Nansi Mishra 01:02

Over the last four decades, China has transformed from one of the poorest countries to its second largest economy. India is also in the race to become the world’s third largest economy. In this podcast, we talk with Manoj Kewalramani to know what China did to reach where it is now and what India can learn from China.

Manoj Kewalramani is a fellow China Studies and the chairperson of the Indo-Pacific Studies program at the Takshashila Institution. Do watch this podcast to learn why has India so far was not successful to live up to its economic potential and how can we fix these problems. Hi Manoj Kewalramani, welcome to The Neon Show.

Manoj Kewalramani 01:43

Thank you so much. Pleasure to be here.

Nansi Mishra 01:45

So Manoj, India and China have the same number of population and people love to compare India and China. So let’s just start our discussion with the similarities and differences India and China have.

Manoj Kewalramani 02:00

Okay, so in terms of similarities and differences, I mean, I think a lot of our similarities are fairly superficial, right? Obviously, the population size is somewhat similar, although now India has a larger population than China. And India is likely to remain a larger population than China for the foreseeable future because China’s population decline is now well and truly set in.

In contrast, our fertility rate is much higher. So India is likely to continue to remain the most populous country in the world for a long time to come. In terms of culture, there are some similarities.

So Chinese culture is also very family oriented in some way. You know, just like in India, you’ll see when a girl or a boy is sort of marriageable age, you’ll see parents sort of looking out for arrangements. In China also, you’ll see that it’s slightly different.

In India, we have marriage bureaus and things like that. In China, you’ll have, you know, there are parks in which you’ll have photographs and bio-data is put up and parents will come on a particular Sunday and check out all the photographs and go. So you’ll have that sort of arranged marriage set up.

But it’s a family oriented system, you know, there’s a concept of inheritance of family wealth and things like that, which, again, is something that India has in common. I think that that’s where largely our sort of similarities end to my view. There’s a sort of, again, superficial Asian shared sense of colonial history, although colonialism in China was very different from colonialism in India.

China wasn’t fully colonized the way India was; bits and pieces of China were ceded to certain colonial powers. But the Central Empire, the Chinese government, you know, ruled by the ostensibly Chinese dynasty stayed. In India, that was not the case.

You had princely states, but you also had the Raj and you had a different sort of system. And India was far more colonized than China in that sense. But at a certain level, yes, there is shared experience that exists.

But I think that’s where I think broadly our similarities end. India is a hyper diverse country. China is not a hyper diverse country.

China has some diversity. You have a predominantly the population is Han Chinese over well over 90% of the ethnic population is Han Chinese. Then you have smaller minorities, the Chinese, officially, there are over 50 minorities, but they are so small in terms of numbers that it’s not significant politically.

In contrast, India is a hyper diverse society, not just from the point of view of language, but ethnicity, religion, you know, and even if you go further below at different levels of magnitude, you will find greater diversity in India. So that’s a significant difference. China has historically been a centrally ruled country, right?

There’s been a strong gravitational push towards the center and a strong central rule in the country. India, on the other hand, has not been that historically. There has been scarcely a dynasty or a rulership in India, which has ruled the entire landmass or a significant chunk of the landmass. It’s usually been much more fragmented.

And decentralization is a far broader trend. The push and pull in India of even in modern India of, of sort of federal states or sort of states demanding greater autonomy and the union demanding greater control is continuous, right? And so the tendency is not central, stronger central rule, the tendency is a push and pull in China, the tendency is stronger central rule.

In terms of economics today, I would say China is a much more thriving economy than India. It’s slowed down significantly right now, India is growing at a faster pace. But China still remains a thriving economy.

It’s a much larger economy, about five and a half times India’s size. Its efficiency and state capacity, I think, is much better than India’s, and its ability to deliver on outcomes is much better than India’s. The one thing that I think, I mean, beyond all this diversity, the one thing that I think is in common is that there is a shared culture of enjoying Bollywood music.

I think that one of my favorite experiences of being in China was at, I used to travel by overnight buses at about 5.30am in the morning when you’re close to your destination. The bus would, when it enters a town and when it’s morning, the lights would come off, come on, and you would have a Mohabatein song, Aankein khuli ho yaa ho band, so I think that sort of, you know, so there’s a shared sense of that, even on the streets of China, you see, in the parks, you see women dancing, elderly women dancing. That’s their form of exercise.

And on occasions, they would dance to Tu Chiz badi hai mast mast, which would again be one of those fascinating experiences of being in China. So you would have those kinds of experiences. So I think there’s a shared sense of joy for life, which I think exists amongst Indians and Chinese.

But in terms of material things, I think there’s a big difference between the two countries.

Nansi Mishra 07:01

Okay. Like What’s the difference?

Manoj Kewalramani 07:03

In terms of just how we live our lives, you know, in terms of what our pursuits are, in terms of the freedom that we have to engage in those pursuits, in terms of how we deal with the government that we have, and in terms of again, broader, the economy, the country, the structure, there are big differences, which I just talked about earlier.

