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Fault Lines in the development models of China and India–Part II

During the last four decades, Western technological innovation has focused too little on reducing the adverse environmental impact of growth and too much on saving labour—something that India and China have in abundance. So it makes sense for India as well as China to focus their scientific prowess on new technologies that use fewer material resources, but use more hands

To some of us, it is clear that the kind of development model that China and India chose in 1980 and 1991, respectively, is not a sustainable one. Such a development model based on the post-1970 distorted US model would not deliver what the people of both countries aspire to. It is amply clear that the development model based on promoting intensive consumption, as is prevalent in the United States and Europe since seventies, is not sustainable ecologically for the world and is culturally alien to India and China. The current Western model is dependent on a business-provoked, self-centred lifestyle, funded largely by offering careless financial credit to the common people, akin to the norms in the Western world. The current lifestyle is not healthy, both to the mind and the body. If we really want inclusive development and wish to carry our rural folk along, then we both have taken the wrong road. It is completely unimaginable that 2.5 billon people of India and China can ever hope to have a lifestyle similar to the Americans. Nature has not endowed the world with resources to match. Not only does the world not possess resources such as fossil fuels to support such dreams, but we do not even have enough water!

 

To understand the gravity of the situation, compare the per capita consumption of the fuel and water consumed by the Americans and Europeans. Indeed, both of us have a sizable population that lives like the Americans, and they too consume and pollute as much. Therefore, even if the leaders of both nations dream of bridging the widening gap between their haves and have-nots and focus on inclusive (India) or harmonious (China) development, they can never realise that dream. Both countries have a traditionally superior cultural model to lead a happy life that assures good health, happiness, social peace and comfortable living without excessive use of resources. Two centuries of technological progress and outstanding innovations in the use of science and technology will very well supplement our basic tenets and our traditional wisdom in conducting a harmonious life that can include many more. It is the combination of traditional lifestyle and modern knowledge that can help India and China to evolve a fresh alternative development model. In fact, today, one can feel that both the Dr Manmohan Singh-led India and the Hu Jintao-led China are indigenously seeking it.

 

The issue indeed, is more fundamental than the materialistic aspects of lifestyle which form an integral part of the Western model. The Western concept of being a developed society as has evolved in the last four decades, and their current model of economic development itself has several serious shortcomings, besides not being sustainable. It is also increasingly being realised that materialistic lifestyle resulting from such a model has many undesirable consequences, most important of them being the menacing fallout of global warming.

 

At the social level too, many are of the opinion that such a life is unnatural and emotionally unhealthy. Instead of narrowing the gap between the rich and the poor, pursuing the Western model is, in reality, widening it. Various studies show that a growing number of people in the developed world are emotionally unsettled, less happy and have psychological problems.

 

Interestingly, both, the Indians and the Chinese, on the other hand, have been practicing an alternate lifestyle model which can be broadly described as “simple living and high thinking”. This alternative way of life is nature friendly, healthy and emotionally fulfilling. This helped their huge population of poor to live tolerantly and peacefully. Some think this is a utopian and romantic belief since one sees helplessness in their peacefully tolerated abject life in the shanties. The economically weak in both these countries can bear their deprival of material comforts without the mental misery that the poor in the West are seen to go though. Psychiatry practice is definitely not a rewarding profession in India or China! Spiritual teachings by saints in India and Confucian thoughts and Buddhism in China have prevented them from getting hurt.

 

However, the Western lifestyle is exciting due to the higher levels of physical comfort, safer living and personal productivity. It is a fact that all these are the result of technological advances and man’s quest for new knowledge that happened in the Western world during the last two and half centuries. The Western world has the social order and the wisdom to encourage innovations. However, both the Chinese and the Indians gave the world foundational technologies till they got bogged down by the rule of the invaders from the second millennium onwards. Western society, for the last two centuries, used its innovative exploitation of technology and natural resources for comfortable living. Later, a progressively evolved industrial revolution was seamlessly followed by the communication and information revolutions to enable this remarkable transformation. It allowed common citizens to become productive participants and get rewarded in return.

 

 The problems started when inventions and discoveries became intellectual “private properties” and the tools came in the hands of money sharks in business. In the late 1950s, intellectual property of an individual became a corporate property with financial limits on its exploitation. Even till the early seventies, the Western developmental model looked ideal since per capita consumption was limited and earning differentials between the rich and the poor were justifiable. But, it is now realised that the money-centric modern business culture that essentially evolved from the early 1970s out of US business schools has been leading the world up the garden path. One can even say that the root cause of the current global economic crisis emanates from the greed of the multinational businesses that lured their democratic governments to go rather recklessly on a privatisation spree. It was essentially an escape route for politicians as they allowed public service to become bureaucratic, largely due to their poor governance and the consequent laxity in imposition of discipline in the delivery of public service by bureaucrats.

