Why China is ahead of India

It is the flavour of our times to compare India with China virtually on everything. Surely, it carries a romantic exaggeration of ourselves; a sense of having arrived at the international scene.

More importantly, it allows us to benchmark -- at least on the Asian stage -- against an ancient civilisation, a large country and with a modern state facing typical problems. To that extent India and China are comparable.

While one set of our intellectuals seeks to compare India with China, another seeks to assume that we have grown sufficiently in size and strength to become China's partner. India's Minister of State for Commerce Jairam Ramesh, one our most respected intellectuals, does not believe in competition between these two countries. Rather he moves one step ahead and suggests cooperation, especially on trade and commerce, and is credited with having coined the term 'Chindia' -- a theme that seems to have captured the fancy of many across the world.

For long I had oscillated between these two schools of thought -- of cooperating or competing with China. Then last year I had the good fortune of visiting China.

Unlike many who visit Shanghai or Beijing and form an opinion about China, I chose to visit Nanjing -- the seat of temporal power in China in not too distant past. It may qualify for what is called a Tier II city, equivalent to Jaipur or Patna. Yet the infrastructure growth of the city was far superior to any of our Tier I cities.

Put bluntly, New Delhi may take another two decades or so to catch up with Nanjing. And for the moment, let us say bye-bye to comparing Mumbai with Shanghai.

But this spectacular growth in infrastructure was not achieved by the mere assertion that China is a potential economic superpower. Nor was it achieved by showing supine indifference to governance. In fact, locals told me that provincial governments act in tandem with the central government to effectuate this grand idea of development -- a fact that is often missed in India.

The purpose with which the Chinese have designed their economy, infrastructure and the manner in which they have positioned the same at the global level with clinical precision simply stupefied me.

In contrast, the Indian growth model would seem to happen more by default rather than by design. Crucially, the angularities accumulated in our development model can be best understood and appreciated only when we 'compare' some important statistics between India and China.

Take, for instance, the steel production and consumption (prime economic indicators) in India and China. While we produce approximately 45 million tonne of steel every year, China produces ten times more, i.e. approximately 450 million tonne of steel in a year. Industry insiders tell me that the total capacity addition in China in 2007 was in excess of the total Indian capacity built up over one hundred years!

Put differently, 80 per cent of the additional global capacity in the past decade or so has been due to the Chinese expansion in their domestic capacity. This is the Chinese way of becoming an economic superpower.

Yet this piece is not on comparing India with China. Nor is it about cooperating with China. Rather it is about our muddled approach to growth and allowing lobbies to influence our policy formulations at a tremendous cost to out national exchequer, growth and development.

And such lobbying and policies not only rob Peter to pay Paul, but rather have a calculated effect of stunting the overall economic growth of the country.

The disaster called the mining policy

Given this background, an analysis of the iron ore export policy from India will better help illustrate why China is ahead of India. Readers may note that India is home to huge iron ore deposits. Yet some vested interests have been successful in sowing doubts in the mind of the media, polity and the common man that we could run out of this rich natural resource within the next few years and, in the process, endanger the future growth of the country.

It is important to note that the proven resources of iron ore have been estimated to be approximately 25 billion tonne as compared to 22 billion tonne in 1990 -- a staggering amount indeed, despite years of mining for domestic consumption and exports.

It is important to note that the government has never provided the necessary incentive (fiscal, infrastructural or monetary -- of the kind that is provided to, say, petroleum exploration) to the mining industry to prospect iron ore within the country. Naturally, no serious exploration for iron ore has taken in India for the past two decades. And that is the real issue, not exports.

Naturally, given this scenario, this allowed lobbyists to play on the mind of one and sundry with the specious plea that this 'strategic natural resource of iron ore' of the country should not be allowed to be exported. And strangely to protect future growth of the country, these lobbyists seek to stymie the present growth -- a fact that is lost on many. The beneficiaries in the entire game, of course, are too obvious.

It may not be out of place to mention that this very idea of banning exports is an anachronistic idea in the liberalised era. Nevertheless old habits die hard. Government machinery, used as it was to the concept of 'controlling prices' in the distant past, assumes even today that it is its fundamental duty to control prices. What is lost in the melee is that every government intervention ends up compounding the confusion.

The apparent economic logic contained in the preposterous idea of banning or restricting exports of iron ore is contained in the plea that it does not contain sufficient value-addition, while export of steel does. Nothing can be more fallacious. By the same logic, exports of steel (again a primary product consumed by the common man) need to be banned as the value addition of steel is significantly lower when compared to a car!

Now will the government, by that logic, ban exports of steel from India?

License permit Raj is still alive

Given this perverted logic it is indeed strange that the United Progressive Alliance government has fallen for the trap laid by some lobbyists and imposed an export duty -- yes, export duty -- of Rs 300 per tonne (subsequently reduced to Rs 50 per tonne on iron ore of lower quality) on iron ore since March 2007.

But it is not merely an issue of export duty. Rather it is the policy conundrum that is at the root of the issue on hand. What must indeed flummox an ordinary person is that our export policy requires iron ore to be canalised only through the MMTC (Metals and Minerals Trading Corporation) -- except by those who 'manage' to obtain licenses from government for direct exports.

If this is the general rule for India, the exception is for the ore from Goa which is completely de-canalised provided it is exported only to China, Europe, Japan, South Korea and Taiwan.

The confusion does not end here. Further, iron ore of Redi origin to all markets is de-canalised, irrespective of Fe (iron) content, while others are allowed to export only up to 64 per cent Fe content.

Why Goan ore? Why only to these five countries in case of Goan ore? Why Fe content of 64 per cent and not 65 per cent or 63 per cent in case of others? What is so special about the Redi ore that it can be exported without any restriction while others cannot? Questions that surely would have some answer but would also simultaneously point out to an ugly polity-bureaucracy-industry nexus.

It is in this connection that it may be noted that the Hoda Committee that was constituted to look into these issues concluded that 'there is no need to impose any quantitative restrictions on exports' and recommended as 'an abundant precaution' export duty only on iron ore lumps with Fe content above 65 per cent.

Further it recommended that the system of licensing and canalisation currently in operation should be discontinued and suggested that the captive miners should not be allowed to export.

But what adds to the consternation of the domestic mining industry, especially standalone mines, is that it is estimated that 60 per cent of the iron ore production within the country is in the form of fines which do not have much domestic demand.

It is the balance 40 per cent lumps that are consumed by the domestic industry ostensibly because it consumes lower power. Even on such lumps the Hoda Committee recommended an export duty and not banning the same.

Consequently, given the extant policy of the government, lumps, which are not consumed within India, get accumulated at the mine pit heads leading to potential environmental hazards. And the export duty levied is not a deterrent for the export of lumps, especially with higher Fe content, given the fact that the iron ore cost is at an all-time high in the international markets.

And it is this material that India needs to protect and is not protecting while it needs to encourage export of lumps which it is not encouraging.

This is the crux of the matter -- a lack of vision, strategy and priority -- by the government that is impacting our economy. And the iron ore exports are merely illustrative of what is wrong with out policy formulations.

Clearly, the government needs to address these issues on a war footing. With many standalone mines getting closed due to the fact that exports of fines are uneconomical due to lack of infrastructure, improper connectivity to ports and, of course, the export duty (rupee appreciation vis-à-vis the US dollar is another reason). Experts also say that this is creating unemployment, especially in Naxal infested areas.

Be that as it may, until these issues are resolved, it is futile to either compare or cooperate with China in any significant manner. It is the failure of our policies that is responsible for our lack of growth and development. No wonder China produces 450 million tonne of steel and we are happy with 45 million tonne.