Nansi Mishra 7:20

And for how long you were there in China?

Manoj Kewalramani 07:23

So I’ve traveled to China on and offs for around 20 years now. But I lived in the country from 2010 to 2016. Part of that was living in the south of China for a couple of years and traveling across the country.

I used to, my father has been a trader all his life. And for over 40 years, he’s been doing contract manufacturing and exports from China. So about two and a half years, I spent trying to manage his business, I was not very good at it.

And after that, I went back to journalism. But yeah, in those two and a half years, I sort of traveled around the country while being based in the south of China. So it gave me an opportunity to experience firsthand how Chinese manufacturing functions, how people live.

And then for about three, three and a half years, I was working with Chinese state media as a foreign expert with Chinese state media, which again, gave you insight into, you know, how Beijing functions, how the political class thinks, how think tanks work, how journalists think, how does the information ecosystem in the country work.

So I feel it was quite a holistic experience of, you know, being outside government and being sort of somewhere affiliated with the government system, because it’s state media, it’s owned by the government.

Nansi Mishra 08:42

Yeah. And that made you a perfect choice for Takshashila.

Manoj Kewalramani 08:46

I hope that’s how they look at it.

Nansi Mishra 08:49

So Manoj, China is also known as the manufacturing hub in the world, right? How did it reach there, like, if you break down in steps?

Manoj Kewalramani 08:58

Yeah, I think that, I mean, if you go back to when the People’s Republic of China was formed in 1949, it was a very, very poor country, just like when India became independent, India had deep challenges, it was very poor. What has happened since then is that the first about three decades were quite challenging. I think they had a mix of policies where they tried to sort of push collectivization, they tried to push mass industrialization.

And the idea was that everybody can manufacture steel and things like that. And that led to a lot of backyard factories, which were terribly poor, which had poor productivity, poor output, and so on and so forth. But around 1978, after Mao Zedong died, you know, he died in 1976, there was two years of deep turmoil in the party.

Because again, when you have a unitary single party system, it becomes a case where one person dominates and Mao used to dominate everything. Once he died, there was two years of flux, because whenever a dictator dies, I mean, dictators usually have this dilemma, right? How do I choose a successor?

Because whenever you choose a successor, you are deeply insecure of your successor usurping your position. And that was the case with Mao also, eventually, when he died, the person who was his ostensible successor was not as powerful, right? So he ended up basically saying, you know, I’m going to do what is called the two whatevers, which is whatever the chairman said, and whatever the chairman did, I will continue those policies.

But there was a pushback because China was still very poor after three decades, after nearly four decades, actually, three, four decades. And so the idea was, okay, we need to reform.

In 1978, they launched a big reform initiative, which is called reform and opening up, which essentially said that everything that is state controlled, which was basically everything in China, your entire life was state controlled, is now going to be liberated, we’re going to gradually open these things.

So from pricing reforms, to market reforms, to allowing private manufacturing. It started to happen gradually, you opened yourself up to foreign capital, foreign people, foreign investment, foreign technologies. And that allowed you to essentially broaden the scope of what you were doing. And gradually over a period of time, you started building manufacturing capacity, because you had cheap labor, you were open to foreign capital and technology.

And as sort of the years passed by, you stuck with that reform, despite deep internal differences. Around 2001, China joined the WTO, which I think gave it this rocket fuel to sort of launch into this next century. And that I think was a big change, right?

You had access to Western markets, you had access to Western capital far deeply than what you had in the past. And the state policy incentivized through subsidies and through other means, for example, by keeping labor rights, by not being very stringent on labor rights, by allowing easy access to land by subsidizing energy, water, things like that. You incentivized exports and incentivized manufacturing.

And that I think has been a trend that was sustained. That is basically what led to this manufacturing boom, right? The idea that you can make everything in this country, because now you have access to all of this.

You invited foreign companies to come in and set up shop. So you had all these global MNCs that came into China, you weren’t necessarily terribly worried about them crowding out your indigenous manufacturing. Because you wanted capital to come, you encouraged joint ventures.

People learned how do you run these companies. How do you run? How do you manufacture? What are processes? So from technology to processes to management, you learned. And then you started your own sort of systems, your own companies. And you grew, right? This was a time where the world was, globalization was at its peak.

Nansi Mishra 12:46

But how did these companies coexist with the Chinese government?

Manoj Kewalramani 12:50

So it was, the Chinese government was very friendly. It was very, very friendly to foreign investors. It was very, if you’re a foreign investor, and you came into China, you were given the red carpet treatment. It’s not the case now. It’s changed now. It’s changed significantly.

But in that period, what had happened was that the party’s objective was to grow economically, right? The bargain that had made with the people was that we will give you prosperity, you give us political control, and you will not challenge our political control. In 1989, if you recall, there were the Tiananmen Square riots that took place.

After that, this was the compact essentially that the party offered the people that politically we remain unchallenged, but we will commit to providing you prosperity. And whatever decisions need to be taken for that, we will start to take. And they did that, right?