 

Today, big businesses use the magic of modern communication media to brainwash young men and women to practice mercenary, profit-centric style of management, focusing only on stock price and earnings. There has hardly been any organic growth of companies. The sizes grew primarily through mergers and acquisitions from all over the world. The media is being used shrewdly to teach people to live beyond their means and metamorphose into thoughtless consumers. Companies now build on the guilt factor and lure the young to buy non-essentials by making them out to be essentials. Business schools sponsor a win-at-all-costs trading approach with charismatic role modelling, teaching and coaching with an orientation to be reckless and with a motive to profit by every means. I wish that those in power in the United States used management thinker Tom Peter’s advice given in the early 1980s to close down all US business schools, preferably with its faculty locked inside!

 

In fact, I strongly believe that US multinationals in the early seventies took charge of the US economy. I have always felt that the United States that I was familiar with before 1970 has changed in terms of cherished social values. Due to the mismanagement of their economy on the advice of such business management experts, it is fast declining from its global supremacy. The current plight of the Europeans too can be easily traced to the American influence on their governments and institutions. The Western world has largely become the world of consumers and, consequently, produces little and does not create real wealth. Only those who trade in money and commodities earn well through market manipulation. People in the West also seem to increasingly realise the bitter truth that marketing is driving them into miseries. The boundless credit and lure of multimedia is hurting them like none other. Many independent studies have shown that excessive consumption of food and fun is harming them, both in body and in mind.

 

Till the early seventies, business culture in the United States too was different. Bright brains, those days, were in research labs and on shop floors using innovations to create some real wealth. There evolved a business culture that caused the United States to get rich as a society. Significantly, this was an inclusive growth. The real income of the average American had been soaring since the end of World War II. Wage ratios between the wealth-creating talents and shop floor workers were acceptable to all. The country’s trade balance was positive and consistently growing. Employment was ever-rising. The standard of living was improving democratically year after year. The number of college-going students doubled every five years, and unlike today, getting in was no longer the privilege of the rich and elite. During those decades, there were major breakthroughs in technology. James Watson and Francis Crick won the Nobel Prize for decoding the molecular structure of DNA. Tuberculosis had all but disappeared, and Jonas Salk’s vaccine was wiping out polio in the United States. Many may not know, but Dr Salk had refused to take a patent for his discovery and had said that he invented it to prevent human suffering. This reflects the culture that prevailed then. Then during the Nixon presidency came multi-national provoked economic theories and practices. Today, we cannot catch a glimpse of that industrious US. The companies grew organically, then. Today, the only corporate growth route is through mergers and acquisitions. {break}

 

Talking of happiness, both India and China have masses of contented poor who smile more frequently on an empty stomach than their well-fed Westernised rich compatriots living in their city towers. Here, one can see that in the matter of poverty reduction, the Chinese leadership did far better than its Indian counterpart, which is handicapped by the ‘system’ as claimed by it.

 

A careful study of China’s spectacular success since it began its transition to a market economy reveals that they managed it with adaptable strategies and policies: as each set of problems were solved, new problems arose, for which new policies and strategies were devised, and this has been going on year to year. To appreciate this policy, one has to read the annual reviews of the country’s progress by successive presidents since 1978. To that extent, single party rule has benefitted China, ever since their leadership got its new vision from Deng Xiaoping. China recognised that it simply could not transfer economic institutions that had worked in other countries without adapting it to the unique problems confronting China. Today, senior Chinese leaders talk about the need for a new economic model. They seem to be aware that their economic growth is mainly enabled by materialistic multinationals, which moved their manufacturing set-ups to China in order to use its cheap labour and very favourable tax regime. This Western model helped China to achieve over 10% annual GDP growth for three long decades. But this will not work long-term even if it has enabled China to lift hundreds of millions of Chinese out of poverty by wealth-creating activities like manufacturing and agriculture—the two vocations that use labour of every type in a large measure. Growth in manufacturing cannot be sustained too long without serious consequences. There is no doubt, however, that Chinese workers have been important beneficiaries, as it created over 200 million new blue collared jobs for their rural poor by their efficiently controlled migration to cities.

