This century has been good for India, so far. Its economy has been bounding along finally reflecting a closer correlation between promise and performance. The demographic trends have never been so propitious. Given current trends and informed forecasts India’s GDP is expected to double every seven or eight years. It is climbing closer to $2 trillion now. Thus by, say 2050, we could be looking at a GDP in real terms of over $ 40 trillion. If the current trend were to do slightly better and keep it up, by 2050 or even earlier, India could conceivably emerge with the world’s largest GDP. While this potential may not be realized by India’s ever squabbling, petty minded and greedy elite, many knowledgeable people abroad seem fully aware of it. Some almost certainly would be contemplating tripping us up on the way to this tryst with destiny?
How we fare during these next crucial decades depends a great deal on how we perceive ourselves? This psychological factor is critical to sustained economic growth. Economics thinkers now seem to have come full circle in their reasoning’s. Classical economics was linked closely with psychology. Adam Smith’s other great work was “The Theory of Moral Sentiments” and dealt with the psychological principles of individual behavior. Jeremy Bentham contemplated a good deal on the psychological underpinnings of utility. It was the neo-classical economists who distanced themselves from psychology and sought explanations for economic behavior with what passed off as scientific and rational methods. It is not as if the switch was complete. Many great economists like Vilfredo Pareto, John Maynard Keynes and Joseph Schumpeter continued to base their analysis on psychological explanations. In more recent times this school of economics has been given greater importance and is reflected in the award of Nobel Prizes to behavioral economists like Herbert Simon and Gary Becker. Every politician worth his salt knows that national mood and perceptions are decisive in determining national outcomes. Thus defending India physically implicitly implies defending its national mood.
The changed nature of economics.
The inexorable growth of China’s GDP has been the dominant event of the past three decades. China having surpassed Japan a few years ago, is now taking aim at that of the USA ($14 trillion), whose economy is at present more than two and a half times bigger than it. It took China a little less than a decade to make a similar leap to overtake Japan. But then Japan has hardly been growing since 1995 and its GDP has been roller coasting between $4-5 trillion.
Overtaking the USA will still take some years and some effort as that country has begun posting some smart growth after the gargantuan Obama stimulus package pump primed, not just the US economy but also the world's economy, and particularly of countries like China which have a symbiotic economic relationship with it. Despite this, Chinese GDP is expected to surpass that of the US well before 2020 when it will be about $24.6 trillion as to the USA’s $23.6 trillion.
But GDP alone does not make a nation wealthy? China’s current per capita income keeps it in the company of countries like Algeria and Albania. Even in 2050 when the Chinese GDP will be much bigger than that of the US, its per capita income will still be less than a fifth of the American per capita. Neither does GDP alone make a nation powerful. Midway in the 1800’s when Britain was at the peak of its world power, its GDP was about 5% of WGDP. The GDP’s of many Arab countries exceed Israel’s, but we know where they are in terms of power.
If India keeps growing at the present rate of about 7%, its GDP will surpass that of China by 2045 and if India’s population stabilizes in 2050 at 1.6 billion, then in all likelihood its GDP too will surpass China’s. It is now about one third of China’s. But what does this imply for the world’s power structure? True the world’s economic fulcrum will shift to Asia. Already Asia’s GDP exceeds that of the USA and EU. By 2050 it will account for about over 52% of WGDP, with India or China having the biggest GDP. In its report “Asia 2050: Realizing the Asian Century.”, the ADB makes the following observations: By the middle of this century, Asia could account for half of global output, trade, and investment, while also enjoying widespread affluence.
By nearly doubling its share of global GDP (at market exchange rates) from 27 percent in 2010 to 51 percent by 2050, Asia would regain the dominant global economic position it held some 250 year ago, before the Industrial Revolution. Some have called this possibility the “Asian Century”. In this scenario, Asia’s GDP (market exchange rates) would increase from $16 trillion in 2010 to $148 trillion in 2050, or half of global GDP. (See table)
But when you get down to the basics, power is more a relation of the money available with a government than its GDP. This simply means the larger the revenues the greater the power at the disposal of a government. The US today has a Tax/GDP ratio of about 27%, while that of China is 17% and India’s 17.7%.
The ability to raise revenues is linked to the per capita income, income inequality and tax compliance. The per capita income of the USA is now $47,000, China’s is $4300 and India’s is $1300. Given this, the ability of countries like India and China to squeeze more out of their people and squeeze greater effort is limited. Even in 2050, if all the projections come true, the USA per capita will four to five time s bigger than either India’s or China’s. So should we be counting our chickens before the eggs hatch? Nevertheless, it is being confidently predicted that the top three places in global GDP rankings will be held by the USA, China and India, with the other major economies and powers like Brazil, Germany, Japan, Russia and UK straggling well behind in GDP terms.
Geography and recent history have made the India-China relationship a difficult one and one in which the USA will find ample space and opportunity to inveigle itself to its advantage. This is a made to order situation for strategists and leaders in the three countries to ply their trade with plenty of worst-case scenarios. It would seem that India and China are destined to live out the foreseeable future as rivals, if not adversaries.