So they were open to say foreign education. So you know, New York University, NYU has a campus in Shanghai. They were open to foreign experts, foreign scholars, foreign technology, foreign talent.

And these companies came and they said, hey, look, I don’t really care what your governance system is like, provided there is good enough facilities and a good business environment for me. And I can cater to the market because what companies want to do is make profits, right? That’s their mantra.

So the Chinese government said, great, we also want to make profit. Let’s do business. Let’s not do politics.

And for about 15 years, that’s what everybody did. And China made, Chinese people made a ton of money, the Chinese government became well off through export surpluses, their foreign exchange reserves rose and so on and so forth. So that’s essentially the boom.

It’s about being open, but it’s also about governments creating an enabling environment. In that, of course, you had lots of challenges of human rights and things like that.

For example, when it comes to labor rights, particularly, right, you would, I mean, in the, towards the first decade of the 2000s, towards around 2008 to 10, you’d have read stories of, you know, sweatshops in China manufacturing, you know, Gap t-shirts, or, you know, how badly Apple manufacture, Apple employees are treated who are manufacturing.

There were stories of, you know, how people had to leave their homes to migrate, and they would live in these factory dormitories, you know, particularly women. But if you looked at it from the perspective of those individuals, what they would largely tell you is that, look, I’m seeing upward social mobility for myself. You know, my father or my grandfather or my uncle, 40 years ago in the 70s, died of starvation.

Today, I’m being able to feed my family, my child is being educated, and yes, my life is not easy. But this is a generational problem, and I will overcome it. And today, most of those people, you know, when I met when I meet people in China who are 30, 40 years old, or around my age, they will tell me, I’m much better off, you know, and I could see that social mobility, and therefore, that pain didn’t matter as much.

So yes, while sitting in San Francisco, you know, you might have felt like, oh, my God, this is a sweatshop. For that person, it was upward social mobility. And as much as they may not be happy with that existence, it meant that their life was improving. So I think that was a bargain that they were making.

And that’s essentially what happened, right? Foreign companies took advantage of cheap labor, access to all these, you know, resources, and everybody grew. Until, of course, the last, perhaps 10-12 years where things have changed.

Nansi Mishra 16:04

Yeah, I was also having this discussion with Sridhar that migration is not bad, we want people to work in new factories that are being set up, we don’t want so many people in villages, like, we don’t need those many people in agriculture, right?

Manoj Kewalramani 16:17

Yeah, you need people to come to urban centers, urbanization is needed. But I think one of the challenges, and again, China, this is a common challenge with India and China, right? How do you plan your urbanization better?

I mean, I just drove down here, it took me an hour and a half to cross 13 kilometers. A lot of that is to me, yes, there is traffic, yes, our cities are overcrowded, but it’s also bad urban planning, right? You know, I feel that sometimes our cities cater to our whims and fancies, rather than actually directing traffic the way it should go.

What you will see in China is that there has been better urban planning. It’s not that their cities have not grown in an unplanned manner. There has been unplanned growth.

But there has been better urban planning. Some of it is positive, some of it has been problematic. So for example, in China, you have something called the hukou system, which is the household registration system.

So if you’re a migrant who is moving to a city from say, a rural area, every individual wherever you’re living, you have a household registration, right? It’s sort of your Aadhaar card with your address proof of where you are. That registration allows you to access to public utilities and public services.

So education, healthcare, things like that. If you move to a city, and you don’t have a household registration of that city, you don’t get access to subsidized cheap public services in that city.

So if you’re a migrant who’s moved there with a family, either your company gives you that household registration and applies for it for you, so that your child can go to school there, or you can get access to subsidized healthcare, or you wing it and you survive however you can survive.

So when… or your children will keep living where their original registration was, whereas you are alone here, which has meant that a lot of people in China live in separate systems like this, where the parents may be living in a city, the children are left behind with their grandparents to take care of them and send them to school because you can’t afford schools in cities.

So there is obviously this unplanned nature in this poorly planned structure of urban planning in China. But that is something that they recognize and they’re trying to work on it, but it’s difficult to do because of the nature of the political economy in the country.

In India, what we’ve done is that unfortunately, our urban planning has been very, very poor. Our cities are bursting at the seams. We are struggling with accommodation, we are struggling with facilities.

And again, some of it has to do with delays in delivery of projects. So if you look at infrastructure in our cities, it takes a long time to build a metro, which you’ve probably planned 10 years ago, assuming a population increase of five years, which is when…

Nansi Mishra 18:50

We are talking about Bangalore, because it’s much better in Delhi. I have been like I was in Delhi for almost 7-8 years.

And I think in those 7-8 years, there were so many options to reach a place within metro.

Manoj Kewalramani 19:05

Yeah. No, and I think that Delhi got a boost because of the Commonwealth Games.

You know, that created the urgency to do some of these things. But for example, I lived in Delhi for a significant number of years working there as a journalist. I’m originally from Bombay.

And I find that if I was to look at Bombay today, I mean, it feels like our cities are perpetually under construction. There is perpetually work going on. Yet we are unable to anticipate population growth and deliver projects on time to do that.

