Indian Defence Review

Now since 1992 both of us have pursued more and more towards the market. The Chinese have been much more open. They have taken vast amounts of direct foreign investment and they have worked out a unique foreign trade system by which they have gained enormously. East Asian countries i.e. Japan, Taiwan, Singapore, Malaysia, Indonesia, Hong Kong and South Korea were called tigers by the World Bank. They realised that their wages had risen substantially. They could not export to the USA as they had been doing before. These countries certainly realised that their wage rates had risen substantially. They were not able to penetrate the American market on sheer exports. They came up with this idea that they would export to China semi-processed goods and allow China to add value to it and then export it to the United States. So the Chinese imported it from all East Asian countries like Taiwan with which they had political problems. They imported goods in semi process. For example Lenovo computer, it has got the label of China but actually the material is from Taiwan. They put it together. I know that it is not a Taiwan’s company, even i-phones. Most of the things made in China are actually and substantially made somewhere else. They add value to it and sell it to Europe and the United States. If you see i-phone parts assembled in China but made in USA stamp on them, you will notice that material is to get from Taiwan. IBM was renamed as Lenovo. So, most of the goods that you see “Made in China” are actually/substantially assembled somewhere else and then come very cheaply and they sell it in Europe and the United States at a much higher price. So if you look at the figures of China, you will find that there is a deficit of trade.

Most of the things that you see in the USA or India which say “Made in China” are actually/substantially made somewhere else. They come quite cheaply. They add value to it and sell it to Europe or the United States at a much higher price. If you look at the trade figures of China you will find that it has a deficit of trade in the balance of payments with East Asia and a surplus in the balance of payments with the West, which is much larger than the deficit with East Asia and, therefore, the China’s reserves began to rise. When the economic crisis took place and the imports from China dropped in the western countries, what China did was it cut imports from East Asia. It transferred the depression of America or the recession of America and Europe to East Asia. That is how East Asia got affected. We got affected because of its participatory notes or scandalous things that we invented. We have used our brains in wrong things in the Indian economy. But I would not discuss those things.

The main engine of growth has been this. You will be surprised to know that over 60 per cent of the goods that are produced for exports in China are not actually produced in China. They are foreign aided Chinese companies. Chinese companies domestically producing for China are a very small proportion of its industrial output and, therefore, China very skillfully used and leveraged the world economy for its benefit, and thanks to whom! To all the Taiwanese, Indonesian and Singaporeans companies. China had no market intelligence. But the Chinese were benefited by the overseas Chinese—but we cannot be benefitted similarly by overseas Indians because they are motor mechanics, or software engineers or something else. They are not in business so much. So, therefore, market intelligence is something that we never got from our diaspora.

Now the question is if you want to disrupt the Chinese economy, you make it profitable for East Asia to send its semi processed goods via India. These are democratic countries. They are not very comfortable with China. They are not happy with intellectual property rights loss of China and the implementation and why don’t they come via India? Well we have to improve our infrastructure first. Our octroi is well to drive anybody nuts, the system needs to improve. Why don’t American countries put their influence to go products through Indian market? In India it has to go all the way down to the octroi and, therefore, it is very difficult to handle the international business. China is corrupt but if the appropriate decision is taken everything goes smoothly. In India you have to go all the way down—down to the octroi and, therefore, international business is finding very difficult to come here. No foreign company wants to come here because of hassles appearing herein. You have to minimise hassles. International businessmen will go where they will find profit. If you minimise the hassles they may decide to come. This is the model on which it comes.

Now, we can discuss what the strength of China is and how we can leverage ourselves on it. Their strength is their high reserve of dollars that they have built. It is shaking the international system. In fact, Americans are not so stupid as they look but they are even smarter than what they look. Chinese have enormously large amount that is shaking the international system. They have created a huge hype that Chinese currency is undervalued. A vast amount of money from different parts of the world particularly through Hong Kong has now entered China officially and they are waiting for a revaluation of the Chinese currency so that they can go out without having made a killing, without doing any work that is called leveraging. One of these days they are going to realise that China is not going to revalue it because once they go to revalue it too much their exports are going to be hurt and that money will come out and once it comes out then I think the Chinese market is going to be thoroughly destabilised.

