manoeuvre mid-stream. India and China must evolve in their own ways.
India’s leaders are at a crossroads. India must not slavishly follow Western models any longer. Nor can India be China. The time has come for India to find its own way, a more Mahatma Gandhian way than Western or Chinese way, to create a more equitable society.
This article is based on Arun Maira’s book, Reimagining India’s Economy: The Road to a More Equitable Society, published by Speaking Tiger Books (2025).
Arun Maira is a former Management Consultant and member of the Planning Commission of India. He has written several books including Transforming Systems: Why the World Needs a New Ethical Toolkit and Transforming Capitalism: Improving the World for Everyone.