There are many reasons for that. There is state capacity, you know, governance challenges, citizen engagement, all of that. But that’s again, one difference between India and China, right?

By China, I think the ability of the government to mobilize and deliver project outcomes on time is far more stronger than India’s, right? And again, that is systemic differences. But would I want to be in a place which is much more efficient in delivery, but where my fundamental freedoms are restricted, as opposed to a place where I have significant inefficiencies and it takes me one and a half hours to travel 13 kilometers.

But I potentially have greater freedom to express myself and live my life, right? I think those are the challenges. And I think 10-12 years ago, I don’t think this was necessarily the case in China, where this was the bargain.

In fact, there was lots of pushback against government control. Today, that has receded, right? Today, there is far stronger government control. And this bargain has become far more sharply in focus.

Nansi Mishra 20:32

Like it’s just so easy to move around, like move from Delhi to Mumbai to Bangalore, you just need to change the address on Aadhaar. And it is also all the processes digitized. You don’t have to visit the office.

Manoj Kewalramani 20:45

Exactly. And it doesn’t inhibit you from accessing public services, right? Which I think is a significant drawback in the Chinese system.

And I think a few days ago, they had something called a plenary session, which discussed their economy. And this was one of the big reform things, you know, but it’s very difficult to do because cities will push back, right? I mean, often, you know, when we discuss India and China, people say India has too much democracy and too much politics and China functions better because China does not have politics, right?

A single party state, central control. That’s not true. It is a single party state with strong central control. But everything, there is politics in everything. And you know, and there is political pushback and bargaining in every system. It’s just that we can’t see it as clearly.

If you see the signs, if you read the signs, you can see where that pushback is happening. In India, it’s in your face, right? So that is a similarity, but also a difference in terms of how our systems work. But yeah, because of politics in China, that reform doesn’t happen.

Nansi Mishra 21:45

And we also talked, you also mentioned about access to land, right? Let’s also talk about real estate infrastructure in China. Like, there was a boom, then it’s falling down. What’s really happening?

Manoj Kewalramani 22:00

So this is what happened with the property sector, right? Somewhere around 2008, when the great financial crisis took place in the world. It also hit China. Everybody remembers that the United States in response to that financial crisis announced a 700 plus billion dollar stimulus package under Obama.

But nobody really recalls that China also announced a massive 500 plus billion dollar stimulus package, because they all felt the strain of that crisis. Where that stimulus money went was largely real estate.

Why did that happen? Because in China, the political economy is such that if I am a city’s mayor, or a provincial governor, or a party chief, I’m going to be in office for a few years, right? The metric by which my political achievement is going to be judged is GDP growth.

This used to be the case at that point of time, right? And as I deliver more GDP growth, I am a meritorious individual who’s proven track record, and I go up the party ranks, right? So the difference is that Chinese politicians are bureaucrats and politicians of the same party.

In India, bureaucrats are different from politicians. So anyway, those individuals basically sought GDP growth. GDP growth is essentially a measure of activity in the economy.

So when you got access to this money, the stimulus money to stimulate employment, ensure GDP growth, the best place to do this was to build more. So you built all kinds of things. You built housing, you built useless projects such as big parks, which nobody’s going to access.

You built bridges on which nobody goes. You built massively beautiful fountains in places where there may be like 2000 people living. So you have a brilliant, beautiful fountain there.

You build cities in cities which nobody lives in and nobody is likely to live in also, because you had the money and for the political incentive was to build so that there is GDP growth. Now, whether that asset is going to be productive was not the concern of this guy who was in charge, because he knew that by the time this productivity, by the time this asset is created, I’m going to be promoted to my next job because I’ve demonstrated this growth. The problem is the next guy’s, right?

The next guy came, he said, okay, I have money. Let me continue to build. So you ended up building a lot of inventory and a lot of vanity projects, which did not yield anything.

So this was wasteful investment, right? And like this, the property boom sort of grew. And obviously, when people are going to look at where am I going to save my money?

Now, the Chinese are also big savers like us. So whether you’re going to save your money, you’re going to park your money in the real estate sector because it’s booming, like it’s growing consistently, because there’s constantly money coming in. At a certain point of time, you can see that there’s a bubble building, because you have ghost towns around the country where nobody’s living, in order to demonstrate further activity.

In some places where you’ve built these beautiful towers, after some years, you destroyed these towers and you rebuilt them, right? Because you had to create activity and employment. So public money is parked in that.

There’s a big bubble there. The government is worried that sooner or later, this bubble will burst. And there will be political pushback because people will be on the streets.

And of course, banks are leveraged, because all this money is going through the banking system, and it’s going as loans to these developers. And if none of this is productive, at the end of the day, developers will default on their loans, it’ll come back to the banks, there’ll be a run on the banks, and there will be full public cry. So how do you deal with this challenge?

It’s a structural problem. You can’t wish it away. The real estate sector accounts for anywhere between 25 to 30% of the Chinese economy.

