Can India catch up with China?

M. C. MADHAVAN

January 6, 2015

In India’s noisy political democracy, the problems are compounded by the existence of multiple political parties with no coherent approach to development

The average Indian was slightly better off than the average Chinese in the initial years after Indian independence. But China’s approach to development has varied markedly over the last 40 years and has been so successful that it now ranks as the second most important economy in the world. India has made good progress but is still substantially behind China.

In the first decade of this century, India’s growth reached a take off stage that prompted many people to ask when India would catch up with its neighbour. It was also thought that democratic India may even overtake China. Will that dream come true?

China and India, despite being such large countries, accounted for only 4.5 per cent and 4.2 per cent of global GDP in 1950 in Purchasing Power Parity (PPP$) terms. The ratio of China’s GDP to India’s was 1.18 in 1913 ($241 billion/$204 billion); in 1950 it was 1.08 ($239 billion/$222 billion). Estimates of per capita income made by Angus Maddison and Dharma Kumar suggest that India might have had a higher per capita income. However, there was not a marked difference in the level of human development.

Both countries, in the course of history, have feared foreign domination, have considered the state as the driver of growth and have suspected the private sector’s initiatives. For India, the problems were achieving unity in diversity and accommodating various languages and religions in a democratic set up. On the contrary, China’s hard state enabled it to pursue a single goal with determination and mobilise maximum resources to achieve its goals.

Growth in China

China experienced many problems in initiating industrialisation, but after some hitches, it switched to an all-round emphasis on heavy and light industries, and had a more successful resource mobilisation strategy than India did. As a result, Chinese manufacturing grew at 9.5 per cent, twice as much as India’s rate, from 1965-80. Also, China managed its agrarian reform better than India did.

On the whole, estimates by Richard Herd and Sean Dougherty suggest that China grew at a much faster rate than India did during 1950-79, and Chinese per capita GDP was more than twice the rate of India’s. This is largely due to higher growth in Chinese labour productivity and capital deepening. By 1978, the per capita income of China was estimated at $979; India’s at $966. China had caught up with India over the 30 years, but not dramatically surpassed it.

“China has outrun India in every area of economic endeavour in the last 35 years, except in computer software industry and agricultural research”

Few people in 1978 could have imagined the monumental economic progress that China would make because of the economic reforms pushed by Deng Xiaoping. The reforms stressed the principle of “each according to his work” rather than “each according to his need,” professionalism and efficient economic management at all levels and the gradual introduction of policy changes to avoid problems in implementation.

Deng transformed agriculture first and then took on the industrial sector. He opened up the latter to foreign capital while making room for the growth of village and local enterprises. Jiang Zemin, Hu Jintao and now Xi Jinping have continued to follow Deng’s principles, but with some adjustments. China’s economic growth was also made possible by a very large net inflow of foreign direct investment, a sign of confidence in the Chinese economy by outside investors. China is the leading nation in exports and the second largest economy in the world. The country’s per capita income more than quadrupled, ($5,720 equivalent to about PPP $13,000) and abject poverty was completely eliminated (though income inequality increased). China’s Human Development Index has also risen from .423 in 1980 to .719 in 2013, according to the United Nations Development Programme 2014.

Against China’s success, India’s achievement, though significant compared to what it was before independence, is modest. India also took tentative steps to modernise its economy in the early 1980s, but these petered out. Freed from the constraint of food grain availability thanks to the Green Revolution, India did not manage to apply to its industrial sector the lessons it learnt in its agricultural revolution — using foreign knowledge, relying on the private sector and deploying subsidies selectively. Instead, foreign borrowing was used to ease the consumption constraint in the public sector and to cushion loss-making public enterprises.

Indian policy underwent directional changes in 1991. Prime Minister Narasimha Rao ushered in reforms which were implemented well by his Finance Minister Manmohan Singh, who then became the second-longest serving Prime Minister of India. Indian economic growth accelerated during the period 1995-2008, but could not maintain the momentum due to political paralysis of policies that were necessary for economic growth. Gross national income per capita in 2013 was $1,550 and India’s HDI increased from 0.369 in 1980 to 0.586 in 2013.

Primary difference

The primary difference between the performance of the Indian and Chinese economy has been the faster growth of capital stock in China. With only a slight difference in the growth of employment, this translated into a more rapid growth of capital intensity. The growth of total factor productivity has also been faster in China. This appears to reflect a greater ease for labour to move out of agriculture into higher productivity sectors in China than in India. China has outdistanced India in every area of economic endeavour in the last 35 years, except in computer software industry and agricultural research.

Despite international border issues that still exist between India and China, the two countries are trying to create a cooperative relationship — China has become India’s largest trading partner in 2013, India’s trade deficit with China is about $38 billion, President Xi has offered $20 billion for investment in Indian infrastructure and other industries, and a 100-person delegation of Zhejiang province has signed MoUs with India totalling about $2.46 billion.

India will most probably overtake China as the most populous country in the world in 2030. China is better placed structurally than India for a good economic performance, but it is most likely to be much lower than its recent average performance of about 10 per cent a year. How much lower it would be would depend on its ability to maintain current labour productivity levels and the benefits likely to flow from its proposed trans-continental rail system and other transport-related activities. Troubles in China’s financial markets, a declining young and increasing older population as a proportion of the working age population, increasing wages in general and export industries in particular, costs associated with cleaning up serious environmental pollution, increasing competition from other countries in export industries using low-skill and semi-skill labour, lower savings rate and a possibly lower investment rate will have a negative effect on its growth.

India has an excellent chance of catching up with China if it can increase its labour force participation rate (particularly women), increase the average level of education, improve the quality of its labour force through special training programmes, reduce impediments to let foreign capital participate in its development process, design policies to cultivate a culture of entrepreneurship, and reduce corruption at all levels.

The problem in India has always been implementation. In a noisy political democracy, problems are compounded by the existence of multiple political parties with no coherent approach to development.

Prime Minister Modi, with his majority in Parliament, has an opportunity to reignite the engines of economic growth. Even if the Indian economy were to grow at 10 per cent a year, its GDP at 2011 PPP$ will reach only about 26 trillion in 2030; China can easily reach this by 2022. I don’t see India catching up with China in the next 25 years unless, of course, there is a massive failure of sorts in China.

(M.C. Madhavan is professor emeritus, Economics and Asian Studies, San Diego State University.)