But rivals need not be enemies and neighbors need not get fratricidal. If there are two large and rising powers in a region, rivalry is inevitable. France and Germany or Brazil and Argentina come readily to mind. The situation between India and China is not very different. Nationalism arrived in both countries at about the same time in the early 1900’s with the advent of Sun Yat Sen in China and MK Gandhi in India. This was after centuries of foreign rule or domination over the Han and Hindu ethnic majorities. After decades of turbulence, servitude and exploitation, in the waning 1940’s both countries emerged as “free nations” with entirely different political and economic systems. Mao Zedong and Jawaharlal Nehru were leaders with entirely different personalities, ideologies, visions and world-views.
The isolation of the two countries that the British had so assiduously nurtured by supporting an independent Tibet was rudely shattered by its annexation by China in 1951. This and the handing over of Xinjiang by the then USSR to the new PRC made the Han and the Hindu neighbors for the first time in history.
The global crisis and the changed circumstances.
The global economic crisis has exacerbated problems within its rapidly growing economy. With US markets rapidly shrinking China needs to find markets elsewhere to sustain its export led growth model. The rapidly growing Sino-Indian trade but increasingly unbalanced in China’s favor mostly due to an undervalued Yuan is yet another festering issue. China derives much of its export prowess due to its undervalued Yuan and exploitative practices in the work place.
The economic profligacy of the USA and China’s somewhat naïve hoarding of trillions of dollars as reserves makes it the USA’s co-equal in causing the global economic mayhem. There is no sign that China has derived lessons from this and will take a more positive attitude to reconstruct global economic order. China still does not seem to have grasped the essential reality of its trade relationship with the USA. Many American economists have taken to describing it as akin to that of a dope peddler and drug addict. China supplies cheap goods to the USA and then proceeds to invest its trade surplus in US securities, which in turn fuels more American consumption. Besides the printing of dollars continues unabated.
This gives China the two digit GDP growth rates it has got addicted to and the Americans the high standards of living they have got addicted to. The way out of the current crisis is only when the US starts to curb its appetite for overseas goods and overseas adventures like in Iraq and Afghanistan, and China gets used to more realistic and manageable growth rates, in which case the revaluation of the Yuan becomes a mandatory obligation. The problem is that the Chinese consider any such suggestion as a criticism of their wise policies that made them a world player! Sensible opinion from India and elsewhere will only keep pointing out to this as the key destabilizer of global economic order.
India-China trade is burgeoning and is now headed to pass $70 billion by the end of 2012. The trade balance favors the Chinese to over $20 billion. The irony of this is that even this relatively small amount of money will then as a part of China’s US securities portfolios and thereby feeding the consumption frenzy in the US even more.
The composition of India’s imports and exports with China is quite revealing. While India is mainly an exporter of primary goods like iron ore, cotton and minerals to China, China is mainly an exporter of high value added manufactured goods. This more than the trade gap underscores China’s manufacturing prowess and its lead over India. The two charts below tell the tale. The first one relates to what India imports from China. The composition is telling. They are mostly manufactured and high value added goods. In the chart that follows we have India’s exports to China.
Primary goods like iron ore, cotton and yarn, and minerals, all with little manufacturing value addition. It is as if a under developed country is exporting to a mature industrial nation. And mind you China is an industrial nation with 52% of its GDP derived from Industry while India’s ratio is less than half that.
It is China’s manufacturing prowess that has made it the world’s engine of growth. It consumes huge quantities of raw material and semi finished goods from its neighbors like Japan, South Korea, Taiwan and the ASEAN countries. This extract from a recent IMF report tells it thus: “ China now accounts for 50% of all intraregional intermediate exports, making it the centre of Asia’s supply chain. Overall, intermediate goods exports accounted for about 70% of the annual export growth in Asia over the last decade, more than double the consumption of final (consumer and capital) goods.” As a result of this greater vertical integration, the co-relation of Asian economies exports to China with Chinese exports has increased. The IMF study highlights this dependence of exports to China and after some value addition to other countries by stating; “Regression estimates suggest that a 1% drop in Chinese export growth would lower the growth of exports of other Asian economies to China by about 0.66%.”
The result of this huge expansion in China’s exports has seen a huge pile up of Chinese foreign reserves. These huge reserves can only be invested in abroad. This was the primary reason for the US housing boom and the toxic loan crisis that almost brought the US economy down. Clearly a way has to be found out of this situation as well. China’s suggestion that the Renminbi also becomes a world reserve currency finds few takers in India.
In the recent years there has been much speculation about the emerging rivalry between India and China. A good deal of this owes to the fact that India too has joined China in the high GDP growth club. While Chinese reforms, which began in the mid 1970’s gave it an edge; India’s reforms that began in the early 1990’s have begun to show signs of having taken root. Since the turn of the century India has been posting annual growths of closer to 8%. Given its more favorable demographic profile India’s GDP is predicted to soon grow at a faster rate than China’s. If these projections are realized, in another quarter of a century India’s GDP will not only overtake that of the USA, but will hover pretty close to that of China.