So in 2020, at the midst of the Chinese government decided that look, we need to deal with this problem. Because there’s a moral hazard here. How do we deal with it?

They said, look, we’re going to put these three red lines on developers borrowing money, that you need to demonstrate certain reserve capacity, you need to demonstrate certain viability, you know, there were three specific lines that were put out, only then can you borrow more money from banks. This initially immediately meant that the developers who were looking for what you become used to easy money suddenly started facing a crunch. So a lot of property which was sold, but not completed, stalled.

A lot of unsold property, people stopped buying because people knew prices would fall. So you ended up in a case of stagnation. And then subsequently, the stagnation led to companies failing because you could not deliver on projects, you didn’t have access to capital.

So this was a government enforced process of slowdown in order to deal with the moral hazard and in order to divert money away from the property sector into the manufacturing sector.

Because from the Chinese government’s point of view, the future of China is advanced manufacturing, intelligent manufacturing, green manufacturing, they need to focus on technology. So what you have seen over the last three years, and there are wonderful charts to show that every year, property sector investment falls by about 9-10 percent, access to capital for developers falls by about 13-15 percent, whereas the manufacturing sector investment rises.

So banks are being incentivized to transfer money over there. Now the challenge is you can do this theoretically, but what it means is that it’s eroding the wealth of your citizens, right? So if I am a 40-something year old who’s bought one house, who’s got a steady job, and who’s got more savings, now suddenly because the economy is starting to slow down, I am worried whether my wage growth is going to be consistent.

I was hoping that my investment in the property sector would give me wealth growth, but that’s not going to happen now. In fact, I’m worried whether the wealth will even erode, forget growth. So I am likely to spend less.

So there’s a ripple effect of that decision that’s taking place in the economy, which has led to deflationary trends in the economy. But that’s the challenge with the property sector right now. So what did the government decides that, okay, we can’t let this continue, but we cannot even go back to the old way, because it’s not feasible.

Money will go into areas where we don’t want it to go into. So in January this year, they said, we’ll create a new real estate management mechanism. Under that mechanism, the government said, the central government said that local governments must talk to, so provincial and city governments must talk to developers, and they must create metrics on the basis of which you will identify and whitelist certain projects.

So a developer may have 500 projects in a particular province, but only 20 may be whitelisted as viable, because the houses are pre-sold, they need to be completed, or because part of the housing is pre-sold, or because there is greater potential that project to deliver. So you will whitelist those, and banks must provide funding to support them. But whether those projects succeed is not our problem.

So banks have to also do their own risk analysis, because central government is not going to say that if you failed, if the project failed, because it was a whitelisted project, but it still failed, don’t come to us and say, give us bailouts. We will not do it. So all of you have to take your own assessments, but you need to provide money to kickstart this process of particularly unsold housing, or particularly pre-sold housing to be delivered.

Also other housing that you think can be converted into affordable rental housing. Encourage them, do it. State-owned companies can buy those projects, and they can provide them as affordable rental housing to these new people who are migrating to cities, and the government can subsidize them.

So through these three-four mechanisms, we will start pumping money back into the system. So we are not going back to the same old way. That in the last six months has led to some investment, but nowhere near the scale that is needed to stabilize the real estate sector, or to give people confidence that my wealth will not erode.

So therefore consumption is still down, the economy is still struggling, whereas the government is basically trying to say, we’ll try to manage this bomb as long as we can. In the meantime, we are hoping that our manufacturing investments will start paying off, and people will be able to switch jobs, the economy’s main drivers can switch, so that even if subsequently the property sector takes a big cut, it’s okay.

The losses won’t be as large, but at least we’ll enforce some discipline in what has been an extremely undisciplined sector for the last 15 years. So that in a nutshell is what’s happening with the property sector.

Nansi Mishra 30:24

And it has any relation with manufacturing?

Manoj Kewalramani 30:28

So the relation is this, right, that if you had money, if you had 100 rupees as an investor, you would put them in the property sector because the returns are very high, right? Because you always knew that Beijing will not allow the sector to fail. Because if the sector fails, it has significant economic impacts.

And if it has significant economic impacts, it will have a political impact on the stability of the government.

So you will not allow it to fail. Now what you’re seeing is that in a limited way, they’re allowing things to fail, because they want that money to go into manufacturing, that 100 rupees, they want 70 to 80% of that to go into manufacturing and less to go into property because property for them is unproductive asset and manufacturing is where the future economic growth will come.

So it has that link right where you’re trying to divert capital forcefully by restricting the growth of the property sector.

Nansi Mishra 31:14

Okay, and Chinese government is now prioritizing other kind of exports like lithium-ion batteries and solar systems and can you elaborate more?

Manoj Kewalramani 31:25

Yeah, so this is linked to the previous conversation that we were having on the property sector. Essentially what the government is saying is that our economic model needs to change. Previously there were two ways of our economic growth one was this investment which was government-led which was going into properties and other things and one was exports, manufacturing investment.