 

India, unfortunately, has failed to gainfully support both these areas. But this growth model has its limits. Global slowdown and lack of economic growth in the Western world is already hurting exports with consequential joblessness in China. China’s GNP export-led growth indeed looks impressive to everyone. One can see its real reflection on the faces of its people, not just on the streets of Shanghai, Dalian or Wuhan, but also in its villages. Some of the areas that we went to during our SME study were a hundred miles away from industrial areas in China, but the rural folk there had stable electricity, paved roads, televisions and even Internet connectivity.

 

So far, with an increasingly large share in the export market, half of China has benefitted greatly. But China has another half that is still very poor. Will there be a sustained demand with the ongoing poor state of economies of the developed world? Today, a lot of these rural communities live on the remittances from family members who have migrated to coastal cities. It is similar to the money orders sent by migrant Indians in Mumbai to their families in Bihar, UP, the Konkan area or any other state. We found that even the farmers were better off with new crops and better seeds. The local government sells high-grade seeds with a guaranteed rate of germination on credit. In spite of this, China still has a sharp rich-poor divide. The sad part is that this divide is growing even though income levels are higher. For the Chinese people who have seen total equality in poverty, this economic divide becomes far more painful. In India, a sharp rich and poor divide has existed since eternity, but the Chinese have seen the perils of equitable distribution of poverty that Mao brought about from the early 1950s to the end of the 1970s.

 

Leaders in China as well as India realise that the current divide must be narrowed if they have to have inclusive and ecologically sustainable growth. Luckily, healthy life for all seems to be China’s current agenda. I have seen playgrounds and well-maintained stadiums even in small places in China, where the young are seen in large numbers practicing sports and games. Everywhere, one can see carefully planned and well-maintained streets, green areas, parks as well as extensive public transportation systems. While some Indian leaders in Delhi have well-intended schemes, their corruption-infested delivery channels frustrate realisation of any of their noble objectives.

 

Realisation to move away from the Western model and seek another has now become more urgent after the global economic clash and its backlash on India and China. China felt it far more strongly than India due to its over dependence on export trade. They realised that even countries seemingly committed to competitive markets were getting protective and complaining of unfair competition. The export-led growth model was in danger and maintaining high growth was untenable. This strategic model worked well for China earlier in many ways. It supported technology transfer, helped to close the knowledge gap and rapidly improved the quality of manufactured goods. Export-led growth meant that China could produce without worrying about developing the domestic market. But the global economic catastrophe changed that quickly. China realised that it had to change. The country has a large portion of its reserves blocked due to its earlier strategy of “vendor finance” by depositing its earnings in the United States. It financed the huge US fiscal and trade deficits, allowing Americans to buy more goods than they could sell. In fact, to meet the challenge of restructuring its economy, removed away from exports and resource-intensive goods, China is stimulating domestic consumption. While the rest of the world struggles to raise savings, China, with a savings rate in excess of 40%, struggles to get its people to consume more.

 

Both Indians and Chinese, especially those who are not economically strong, intuitively do not trust the government and focus on saving for their “rainy day”. The Chinese government is therefore, now focussing on providing better social services (public health care, education, nationwide retirement programmes, etc.) with a hope to move people away from their urge to save.

 

The Chinese government is also giving cheaper access to finance for small and medium-sized businesses. Both countries therefore, will have to look for new sources of dynamism in their growing entrepreneurial ranks, which requires a commitment to creating an independent innovation system.

 

China has, for long, invested heavily in higher education and technology, and now it is striving to create world-class institutions. India too needs to somehow speed up. While both countries should stimulate an environment of dynamic innovation, they should resist pressure by Western governments to adopt the kind of unbalanced intellectual property laws that are being demanded of them. Instead, they should pursue a balanced intellectual property regime because knowledge itself is the most important input in the production of knowledge; a badly designed intellectual property regime can stifle innovation as has been the case in several areas in the post-1970s America. IP rights protection needs a financial cap, after which that protection must go, rather than become the current protection over a long period of time.

 

During the last four decades, Western technological innovation has focused too little on reducing the adverse environmental impact of growth and too much on saving labour—something that India and China have in abundance. So it makes sense for India as well as China to focus their scientific prowess on new technologies that use fewer material resources, but use more hands.

 

However, it is essential to support innovation and scientific research in ways that ensure that advances in knowledge are widely used. This itself may require innovative approaches quite different from intellectual property regimes based on privatisation and monopolisation of knowledge, which result in high prices and restricted benefits.

 

(PS Deodhar is founder and former chairman of the Aplab Group of companies. He is also the former chairman of the Electronics Commission of the Government of India and was an advisor to late Prime Minister Rajiv Gandhi on electronics. He also was the chairman of the Broadcast Council in 1992-93 that set in motion the privatisation of the electronic media with metro channels. He can be contacted at [email protected].)

