Narendra Modi’s domestic champions vs China, Japan and Korea’s Export Champions

Foreign policy flows out of what you want to be and what you want to achieve as a nation. You cannot be or do all possible things. Given the reality of resource constraints, you have to pick and choose; and do so wisely.

Choices are often concealed and not so obvious. Creative thinking generates resources and presents many more options. For instance, educating your people well, using the virtually free human store of knowledge, creates almost unlimited new human capital, with which a nation can earn a living.

But these choices are lost on those obsessed with brick and mortar, power and pelf, of selfish existence. Elites often ignore such resource creating choices as they threaten their dominance of others within the nation.

However, societies such as South Korea, Taiwan, Japan, Vietnam, and others have shown how choosing resource-creating routes to development, of which education is just one, not only increases available capital & the range of options available for growth, but also increases the brick & mortar economy or power and pelf that the elite hanker for.

It is a question of being creative, and making choices after deep thought, - choices that bring everybody into the development process - that makes the difference between countries with slow GDP growth and that of champions.

So, what do we as a nation want to achieve? Slogans are not policy. A good way to begin the search for an overarching goal that anchors all policy, is to see what our ancestors did, and also to look at what is validated by others. So, let’s begin with our ancestors.

KAUTILYA ON THE DUTY OF A KING

Kautilya in Arthashastra says, “The foremost duty of a King is to increase his wealth [and that of his citizens] by settling virgin forests or by conquest.”

You must of course read his wise maximand in the context of the development choices that Kings faced circa 300 BCE. In those times, agriculture, minerals and trade in cloth made up 90% of the economy. New wealth was mostly created by clearing forests for agriculture. [And producing sons for working the new lands.] The duty of a King was to create the options for growth of wealth and wellbeing of his citizens by growing the economy.

In the modern world “conquest” or appropriation is no longer a wise option since trade has almost fully replaced conquest. For the sake of our security pundits, I will repeat that because they still haven’t got the memo. In the modern world, trade has replaced conquest as one of the means for not only growing your own wealth but also appropriating that of others.

In an earlier essay I had discussed how China is using trade to appropriate our wealth. The essay can be read here:

Kautilya’s insight, even back in 300 BCE, was sharp and deep. As you scan the National Security strategies and doctrines of modern great powers, you will find Kautilya’s maximand at the top of their agenda.

In fact, USA, UK, Germany and Japan make maximization of citizens’ wealth and wellbeing their top-most agenda in their National Security doctrine while Russia puts it at number 2. [Russia privileges defence of its land-mass at number one because of its size, sparse population and the fact that defence of the flat land-mass is only possible at certain critical choke points. If those choke points at the edges are lost, the Russian land mass, given sparse population, rapidly crumbles.]

In India, the land of Kautilya, we have no written national security doctrine; no one knows what the national maximand is. Written policy is foreign to the land and foreign policy is largely about how to handle Pakistan and/or China, and how to buy cheap weapons abroad. Trade, that has replaced conquest, in the wealth maximization matrix of options, is the least understood by our security pundits, military experts and our economists. Does foreign trade inform foreign policy? At best, only in speeches made by erudite EAMs at conferences.

The Kautilyan maximand is still the most relevant one for India, and if properly understood, and applied diligently and intelligently, can lead India into 10% plus annual GDP growth, which is also the only ticket available to be a rising power of some consequence in the new global order.

So, let’s go back to deriving what we should be doing to meet the Kautilyan imperative.

MODI’s DOMESTIC CHAMPION THEORY

Giving credit where credit is due, one must concede that although Modi hasn’t articulated India’s national security doctrine as a Kautilyan maximand or imperative, - he should if only to get everybody on the same page - he is trying to follow that percept in his own way.

I am not suggesting that Dr Manmohan Singh did not have such an objective in mind. In fact, among all the PMs, his understanding of the need to grow the economy in order to emerge as significant power was the sharpest. And he did articulate it many times; but as was his wont, - his speeches sounded more as if he were addressing a Board of Directors meeting rather than rousing the laity with enthusiasm to win support for his policy, - his articulation had little impact on either the laity or the pundits.

Modi however has taken the economic growth imperative to mean that India must build up domestic business firms - or rather domestic tycoons who own such conglomerate of firms - by giving them Govt. favours in cash or kind in order to help them grow in scale and size, and emerge as champions.