But that was low-end exports. We were exporting shoes, jackets, blankets, you know even chemical reactors, but in a smaller quantity. So you were exporting this low-end consumer goods durables and things like that. And that’s what made you the factory of the world. Now your competitiveness in that is declining because overall wage growth has become much higher.

So labor prices become much higher. The quality of products is actually good right now, but the challenge is this: This low-end manufacturing is also deeply polluting, right? So you want to move away from that because pollution has become a political problem, right? I was in Beijing when Beijing used to have horrible pollution AQI of 1000 or things like that.

But in a few years, they changed that by shutting down coal mines and things like that because it became a political problem. So low-end manufacturing can be deeply polluting.

You’re not competitive because your labor prices are going up. Also, there are other competitors who’ve come up. And you need to move up the value chain. So there they look at technology and investments in new technology as growth drivers for the future.

They also look at these new technologies as critical to future geopolitical competition with the west so they see the world and they say that look The world is in a moment where there is a technological revolution taking place you know from AI to Internet of Things to other things you’re in a place where there is a race to capture the commanding heights of new technologies.

So we need to invest in that from basic research to manufacturing. So in 2015, there was a plan called made in China 2025, which was released which essentially was a continuation of previous plans, but accelerated in other domains.

It identified 10 domains from things like again robotics and things like that and said we need to invest heavily in these areas because these are going to be future drivers of our economic growth so to divert and they’ve started to sort of state subsidized funding and also VC funding has gone into these domains to try and ensure that you build capacity in these areas. That’s been their policy, right?

Under Xi Jinping increasingly they’ve doubled down on that and they said we need to focus on high-end manufacturing and go up the value chain to invest in high technologies. So your current exports that you’re looking at whether it is lithium-ion batteries, whether it is EVs. All of that is a product of this that you have shifted that flow of capital to these domains. You’re saying that our future exports will still be export oriented.

But it has to be in these domains because I can no longer compete in manufacturing shoes, blankets, chapels and so on and so forth. Let Vietnam do it. Let Cambodia do it if India does it? Okay India can do it. Let Bangladesh do it in textiles and garments in particular because we are no longer competitive in that and they are also deeply polluting and we can no longer sustain that, right?

We need to move up the value chain there is some debate in China about let India do it should India be allowed to do it because their argument is even in this low-end manufacturing Yes, Shanghai Jiangsu these rich coastal provinces can no longer do it because the competitive advantages are not there as much particularly on price.

But the in interior provinces the hinterland provinces, which are relatively less well off which are poor in fact, they can do it .So, why don’t we transfer our capacity there instead of letting the capacity go to India? But the problem is that the connectivity of those provinces to the outside world is not as great.

Because they are landlocked as compared to the coastal provinces. So they’ve built these real connections to try and transport. But they are still not price competitive to do that through rail and things like that. Also, you will need to transfer technology skills, people and all that and that’s challenging, right?

And most of these hinterland provinces are also ethnic minority provinces where there have been political disturbances.

So it’s difficult to make that transition. So at the end of the day a business has to take a decision and if I’m a business person I’m going to look at Cambodia and Vietnam even a Chinese business person and say I’ll go there. I have great port connectivity. I’m gonna get great facilities.

I’ll do it cheaper and I’ll make profits. So there is a limit to which the government can control private business decisions and that applies to China also. So that’s the sort of push and pull going on right now.

Nansi Mishra 36:03

And I was also watching a video where one of the greatest investors of all time Charlie Munger said that he would prefer to do business with China than India because it is very difficult to get anything done in India.

They have a bribery culture. They are overpopulated. They have a caste system. So I believe every economy has its own set of challenges, right? So what kind of challenges China had at that point in time and how did they overcome them?

Manoj Kewalramani 36:31

Yeah, I mean I think you know the the things that you’re hearing about the Indian economy today particularly from western investors who are critical or who may be you know who may be having a much more cautious approach are things that you would have heard about China in the late 70s and the 80s also.

Not the caste system, but other things you would have heard similarly, right? It’s very difficult to do business in China. Everything is state-controlled. You know, there is a dissonance between central authorities and local authorities and everywhere somebody is asking for an extra buck, you know, there is deep corruption and all of that.

Deep corruption is all systemically there. It’s still true today as it was in the past. What I think is different and where I agree with Mr. Munger is that there is a systematic effort within China which was led by the central administration since the 80s to try and be as open and welcoming to businesses as possible.

Again that came at the cost of labor, right? So and I don’t want to minimize that but there was an effort to make sure that Foreign capital comes in and gets as many facilities as possible because we need it.

And I think that recognition is something that you know, I don’t think in India we have that you know to that degree and to be the ability of the government to do away with Impediments that capital faces whether it is land acquisition whether it is again energy water things like that I think in China there was much stronger and that’s partly because it was a single-party system, right?

Its ability to alienate people yet maintained political control was there whereas in India if you were to do that and you alienate people you can lose political control. So it’s obviously always going to be much more complicated to do it in a democracy.