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Banking sector reforms is the need of the hour

While going ahead with the processes and procedures for allowing new banks, the RBI should, simultaneously, reopen the banking reforms agenda. If this is not done corporates and small borrowers will continue to disbelieve the banking system and find out escape roots for deploying their surpluses and meeting their financial needs

Perhaps because of a sense of futility in the present coalition scenario, the Government of India (GOI) and the Reserve Bank of India (RBI), in the recent past, have been making sub-sector-specific or issue-based observations on financial sector reforms. Reforms, to be successful, need a holistic treatment. There appears to be a studied silence on structural reforms in the financial sector, except for passing references to additional banking licenses to private players or changes in regulatory environment for NBFCs. These are more with the interests of certain stakeholders in view than the overall health of the financial sector.

 

The RBI governor’s recent observation about GOI’s liquidity problems for allowing further expansion of public sector banks adds to the confusion. If the financial sector has to rise to the expectations in regard to credit delivery, especially to agriculture and service sectors, the banking infrastructure will need structural reforms, skill development and a change in outlook on HRD-related issues. 

 

Public sector banks continue to shoulder more than their real share of the burden of lending to traditional priority sector which includes agriculture and small borrowers. Even if they come into being, the proposed additional private sector banks may not be immediately in a position to support the critical areas which are neglected by private sector banks to a large extent, as of now.

 

In this context, any further delay in comprehensive financial sector reforms, for political reasons (“compulsions of coalition politics”, government not having adequate dependable numbers in both the Houses), may have long-term adverse impact on the country’s economic development. Perhaps, this is the right time for the finance minister to open a debate for a consensus in the matter.

 

Here one has to admit that it is quite natural that as a regulatory body responsible for the health of the financial sector, RBI’s concerns go farther from just the net worth of the promoter or his professional capability to run a bank. RBI’s intention to regularize and ratify the parallel banks which can conform to regulatory norms and rehabilitate some RRBs (regional rural banks) which may have manpower and infrastructure in place but may be finding it difficult to perform for want of leadership as also the central bank’s desire to keep the business of banking trustworthy is evident from the cautious approach of RBI in regard to new bank licenses despite perceivable pressure from industry and to some extent from GOI.

 

Read New banking license announcement is first major reform in two decades

 

Even when the RBI came out with the discussion paper on the issue of new bank licenses, it was known that the idea of setting up some more private sector banks was loaded with compulsions much beyond the government’s stated intention to give a greater role for private sector in banking to promote financial inclusion and reduce government’s financial commitments for running banks. The role so far played by the private sector banks which came into being post-LPG (Liberalisation-Privatisation-Globalisation), which are driven by profit-motive, in lending to traditional priority sector, penetration to semi-urban and rural areas and financial inclusion has not been very impressive.

 

It has to be said to the credit of RBI that the central bank effectively brought to the fore the real issues and concerns of all stakeholders in the financial sector, about new banking licenses. In the present scenario, the central bank should take initiative to reopen the banking reforms agenda which was kept in the backburner after allowing some banks in the private sector during the introductory years of financial sector reforms. 

 

In 1991, the Committee on Financial System (Narasimham Committee) visualized a structure for Indian banking system with “three or four large banks that could become international in character; eight-10 banks with a network of branches throughout the country engaged in ‘universal banking’; local banks whose operations would be generally confined to a specific region and rural banks (including RRBs) whose operations would be confined to the rural areas and whose business would be predominantly engaged in financing of agriculture and allied activities”. As more than two decades have passed, though there may be reason to re-evaluate a suitable model in the present context, the relevance of structural reforms has not lost validity.

 

Although the recommendations of the Narasimham Committee were realistic and had kept in view the long-term credit needs and the inability of large banks to reach out to un-banked and under-banked rural India, for various reasons including compulsions of coalition politics, RBI and the Centre did not take a serious look at reorganization of banking infrastructure. Banking services, in India evolved through a multi-agency system and through different limbs, supported the credit needs of small borrowers to a great extent.

 

The need of the hour is to ensure that all players in the business of banking in the formal sector, namely, commercial banks, cooperatives and RRBs remain healthy and perform their assigned roles effectively and the informal sector, through which banks and NBFCs support microfinance needs, is also brought under financial discipline through regulatory arms such as RBI, NABARD and state governments.

 

To read about other initiatives of RBI, click here.

 

The present scenario is partly the result of GOI and RBI keeping the residual banking sector reforms in the backburner after allowing some banks in the private sector in the initial days of reforms. The debate in the media during the last couple of years about “new private sector bank licenses” shows that a bank or a financial institution is a different animal to different persons, depending on the person’s financial status and banking needs. 

