Increasing our trade relationship with India will not be so simple

Trade minister Craig Emerson met with India’s minister for Commerce and Industry Dr Anand Sharma at free trade talks earlier this year - but don’t expect trading links to accelerate in the next decade.

Ongoing efforts on the part of the Australian government to deepen ties with India are well known. The recent Asian Century White Paper frequently couples China and India in its analyses, which suggests it is perceived the two countries are comparable in their underlying trade potential with Australia.

Similarly, Deloitte’s 2013 Global Manufacturing Competitiveness Index predicts that in five years from now China and India – in that order – will be at the top Deloitte’s Manufacturing Competitiveness Index. These predictions are based on a survey of the perceptions of 552 CEOs and senior executives employed in various worldwide manufacturing firms.

All in all, therefore, it would appear likely that Australia’s trading links with India are set to accelerate in a similar way to China in recent years, right?

Well, no, it’s highly unlikely, at least over the next decade.

This is not simply because of the 13% decline in total merchandise trade between Australia and India between 2011-2012, compared to the 13% increase in trade between Australia and China.

Rather, the reason has much deeper historical roots that can be traced back to the early years of India’s political economy after winning independence from Britain in 1947.

The economic policies pursued by India’s long-serving first Prime Minister, Jawaharlal Nehru, whose leadership from 1947 until his death in 1964, was marked by central planning and government ownership of major industrial organisations.

He was openly distrustful of private businesses and the drive for profits and private wealth. This in turn led to the development of an elaborate bureaucracy designed to “manage” the activities of big privately-owned businesses.

Such was the impact of this policy that businesses were pressured to remain small so as to avoid being answerable to a powerful bureaucracy renowned for its lethargy, incompetence and corruption. Nehru also eschewed foreign investment and favoured economic policies of self-sufficiency as opposed to specialisation, accompanied by a growth in international trade.

After his death, his only child, Indira Ghandi, eventually became Prime Minister in 1966 and remained in office initially until 1977 (returning in 1980 before being assassinated in 1984). During this time, Indira pursued the same policy agenda as her father, but additionally nationalised most of the banks, wresting near-total control of the financial sector.

So how well did the economy perform under the stewardship of Nehru and Ghandi? The best overall measure of improvements in material well-being is the average annual rate of growth of real income per person, technically measured by the rate of growth of per capita GDP.

During the Nehru-Ghandi period (1950-1977), India’s per capita GDP grew at an annual average rate of 1.5% - a low growth rate for a country with relatively low pre-existing living standards. It made a very small impact on poverty levels. By comparison, the growth rates in China, Taiwan, and South Korea over the same timeframe were 2.6%, 5.8% and 5.7%, respectively.

The fact that China, in spite of the disasters of Mao Zedong’s Great Leap Forward and Cultural Revolution, managed to grow more rapidly than India, is a testament to the extent to which the Nehru-Gandhi policies failed to deliver.

After her assassination, Indira Gandhi was succeeded by her son, Rajiv Gandhi, who remained Prime Minister until 1989. (He was assassinated in 1991). During the 1980s, some economic reforms were introduced, particularly during the years when Rajiv was in power, but they were not as far-reaching as the reforms that were to come later in 1991. Nevertheless during the decade ending 1989, the annual average rate of per capita GDP grew by 3.6%.

In 1991 the Congress Party was back in power with PV Narasimha Rao as Prime Minister. India had barely enough foreign exchange to pay for a few of weeks of imports. The International Monetary Fund (IMF) demanded deep reforms in return for its support.

Via the actions of Rao and the new Finance Minister, Manmohan Singh (India’s current Prime Minister), significant market-oriented reforms were introduced, including a freeing up of the exchange rate, an encouragement of foreign investment and a dismantling of much (but not all) of the bureaucracy that had for decades stifled rational business decision making.

Notably absent from the reform package were sensible labour market reforms. Thus bureaucracies could and still can intervene in the employment policies of large companies, preventing them from, for example, firing or reclassifying workers. This policy of “protecting” workers has stifled the commercial development of business and the overall economy of India. Nevertheless since 1991, per capita GDP has grown at an annual average rate of 5.2%.

So what does all this have to do with Indian-Australian trade?

Because India’s industrial sector (which includes manufacturing) has been held down by a bureaucracy inherited from the Nehru-Gandhi years, Indian manufactured goods are rarely seen in Australia. The computers, flat-screen TVs and clothing that we buy in Australia are more often than not made in China, not India. India’s decades of repression of business development has made India’s businesses relatively small and uncompetitive. Of the top 500 businesses in the world, 132 are American, 73 are Chinese and eight are Indian. Even Australia, which has a mere 2% of the India’s population, has more businesses in the Fortune 500 than does India.

Over the last three years, 18% of Australia’s imports (mainly manufactures) have come from China, whereas only 1% has come from India.

Australia’s trading links with India will not increase substantially and sustainably until India recognises the importance to economic growth and development of big business.

Big business magnifies the benefits of economies of scale and lowers prices for the poor, among other things. It thereby contributes to the wellbeing of all of its stakeholders, as well as the economy as a whole.