And but I think that’s the beauty of India right because can you do that growth while maintaining this conversation around individual rights and labor rights and things like that. There will always be friction, but it’s it’s fine.

Nansi Mishr 38:37

I know this is what makes it very complex, right?

Manoj Kewalramani 38:39

Exactly. This is what makes it complex. But it is also something that I think is from a human centric point of view.

I think it is better, right? I mean, you’ll never be satisfied, but it’ll still be better It’s better, you know, I mean in China at a certain point of time because of this openness to capital again there was deep corruption, but there was also an explosion of things like, you know, cancer cases pollution being hidden, you know your soil pollution water pollution being hidden. In India, it’s good. There is transparency that sunlight is needed.

So I think that I would sort of prefer being in the Indian system. There’s no point in suddenly having a per capita GDP of $12,000 when, you know, the cancer rates are skyrocketing. So I think that that is a difficult bargain.

But I think I would prefer that bargain and that conversation in India than in China. From a business point of view I completely agree. Your goal is profitability. So if a government is throwing open the doors laying out the red carpet, you would say yes, I mean, I’m getting profits. Why will I not take that right? But there is a cost to it which today western businesses are realizing as China has become Competitive in domains where the West is competing against them.

It is pushing back, you know. So when it comes to EVs Its support goes to its companies as opposed to necessarily Tesla on the whole, right? Although Tesla has a massive factory in Shanghai. But the approach is that we will support our companies and that’s why BYD today is much much bigger than Tesla. Likewise the companies that came in with joint ventures sooner or later their joint venture partners got the skills, understood the technology, understood the processes and broke away.

And then were preferred by local governments for their subsidies and their support systems. So then they became competitors of their former partners and that then eroded the market share of their former partners and now they are globally competitive. So you’ve seen the government systematically do this which I think is a really smart policy.

I think India should be and I think this Indian this government particularly has actually done part of this. And if you read Chinese scholars and Analysts they complain about this. And it gives me a good chuckle because it’s like okay your game you’re getting paid back in your own coin.

But I think it’s it’s good policy. The fundamental message that I would take back is that yes there are significant challenges that we need to address domestically on factor market reforms, on land labor capital. I would want India to be much more open to foreign capital, foreign talent or foreign technology. There is no reason why Shanghai can have an NYU campus and we can’t seem to get foreign education into India.

We constantly complain about the fact that India suffers from brain drain. You know, the best and the brightest tend to go out.

I don’t understand why we can’t constantly struggle with the fact that there is not enough educational capacity in the country to absorb the students. Why can’t we be open to foreign capital and foreign technology and foreign education?

Nansi Mishra 41:35

This will also solve the problem of unemployment or skill issues, right?

Manoj Kewalramani 41:40

Exactly you need to bring more knowledge and more capacity into the country. And if there are others who are willing to bring it. Of course, they will be for profit. Let them bring it.

We should be welcoming instead of clustering ourself by feeling afraid that there is some ulterior motive. You know you need to… When a paranoid communist country could do that with confidence. I think India should be able to do something like that with confidence. So there are lessons to learn from how China did this.

Nansi Mishra 42:11

This was really interesting. I didn’t think about it because I was having a conversation with Sridhar. We were just talking about unemployment. Like I shared one experience where the 10 job vacancies were there and it was happening inside a hotel in Gujarat and 1800 people showed up for that interview.

Yeah, so like because and people are overqualified for that. Yeah, that job. So I don’t think this is a great suggestion, right?

Yeah, a lot of people are going to the US for that kind of education.

And the good change that we are seeing is most of them are now coming back. Yeah, there was a trend earlier that IITians would go out to study further or for IT jobs. And then they would never come back. Now I think the kind of impact these people can create in India because of that impact they are coming back.

Manoj Kewalramani 42:59

And from what I understand, I mean speaking to people in different governments. You know people speaking to different consulates and embassies here. They want to, the struggle is of the Indian system placing barriers. You want to have university partnerships.

What do they need? They need access to land. They need access to and they need degree recognition. We seem to be bureaucratically too slow in doing that I think those are the kinds of things where if we optimize, if India optimizes the rate at which you expand can be very very quick.

And I think that’s the one that China showed us that if you do these small optimizations and opening efforts? The multiplier effect that kicks in you won’t even realize it when you’re doing them and suddenly you’ll see that Okay, this is suddenly boosted everything Instead.

What we seem to be learning from China is that industrial policy is good. And I don’t think that is necessarily what India should be learning. Yes, in some cases we need to have industrial policy, but not across the board.

We don’t have the money to waste. I mean people talk like we discussed China’s property sector and you know How much is grown and you know these beautiful buildings that you see but it’s an incredible waste of capital. Can India afford to waste that degree of capital?

We have as part of industrial policy now, we have PLI schemes. I’m not against the schemes. I think they are useful but the problem is that once you have PLI schemes with multiple objectives.

One objective is national security. One objective is removing export import dependence. One objective is generating employment. Then you are dividing your capital in so many different areas. If you are thinking about employment as your goal, you will look at high employment generation domains and suddenly you will say Oh toys.