 

At this delayed hour at least, a total view of banking needs of agriculture, industries and service/export sectors and institutional infrastructure for meeting them may have to be taken by the central bank. If this is not done, corporates at the national level and small borrowers at the ground level will continue to bypass the banking system.

 

The RBI has been consistently playing a proactive role in institution-building in the financial sector, since early 1950s. SBI, IDBI, NABARD and new private sector banks are some examples of the central bank’s success stories in institution-building. Despite its efforts, along with GOI, to improve the health of the rural financial infrastructure by rehabilitation of existing cooperatives, trying experiments like Regional Rural Banks and Local Area Banks and promoting financial inclusion, adequate and cost-effective institutional credit is yet to arrive in rural India. The proposed new private banks will initially be able to focus on large investors and borrowers only, which will definitely have an impact on the sources and uses of funds available to banks and financial institutions. In the circumstances, the central bank should, while going ahead with the processes and procedures for allowing new banks, simultaneously, reopen the banking reforms agenda.

 

The diversions so far provided for bigger banks to dilute their priority sector and rural lending responsibilities should be reviewed with a view to ensure that deposit-mobilization gets tied up to the social responsibility of meeting the genuine credit needs of all sectors considered relevant for overall economic development. If this is not done corporates at the national level and small borrowers at the ground level will continue to disbelieve the banking system and find out escape roots for deploying their surpluses and meeting their financial needs.

 

The public sector-private sector divide in meeting social responsibilities also needs a closer look. If this is not done corporates at the national level and small borrowers at the ground level will continue to bypass the banking system.   

 

Overlap of functions, large-scale outsourcing of activities and challenges from business houses who are telling that if you will object to owning a bank, the same objective will be achieved through an NBFC or some other arm or instrument which can achieve desired objectives and reluctance of banks in the private sector to directly penetrate below the creamy layer of the large majority which is waiting for “financial inclusion” are all major areas of concern needing immediate response from RBI.

 

GOI, at this late stage, should think in terms of (a) encouraging individual banks to do business in functional and geographic areas in which they are better equipped and have competitive advantage in terms of outreach (b) redefine the role of various categories of banks considering their background, skills and capabilities and (c) involving the regulator, namely RBI, for conveying GOI’s expectations, so that multiplicity of guidances is avoided.  A comprehensive review of the banking needs and institutional infrastructure for meeting them with focus on how best the existing banks can be guided to meet the genuine credit needs of various sectors of clientele is the need of the hour.  

 

Read other articles by MG Warrier, here.

 

(The writer is a former general manager of RBI. He can be contacted at [email protected])

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COMMENTS

Dr Anantha K Ramdas

6 years ago

Thank you for this interesting article on the banking system and the urgent needs to bring in various improvements.

One of the many problem areas includes the issue of protecting the "savings" and deposits of the account holders.

I believe the insurance coverage for the loss of deposit or savings in an account for any reason is limited to Rs 1 lakh. Time is now for this coverage to be increased to a reasonable level bearing in mind the fact that the amount was fixed decades ago and Rupee value and savings capacities have gone up

REPLY

M G WARRIER

In Reply to Dr Anantha K Ramdas 6 years ago

Safety of deposits is important. Insurance cover ceiling is Rs1 lakh per account. While I agree that the comfort level will improve if the ceiling is raised, normally it may not be of much significance to small savers as our country has not been allowing many bank failures in the recent past and the position may not change for the worse unless we mimic developed countries in banking practices. Most of the small savers are with public sector banks. A hike in the ceiling may mean higher outgo of fee and lead to cost escalation for banks. I am for status quo.

Nilesh KAMERKAR

6 years ago

Sir,

Why are banks operating like kirana stores; selling all types of products from insurance, mutual funds, gold, foreign currency, credit cards, equity & what have you . . . While NBFCs and MFIs are focused on extending credit/loans which is supposed to be a core banking function.

Is there any way, that RBI can get Banks to do what they are primarily supposed to do?

REPLY

M G WARRIER

In Reply to Nilesh KAMERKAR 6 years ago

You have raised a valid point, which needs to be addressed while formulating a comprehensive policy for financial sector. Short answer to your question is, every ‘shop-keeper’ including banker has an eye on expansion of business in areas which are less risky to improve profit. Thus banks try to add more products and services in their bouquet to attract customers. On the other side, you will find NBFCs, Industrial Houses, Postal Department and even governments wanting to start banks.

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