During his 1992 "Southern Tour," Chinese leader Deng Xiaoping stated "to get rich is glorious" and unleashed a wave of entrepreneurial energy that transformed the world's largest communist nation into one of the world's fastest growing economies. The following 20 years led to some of the most impressive growth ever experienced on this planet, and pulled millions of people out of poverty and into a consuming middle class. It is impossible to overstate the impact economic reform had on China.
Thirty years ago, India had roughly the same GDP per capita as China. Today, India's GDP per capita is a fraction of China's. What happened? The key difference between the two countries and their corresponding economic trajectories is that China, a communist nation, increasingly leaned towards capitalism and free markets while India, a democratic country, increasingly leaned towards socialism and managed markets.
Consider the massive bureaucratic inefficiency that plagues India today, much of it the result of managed and planned economic activity in which economic liberties were restricted. It's currently ranked a dismal 142 on the World Bank's 2015 ranking of countries based on ease of doing business...down from a ranking of 140 in 2014 (click HERE for more details). It takes 162 days and involves over 27 procedures to merely get construction permits in India, a timeline that includes more than 33 days waiting a non-objection certificate from the Tree Authority. By contrast, obtaining comparable permits in Hong Kong takes ~2 months and involves 5 steps (click HERE for more details).
The 2014 election of Narendra Modi was a turning point for India. In his first Independent Day speech (click HERE for full text), he emphasized his “outsider status” and terminated the Planning Commission responsible for publishing Soviet-style five-year plans. Modi promised a vibrant manufacturing capability, universal sanitation, and financial inclusion for all. In sharp contrast to the self-aggrandizing approach taken by many world leaders, Modi referred to himself as the Prime Servant, rather than the Prime Minister.
Modi’s actions have to date been consistent with his words. He has formed an economic team around free-market economists like Arvind Subramanian, Raghuram Rajan, and Arvind Panagariya. He has begun simplifying tax policies, liberalizing fuel prices, relaxing restrictions on foreign investment, and focusing the current “Make in India” campaign on new industries such as LED lighting, small cars, and medical appliances. India's poor also managed to open more than 100 million bank accounts in the last four months. Just this week, Modi reminded global business leaders that India offers three things not available elsewhere – democracy, demography, and demand -- and promised to make it easier to do business in India (click HERE for more details). The outlook is indeed bright.
If Modi and his team can help India get out of its own way, there’s no reason the country can’t become the fastest growing large economy in the world.