Modi has also conceded that these tycoons need protection from foreign competition in domestic markets, and has therefore built rather steep tariff walls to protect their profits, at a great cost to hapless Indian citizens, who fork out the cash for the rents that are disguised as profits to such tycoons who are seen as crony capitalists.

So, Modi’s goal of growing the economy may well be in the right direction. However, will his strategy produce results that truly benefit India and its citizens, or will it benefit only the tycoons?

Part of the reason for writing these essays is to explain how Modi’s strategy - of building domestic champions by conferring Govt. favors on select tycoons via stealth taxation of consumers - are sub-optimal both in terms of the GDP growth produced and also from the perspective of growing citizens’ wealth as opposed to that of tycoons.

Chaebols of South Korea and the Toyotas of Japan - the MITI inspired growth strategy of Japan is an object lesson in what a Kautilya inspired maximand can do for its citizens - are often cited as support for Modi’s Domestic Champion theory of growth. China too offers some such examples. So why should Modi not succeed where South Korea, Japan, and even a populous China succeeded?

The answer lies in one word – Exports-the dreaded word in Indian business circles and the economy.

Korea’s chaebols, Japan’s Toyotas, and indeed China’s billionaires were chosen for their ability to compete abroad in export markets; - not merely for exploiting domestic markets behind high tariff walls and extract subsidies from the hapless consumers for their growth.

All these countries chose export champions, and they rewarded such firms with cheap capital in order to enable them to scale up in export markets. That is why they succeeded while Modi’s Domestic Champions will neither grow beyond a certain size nor will become export champions.

Instead, they will become expensive domestic monopolies - as some already have- that excel at extracting rents in sheltered markets by owning the politicians - whoever the politicians are - through anonymous electoral bonds.

Indira Gandhi promoted a model of growth that was to come from import substitution. She called it self-reliance. Her words for Modi’s Make in India.

While Indira Gandhi sold her model to the laity with slogans of “Gareebi Hatao” and poverty reduction, Modi sells his model to the same laity - as robust Hindu Nationalism while scaring them of domination by Muslims, - in a land where Hindus constitute a majority with 80% of the population. The fact that it impoverishes the laity is unlikely to bother either Modi or the leftists unless we understand what makes the economy tick and grow for us - the laity.

Indira Gandhi’s government produced the poorest growth rate since Independence, at 3% pa in her first stint of over 12 years. Maybe she had no choice, given US hostility to India in those times, to tilt towards the Soviet Union. We have more choices now. But Modi is all set to repeat the dismal Hindu rate of growth in his allotted 10 years. And for the same economic reasons.

Left and Right labels are really irrelevant. It is futile to look for a liberal political and economic doctrine in India today. So, it is better to stick to economic fundamentals.

WHY INDIA NEEDS EXPORT CHAMPIONS

With a vast continental-size economy, the 4th largest in the world, and 1.35 billion people, - largely poor no doubt, but with that much more potential to grow - why does India need exports in order to grow at a decent pace? Isn’t the domestic market big enough to fuel growth?

Understanding the crucial role exports play in a developing economy like that of India, is critical to understanding how to get it to grow at a pace that transcends internal constraints on growth. Part of the reason in writing this essay is to show that:

• India’s GDP needs to grow at a minimum rate of 10% per annum for at least the next two decades to catch up with China and regain leadership of its neighborhood - what the Vedas referred to as the “sacred land” - that may be seven different nations today but is one contiguous geopolitical reality, with a shared destiny that India will inevitably shape and lead unless it itself collapses.

• Using internal dynamics alone, never mind the continental size, and 1.35 billion people, India cannot grow beyond 5% to 6% pa once the economy itself reaches full capacity utilization. [It is presently at somewhere between 70 and 80% capacity.]. The balance 4 to 5% percentage point growth - or virtually half of the required growth in the economy - has to come from exports.

• Stagnation in growth of exports over the last decade, particularly under Modi, has tripped us up in GDP growth and led us to lag behind our smaller neighbours like Bangladesh in per capita income.

• Getting exports to lead growth is an imperative. But as I shall show, Modi’s current policies are diminishing growth in exports, and over time protectionism, combined with China’s moves to impoverish us will eliminate us as a potential competitor in Asia and the rest of the world.

• Such policies will cripple exports and restrict India to the lower trajectory of 4 to 6% annual growth, that can never enable India to catch up with China in power, reach, and influence; much less in per capita prosperity of our citizens.

(To be continued. The writer is an independent trader. Views are personal)