We have seen this in 1997. Remember in 1987 onwards till 1997 there was an impression that Japan would buy up America. In fact, Japan had bought up Rockefeller Centre and was among the top in America between 1987 and 1997. There was another impression that Japanese will be the new lingua franca in America. They had entered vast areas like automobiles, radios, televisions, everything. Japanese were growing at 10 per cent, 12 per cent and 15 per cent—everybody was under the impression that Japanese were going to be next economic superpower of the world. In 1997 the entire East Asia faced economic crisis from which they have still not recovered. Japanese are in a pathetic state today. They are affected by the ageing population. They are affected by their inability to clear the non-performing assets of their banks. How did that happen?

It happened just by one trigger. The American stock market. American bond market had raised bond rates. They had obviously studied it. This is my allegation. I do not think that there has been something about this in any book. The East Asian countries were importing a vast amount of money of short run, which is called portfolio and sometime it is called hot money. They used this money in a big way in long-term projects such as residential projects or building infrastructures and so on. Now what happened is that the bond rates suddenly went up in the American market. Consequently, this money decided to pull out because they would be earning in the bond Market with less risk. There was a run in Thailand and this run got translated into every East Asian country with same reasons. All East Asian countries had a massive economic crisis—financial crisis for the same reason in 1997.

The same thing happened to China. For the same reason there was a time bomb ticking on the amount of cash that had come with the expectation that China would revalue it. They will come at a better rate. They will come out with higher valued Yuan that they have acquired by coming in. This is the main problem of Chinese economy. Chinese has also strength in infrastructure which is far superior to ours. It is grossly underutilised. The other aspect of China is the foreign firms—they are the largest producer of exports goods in China. Once they withdraw their support then again it will become a big problem for China.

Chinese banking system is also a big problem because the whole banking system is largely owned by the State. They have big public sector units inherited from the Communist period which they cannot afford to close down since most of the workers are from the Communist Party who believe that everything is guaranteed—free education, free medical attention and free housing, everything is free because they are workers. Chinese system is, therefore, perpetually at loss. The banks have huge non-performing assets like home loans which have not been paid back—a very substantial amount. Informally, it is told that the highest is 40 per cent, whereas at one stage the Chinese agree it is not more than 25 per cent and on the other they say it is much less. But it is a very heavy and substantial amount of loans to be recovered.

The second thing is that the Chinese pay either nothing or about 2 per cent on fixed deposits of household savings. This can be compared with us—we give 7 per cent on our three-year term deposits, whereas in China largely they do not give anything. You can have it secure and safe. People do put money for the security and safety in Chinese banks but they are not paid any interest. The Chinese banks do not pay anything. There is an agreement between the Chinese and the United States to allow foreign banks to accept deposits. Of course, foreign banks can come to China but they cannot accept deposits from the public. If a foreign bank comes to China and accepts deposits from public at the rate of 4 per cent, the Chinese banking system will collapse because no one will put money in Chinese banks as they are getting nothing out of them or at the most 2 per cent whereas foreign banks are offering 4 per cent on their deposits. This is the Chinese system—similar to the Japanese system because it is based on the recommendations from the people you know. In China also it is how you know the people. In Japan that is all really matters—you must have the cozy relationship between the government and the business.

Here too in my opinion if somehow India acts together—builds an excellent infrastructure, cuts down hassles, I am sure that East Asian countries would prefer to add value to their production through India and this will undermine China in no time—if you are able to do that. Most of our people do not even know that such things are possible. The second thing is that, if we are able to use our resources more efficiently—because China uses all its resources very inefficiently and, therefore, it has to have much more oil than what it produces per barrel of oil. The amount of GDP they produce is much smaller than ours. In fact, you compare with China, it has much more inefficient economy than India. Income distribution-wise China is much more unequal than India. In the last 20 years it has reached the Brazalian level if you measure by Lawrence ratio. I would conclude by saying that we have better institutional set-ups in India. Maybe, it does not work. I think we underestimate our institutional quality in terms of constitutional set-up, in terms of constitution. We have far superior system to that of Chinese. Chinese have everything, dynamism in the market, hard work and all that but they do not have institutions. Chinese system is like the Japanese. It is based on family relations, relation with friends.