India can draw lessons from China’s economic reforms suited to its own conditions

Tuesday was the eve of the first anniversary of India’s demonetization drive, with former prime minister Manmohan Singh delivering a harsh rebuke of the controversial initiative.

Singh called it one of the “twin disasters” that damaged the nation’s small businesses while helping China.

Speaking at a conference of traders and executives in Prime Minister Narendra Modi’s home state of Gujarat, Singh called the event “a black day” for India’s economy. The “twin disasters” – demonetization and the shift to a goods and services tax (GST) – led Indian businesses to turn to Chinese imports, Indian news agency PTI reported. India’s imports from China showed an unprecedented increase in the six months ended in September, compared with the first half of fiscal 2016-17, Singh pointed out.

The increase in imports from China should not be a major cause for concern, but distortions in India’s domestic market caused by the “twin disasters” deserve attention. What is urgent now is to make people think about how reform efforts can be aligned with India’s unique economic structure. In this regard, China’s experience in reforming its economy, albeit in a reverse way, could be thought-provoking for New Delhi.

The major criticism of Modi’s reforms is the heavy blow dealt to India’s small businesses. In an article on Tuesday in the Financial Times, which claimed India’s economic strength had been undermined by Modi’s reforms, Rahul Gandhi, vice-president of the Indian National Congress, stated that India’s informal labor sector was “destroyed” and many small and medium-sized businesses were wiped out.

China has gradually moved away from a pure focus on the State sector since reform and opening-up began almost four decades ago, and that shift has seen the rise of small business in the country. But India’s economy is underpinned by microsized, small and medium-sized businesses. The stark difference in economic structures actually suggests that India can’t just copy China’s reform model, because sweeping reforms can easily backfire in India where small businesses and workers, seen as the backbone of the economy, may find the costs of reform unaffordable.

The Modi administration should take this into consideration. Successful reformers need both a strong revolutionary will as well as the acumen to identify the pain points of the public and move to address them.

In the case of India, this means the government must find a way to make reforms benefit the country’s small businesses, rather than turning them into victims.