We shouldn’t have PLI schemes for toys. But why do you need to have PLI schemes for toys? You know, you should… why should state be doing that? If people want to manufacture cheap toys in India, enable the environment to let them go and manufacture it. If people want to import toys because they are cheaper. It’s okay.

Let them import toys. Consumer welfare is happening. It’s okay. Those who are manufacturing toys can look at some other sector to manufacture. Instead you use state capital on what you see as strategically important domains.

Semiconductors are strategically important. You need certain kinds of dependencies to go. There may be others, there may be critical minerals where you support. You don’t need to do it for everything. Why do you need a PLI scheme for furniture making? Is furniture making critical to the economy? It doesn’t matter.

It creates high levels of employment. Yes. Create an enabling environment by reducing taxes. You know the costs that go in. instead of subsidizing them through state capital and then intervening in that market. Don’t do it.

So I think that it’s really important to focus on our industrial policy. Rather than learn from the Chinese and say we’ll spend on everything because the Chinese are okay with wasteful investment. They have money to waste and they are okay with wasteful investment. We don’t So we should not be doing that.

Nansi Mishra 46:09

So we need to create employment the smart way. We don’t need just opportunities where over qualified people are just engaged.

Manoj Kewalramani 46:17

Yeah, right Yeah, I think those are some of the things that I think we should learn some of the negative lessons along with some of the positive lessons, right? I think the big positive lesson to learn from the Chinese is the ability of the state to mobilize people and deliver.

I think that is something you know we should imbibe, you know that what kind of state capacity is needed to do some of these things.

Another really good lesson to learn from them is China grew at its best when it allowed people to experiment. So there was no one China model there were multiple China models, every province every city could experiment under the broad goal that we need to expand GDP growth. And the best outcomes were then replicated in other domains if they wanted to replicate it.

Nansi Mishra 46:03

But in India, are we at a stage where we can afford to…

Manoj Kewalramani 47:06

We should. I mean but particularly in a hyper diverse country the more you try to establish central control over everything the worst of your outcomes are likely to be. If you liberate people to do things without necessarily placing unnecessary restrictions on them and which a lot of these decisions can also come from local governments.

So for example, you know Oh But your employment your hiring must be this percentage of this population your name must be this type.

Unless you liberate people from all of that. Let them chase money which I think is something again. It’s good to learn from China, you know, let people chase money rather than political objectives. Once you start doing that you will see a more well-off society who will be free to create, experiment, do things and you will see answers to your problems.

The moment you constrain them within certain identity silos, which unfortunately is what happens in India. It makes it much more difficult, right? It feels like an environment in which you’re being strangled. Let people be. Let people go and innovate, create enabling environments for them to go and do that.

That’s a much better and that the Chinese did very well until say 2009 10 11. After that things changed and that’s why we are also seeing you know Yes, the more central control the more central direction the less quality of output and the less focus on people. The more focus on what the state needs.

So in this pushing… I mean like as an individual I need my life to get better and the object the whole idea is that as all of us chase our dreams and a betterment of our lives collectively all boats start to rise.

Increasingly that has got that mantra has sort of been forgotten to something to the effect of the state must continuously collectively push people up and pull people up which is a very Chinese way of doing things. And when the Chinese didn’t do what they were doing and from the 80s till the first decade of this year they were actually booming in their growth as they started to tighten state control things have worsened.

So I think that that is a blessing that we should take away that you need to let go of control. You need to let people experiment, let people innovate while creating enabling environments that is on the economic policy. That is on the rule of law.

That is on judicial policy, you know in terms of say how the Judiciary works how quickly it dispenses justice and things like that. You need to fix those things. People will figure out ways to make money, people will figure out ways to solve problems.

Nansi Mishra 49:36

Like, we have definitely worked on our infrastructure and compliance and Indians have started shifting back.

Manoj Kewalramani 49:44

Exactly. So see infrastructure is an enabling environment, right? If you create good infrastructure, which connects your ports to inland facilities. You will automatically be able to attract investment inland and they will be able to export. You don’t need to necessarily give them a 50% duty drawback and all of that.

You know, you can start tailoring those essential subsidies by creating and again the Chinese did this very well. Chinese connectivity to ports is brilliant. And that’s why even if capital is wanting to come to India they will look at those factors and say look, it’s going to cost and I can’t do this.

Therefore I’d rather bear the political cost of being in China because the overall cost becomes lower because of this connectivity whereas people who come to India struggle with this. So the government should focus on creating an enabling environment rather than directing people in which way they should be looking to grow.

Nansi Mishra 50:35

What an amazing discussion. Super insightful. Thank you so much for joining us Manoj. It was very nice having this conversation with you. And Manoj has to step out to pick his son from school. So we are cutting it down here, but I’m sure we need a part two of this conversation soon.

Manoj Kewalramani 50:52

No, thank you so much for having me. It was so much fun and always open for part two.

Nansi Mishra 50:46

Sure. We will do it soon.

Manoj Kewalramani 50:58

Thank you.