After relative constancy for thousands of years, the Chinese economy drew away from India in the early eighties. Just two decades later, the gap with India is more akin to a canyon, especially in industry. Most, nay all, economists, policy makers and travelling journalists would have predicted that, with a large private industrial sector in India, and zilch in China, the result would have been the opposite i.e. a tradition of entrepreneurship, and experience with the capitalist ways of the world, should have led Indian industry to grow at double digit rates of 13 percent plus for twenty years and China should have grown at an average half that or 6.5 percent per annum. The abnormal picture is there for all to witness – industry in China accounts for 50 percent of GDP, in India, it accounts for half that, or 25 percent.

How did this happen? How could it happen? The all time favorite (Indian) explanation is that we in India are a democracy, and China is about as authoritarian as they come. And we, of course, have sacrificed higher growth so that we can enjoy political freedom. I happen to be in the camp that believes that the single biggest achievement of India is its spirit, and practice, of democracy. So is the democratic/authoritarian explanation enough? No, indeed it is nonsense. If anything, us being democratic should have led India to grow faster than China, especially in industry, where we had a distinct comparative, and absolute, advantage. But what about the argument that in China they can implement industrial reforms at will, and here we have to wait for one politician per decade - Manmohan Singh in 1991and Arun Shourie in 2002?

Two indications that the authoritarian argument is poppycock. First, it is manifestly not a co-incidence that the two Indian reformers are incorruptible, and therefore not subject to the wiles of the industrialists i.e. nothing to do with democracy. Second, if authoritarianism is the answer, then how come two vast continents of Latin America and sub-Saharan Africa, containing over 50 authoritarian regimes, have shown practically zilch growth for 40 years.

What explains the canyon? Economic freedom in China opposed to the capture, corruption, and influence of private industry in India. To be sure, politicians did gain an upper hand with the industrial reforms of 1991. But facts suggest that this was temporary, and after regrouping, private industry and their glib "in the name of a level playing field" lobbyists, have reigned supreme and prevented any meaningful reforms. What else can explain this startling fact - no matter what permutations or pyrotechnics are attempted, industrial growth for the decade after the reforms has been about 1.5 percent less than the growth rate (7.5 percent per annum) pre-reforms! What happened?

One major explanation is that the reforms allowed Indian industry to have greater freedom of action and investment, but at everybody else's expense. Industry, and its lobbyists, made sure that the reform that would actually help competitiveness, and therefore higher growth rates, did not happen. Tariff rates declined from insane levels, to insanely high levels of around 33 percent today - still higher than Pakistan, Ethiopia, Ghana, and any other country that you can dare imagine.

One immediate explanation of why Chinese industry grew at almost twice the rate of Indian industry is that it allowed tariff rates to fall to a level of less than 10 percent today. But what was the "political economy" behind the fast and meaningful reforms in China - and the lack of the same in India? One explanation consistent with the facts, perhaps paradoxically, is that the Indian private sector has prevented meaningful reforms. In other words, China was able to implement far-reaching industrial reforms precisely because it did not have private industry to obstruct its path.

Another problem with Indian industry has been its predominantly feudal, family culture. In a global world, a family firm can be a lot worse than a dinosaur - it can prevent a level playing field for the others. What could have been a major advantage - an entrepreneurial culture, and the existence of firms with industrial knowhow - was turned into a nightmare for those wanting to enter the hallowed circle. The family firms were only interested in their narrow profits, and their petty monopoly status. All else was to be opposed. Never mind that the fix had taken place before the competitors were even allowed to enter the doctored level playing field. No one said Indian private industry was stupid, or risk loving. The only way to ensure total success was with total annihilation of competition. It is this which allowed Jet Airways to succeed in making politicians articulate the following policy: Dunkin Donuts could invest in Indian Airlines, but not Singapore Airlines. It is this which delayed privatization in India for ten years - until Arun Shourie said no to their blackmail.

What should be done? Can India ever catch-up? Two distinguished policy wonks, and two very good friends of mine, articulated in this very space last week two very different solutions. Ninan felt that the answer lay in exchange rate depreciation, and Goswami circuitously argued, via the blinding vapors of soda ash, that Indian industry was really not protected at all.

Both articles have disturbing implications for future reforms. Ninan's prescription will not work for two reasons: first, it presumes that he is the ultimate Stalinist and knows the appropriate exchange rate; and second, like all good central planners, he has failed to calculate the intended consequences of his policy i.e. with an inflation of less than 2 percent, and a GDP growth rate the second highest in the world, the rupee will have a tendency to appreciate in a free market. Goswami's calculations of zero protection for soda ash (and by implication for other industries?) suffers from conceptual problems, but most importantly, and painfully, suffers from an unintended implication. The implication is that our central planners have got it absolutely spot-on, and do not need Ninan to join them. Even for as minor (as percent of industry) an item as soda ash, the Babus have reached perfection i.e. the stated tariff rate of 20 percent is exactly what is needed to give zero effective protection! So look forward to the next Budget with precise tariff rates for every item - it is back to the good old days when industry, and their lobbyists, dictated economic policy.

In the mid-eighties, I had described the problem with the Indian economy in terms of the BLIP nexus - bureaucrats, left intellectuals, major industrialists, and politicians. Some fifteen years later, things have changed in India - happily the BLIP model is no more, as globaloney, and Chinese success, has made converts of almost all of us. Senior bureaucrats, and senior politicians, are now the champions of economic reforms.

Thankfully the left has found itself a new role as groupies of the Taliban. Only the I is left, and sadly, that I does not stand for India.