Can India Catch Up With China?

"Both India and China will go on to become middle-income nations, pulling hundreds of millions of people out of poverty," opined Gurcharan Das in his best-selling book ‘India Unbound’.

It is widely known that in 1700 AD, India and China jointly accounted for almost half of the world’s GDP. As a result of colonisation, their share fell to around five per cent by 1950. However, the recent growth of the Asian neighbours has been extraordinary, and it is common consensus that if the trend is sustained, both economies could recapture their historic share of the world GDP.

Although the Communist State had a head start over India, with its liberalization process starting 13 years earlier, India is slowly catching up with China, putting interminable (and normally unflattering) comparisons to rest. In fact, the International Monetary Fund projected India’s growth at 7.4% in 2018, while China’s at 6.8%. But what can explain India's rapid ascent in the world competitiveness rankings?

Basic development economics.

India begins at a low level of resources allocation and utilization. As a result, it can improve productivity by employing excess resources with the existing technologies of labour and capital. China, by contrast, begins at higher resource utilization levels. Thus, massive governmental spending can no longer sustain China’s competitiveness. Technological and institutional reform could possibly pave the road to sustained growth, but that isn’t easy given China’s current structure where a large part of the economy is under direct or indirect government control.

Additionally, for China, not everything worked per the plan. Identifying high population to be a prime issue, Deng formulised the ‘One Child Policy’, enforcing it with great zeal through fines and sterilisation. The policy did succeed in reducing the population growth to under one per cent, but, over the years, created a demographic worry of the "inverted pyramid" and caused a shortage of young working hands.

Furthermore, according to Maurice Obstfeld, IMF’s economic counsellor, China is predictably headed for slower growth. It is expected to cut back the fiscal stimulus of recent years and, in consonance with the stated intentions of its authorities, rein in credit growth to strengthen its overextended financial system. Consistent with these plans, the country’s current rebalancing process implies a lower future growth.

On the other hand, for India, the latest lead indicators show encouraging turnaround signs after last year’s slowdown due to demonetisation and GST rollout. The manufacturing sector appears to have recovered, along with a jump in industrial production, primarily capital goods output. The available data suggests healthy growth of corporate earnings, despite rising commodity prices. Non-agricultural growth has also shown signs of improvement owing to higher investments and the service sector, including public administration and credit growth indicators.

Thus, with capital formation increasing continuously over time, it is almost a given that India will grow. But for India to takeover China, it first needs to tackle several major issues — labour reform (so people hire more, and women participate more), corruption, banking the unbanked, judicial backlog, maintaining peaceful borders, and ensuring ease of business for Indian and foreign businesses. Clearly not an exhaustive list, this is perhaps an overly simplified one.

Moreover, in this entire debate, we need to keep in mind that while technically there is nothing wrong with saying India is growing faster or as fast as China, the bases are different. India's GDP last year was $2.26 trillion. On this base it is expected to grow by 7.4 percent. China's GDP last year was five times larger at $11.2 trillion. So, even if the Chinese GDP grows by 1.5 percent, it would be adding as much to the economic output as India would at 7.4 percent.

All this simply prove that despite the prevailing omens — economic indicators, political stability, and favourable demographics — India has a long way to go before it actually catches up with China.

- Shreeya Jain