It may be time for India to take a broader view of national assets

China’ economy having outperformed India’s should nudge policymakers to broaden their perspective of what matters most

- ARUN MAIRA

India has become strategically vulnerable, caught between the US and China. China’s capital goods production sector has grown 50 times larger than India’s since the liberalization of our economy, when we abandoned policies to build Indian industries and opened our markets to imports. China’s GDP is now five times larger, but that does not tell the whole story.

Despite pressure from the West to abandon its industrial policies, China continued to build depth in its industry. Until the 1980s, India’s capital goods production sector was as strong as China’s. Now India’s service and manufacturing sectors are dependent on imports of Chinese hardware and machinery. Even the US is alarmed by the strength of China’s electronic hardware and capital goods production.

India’s economy has arguably been left weaker than China by a bias against industrial policy since 1991, which for long laboured under a mistaken view that India’s economy could leapfrog manufacturing and go from agriculture to services. Beneath these ideological conflicts lies a fundamental accounting problem. Capital goods are not consumption goods. Their costs cannot be recorded as inputs in corporate accounts and must be charged as depreciation in line with sales growth over several years. This complicates computations of input tax credits under ‘value added’ regimes such as India’s GST. Capital goods and consumption goods must be treated differently: our GST regime recognizes this. But the service industry complains that GST, even after its recent reforms, does not provide it full tax relief for the capital goods it uses, which crimps its growth.