Driving out corruption is key to China’s recovery and India’s future success 

The rapid-fire growth of China in a decade and a half to become a $10.3 trillion economy, next only to the US, and emerge during this period as the world’s biggest trading nation and the largest consumer of energy and a whole range of commodities used in making steel to aluminium to copper took every other country by surprise. In a seismic shift in global energy flows, China earlier this year overtook the US as the biggest importer of oil. By turning itself into a manufacturing powerhouse, the country has transformed the global economic landscape in many ways. So when the world’s second-largest economy wobbles, the impact is naturally felt in the rest of the world, more severely in countries with strong trade links with China.

The direct impact of growth slowing in China is likely to be minimal for the UK since that country makes up for a small portion of its exports. But the indirect impact on the British economy may not be insignificant if the knock-on effect for broader global economic growth is considered. Around 20% of US and European Union trade is with China, and any downshifting in that trade volume will have a bearing on the UK. Mines-oriented Western Australian economy has started bearing the brunt as China, which for a long time now has been the engine for global growth, has started sputtering. For the rest of the world, the question then is will President Xi Jinping be up to the task to shore up the Chinese economy and ensure its safe landing?

Lord Swraj Paul, chairman of multinational Caparo Group and a keen China watcher, tells DCI that he does not believe that “Beijing will be out of policy moves to make course corrections. Remember we haven’t seen the bottom of China problem; it’s still unravelling. No country however resourceful it may be can keep going up and up. As China went on recording eye-popping growth over many years to become the world’s dominant player in many sectors, it confronted issues like growing non- performing assets of banks, a result of a post-2008 investment binge, rising manpower costs shaving off competitiveness in some sectors, an ageing population and corruption. But all the negatives were overshadowed by phenomenal growth.

“One has to appreciate that in the course of the country transitioning from an investment led to a more market-based growth is a complex and bumpy process. I’m not surprised by growth slowing of an economy of China’s size as it seeks to adjust to a new economic model. I’m fully in agreement with IMF managing director Christine Lagarde that the Chinese leadership has the policy tools and financial buffers such as forex reserves of $3.9 trillion to manage the transition to a consumer-led economy. Earlier, China surprised the world with its spectacular growth and I have no doubt President Xi Jinping will be able to resolve the economy’s problems,” says Lord Paul.

What, however, has not helped an otherwise powerful China is the prevalence of widespread corruption seeping into high echelons of bureaucracy and communist party. “I’m very happy for Xi that one of the first things he did on becoming the leader is his declaring corruption as the greatest threat to the survival of the party and China remaining a great power. More importantly, in an unprecedented campaign rightly claiming global admiration, Xi has come down hard on very large numbers of corrupt officials and businessmen. Nothing surprising as the drive to rid the system of corruption is widely acclaimed by citizens, it has put many in the government and business on the edge,” says Lord Paul.  

But is there a possibility of Xi facing a political backlash. “Anything is possible. Take India where prime minister Narendra Modi and his very astute finance minister Arun Jaitley want to make a religion of ‘no favours taken, no favours given.’ But then they are let down by a senior member of the government. I have been a relentless campaigner against corruption and distribution of favours by the government. During the United Progressive Alliance (UPA) regime preceding Modi’s coming to power, there were many cases of wrongful allocation of frequencies to telephony companies and natural resources like coal and iron ore to producers of power and steel. Some favoured companies made huge wrongful gains. Indian people took their revenge by voting UPA out of power in 2014 May elections. A triumph for democracy that was.A cosy relationship between some business houses and the government eats into the vitals of the economy denying the masses the chance to benefit from growth. It will be good to remember what Nobel laureate Indian national poet Rabindranath Tagore wrote over a century ago, that he who does the wrong and he who allows that to happen are partners in crime deserve to be burnt like weeds,” says Lord Paul. His observation in 1983 that “companies are poor but their owners are rich” has become part of Indian business folklore.

It is commonly believed that India has potential to grow at a much higher rate than 7.3% in 2014/15 or 7% as forecast by Moody’s Investors Services for the current year because of deficit monsoon. Lord Paul has no doubt that “India has the capacity to grow at double-digit rate, provided corruption is fought with energy, an environment is created for the genius of all entrepreneurs and not just a small coterie of businessmen to come into play and banks with perilously growing NPAs stop playing footsie. But if growth fails to lift the poor, then it will be something I shall not be proud of. Indian leaders need to introspect why growth benefits are not trickling down to the bottom of population pyramid,” says Lord Paul.

In the past decade and a half, he has built a string of automotive components factories in a number of Indian states in sync with the country’s growing automobile industry (2014/15 Indian vehicles production was nearly 2.34m). How does productivity in Caparo’s Indian factories compare with units in the UK or the US? “Oh, there is much scope for improvement in India,” he says. How did some IT companies in India manage to make a mark on the world stage when the environment was not supportive of new entrepreneurs? “What helped these companies to prosper was the absence of government controls on the IT sector. Moreover, they were not in need of much bank finance. Their capital was brains and creative minds,” says Lord Paul.

Not very long ago when big mining groups swore by “never- ending China growth,” the likes of BHP Billiton, Rio Tinto and Anglo American invested many extra billions of dollar in mines capacity expansion. Now they are finding their margins coming under increasing pressure due to prices of iron ore, bauxite and copper ore collapsing on oversupply and poor demand growth. So Rio without Alcan and Anglo American without iron ore assets of Minas Rios, all bought at market highs would have done better now. Wisdom has finally dawned on miners to cut capital and exploration expenditure. “What you are saying is not an industrialist’s point of view. You have to see an acquisition, a takeover in the context of the time it happened. A takeover is based on due diligence and the best commercial decision of the day. Leave it to history to do the post-mortem.” But what about a few big-ticket purchases ahead of the 2008 financial crisis when claimants of trophies egged on by ‘egos’ were engaged in rounds of ferocious bidding? “In a free market, people are prone to making mistakes. That’s the law of the market,” he says. Having experienced now fewer than ten business cycles in his long, eventful career, his mantra is “when the chips are down, you keep your nerves up and when the going is good you cut costs.”

Lord Paul is globally admired for his engineering and metals business. But he had a distinguished 40-year association with the shipping industry from the founding of Apeejay Shipping in India to making it a thriving entity. So what does he think of the recession in the shipping business which refuses to go away and world seaborne trade not growing sufficiently strongly to take care of surplus shipping capacity? Some industry leaders saying dry bulk freight market could take three years to hit the road to recovery is disconcerting for ship owners and shipbuilders. “You have more ups and downs in shipping business than in other sectors, it being so closely tied up with movements in world trade. The challenge in shipping, as I have experienced is how quickly you adjust to changes. The shipping business that I ran must have made money more often than otherwise.”

Many in India have started thinking that China’s woes will create the right conditions for rises in flow of foreign direct investment in their country. “Make rules for foreign investment which should apply uniformly to all without anyone being required to knock at the government door for clearances. You know how successful a large number of non-resident Indian [NRI] businessmen are. Treat them on a par with resident Indian businessmen. You will see how enthusiastically NRIs will respond to the move,” says Lord Paul.

For over two millennia, society has remained suspicious and on occasions angry with business. Society bears grudges particularly against resource groups, which are manifest when oil is spilt in the seas or rivers and streams are polluted due to discharges from mines or displacement of local people happens to facilitate opening of new mines. All this has to end for good of society. But how does business go about it? “The answer is education. People need to appreciate that for society’s progress harnessing of resources is essential. At the same time, oil companies and miners must care for environment and rehabilitation of displaced people. I think awareness on all these counts is growing,” says Lord Paul.