Higher GDP’s leading to higher military budgets.
While this should not be a cause of friction, it actually does cause some. Higher GDP’s means bigger military budgets. With bigger budgets both nations will inevitably sense greater threats. That’s the nature of such things. The Economist succinctly poses the problem for us. “Commensurate with China’s economic growth the rise of its military outlays too has been quite extra-ordinary, not only causing concern to its immediate neighbors, which include the four of the top five global nations namely USA, India, Japan and Russia.
According to SIPRI, a research institute, annual defence spending rose from over $30 billion in 2000 to almost $120 billion in 2010. SIPRI usually adds about 50% to the official figure that China gives for its defence spending, because even basic military items such as research and development are kept off budget. Including those items would imply total military spending in 2012, based on the latest announcement from Beijing, will be around $160 billion. America still spends four-and-a-half times as much on defence, but on present trends China's defence spending could overtake America's after 2035.
All that money is changing what the People's Liberation Army (PLA) can do. Twenty years ago, China's military might lay primarily in the enormous numbers of people under arms; their main task was to fight an enemy face-to-face or occupy territory. The PLA is still the largest army in the world, with an active force of 2.3m. But China's real military strength increasingly lies elsewhere. The Pentagon's planners think China is intent on acquiring what is called in the jargon A2/AD, or “anti-access/area denial” capabilities. The idea is to use pinpoint ground attack and anti-ship missiles, a growing fleet of modern submarines and cyber and anti-satellite weapons to destroy or disable another nation's military assets from afar.”
While the growth of China’s military expenditure so far is worrisome enough, the future trajectory should cause even more concern. It is predicted by SIPRI and others that China’s military expenditures will overtake those of the US within the next few decades.
According to CSIS, in 2011, Beijing spent $25.8 billion on new weapons and related research and development, up from $7.3 billion in 2000. China’s total defense budget grew from $22.5 billion to $89.9 billion between 2000 and 2011, citing official figures from the Beijing government. However SIPRI estimates Beijing’s 2011 defense budget at $142.2 billion. India’s defense spending grew 47.6 percent over the decade, reaching $37 billion in 2011. Japan’s military budget rose from $40 to $58.2 billion. South Korea’s defense investments swelled from $17 to $29 billion, while Taiwan’s defense budget expanded at a slower pace, from $8 billion in 2000 to $10 billion in 2011. Total defence spending in the United States grew by twice as much during 2000 to 2005 (7.2%) as it did between 2005 and 2011 (3.6%). While understandably in Europe, total defence spending declined from 2001 to 2005 at -1.4%, and declined at an even faster rate (-2.5%) between 2006 and 2011.
People is power.
Now we must consider another relationship, for long disdained by economists and social scientists- growth and size of population. GDP has a directly relationship with the size of nation’s population and its demographic profile. If a population is suitably educated, vocationally skilled and in good health, particularly it’s productive age cohort of between 18- 60 years, then the size of this productive age cohort will determine GDP growth. At this moment of time, China has the world’s largest productive age cohort. But by 2050 India’s productive age cohort will be a couple of hundred million more than that of China’s. That is because populations too rise and wane as families get smaller and death rates overtake birth rates. The table below shows how China’s advantageous younger working age cohort declines will India’s rises. The next one depicts how China’s dependency ratio increases. In other words non-working population increases to put a greater burden on the economy.
While this is happening to China, India’s own working population hugely increases, giving it the potential to grow even faster, and hence the promise to overtake China economically.
For many decades economists world over disdained population growth as adding to economic woes. Many made apocalyptic prophesies for countries like India. The Stanford Population Biologist, Dr. Paul Erlhich in his book The Population Bomb had rather gloomy predictions for countries like India such as starvation deaths at the turn of this century. Happily for us these were exactly the years when India had problems with storing grains and began registering major economic gains. Finally economists began to understand the relation between population and economic growth in amore positive manner. That is because, when the government and society offered better education and health standards, the thus empowered cohorts of young people entered the general workforce with required skills and higher productivity resulted. The younger population were not only the producers, but also the savers and consumers who reshaped societies and economies. A look at the charts below explain the demographic transitions in India and China and they clearly show how better placed India is as we head midway to this century. Thus many economists now project India to have the steepest growth of the middle class in the history of man and that it could become the world’s biggest economy.
By 2050, many of today’s major economies will be showing deep declines in population. Japan, Russia and most of Western Europe will lose huge numbers. Russian population will decline by as much as 40-50 million or a third of what it is now. As China’s population starts flattening its dependency ratio – that is the number of people, young and old, who need to be supported by the families or society - will start rising. China’s dependency ratio will be 64 as opposed to India’s 48.
China’s story, as is India’s, is very much alike. The coats may be frayed at the elbows but when they walk, talk, smile or snarl, the world will take note.
Mohan Guruswamy
Email: mohanguru@gmail.com
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