To Beat China, Be China

BY RUPA SUBRAMANYA

JANUARY 22, 2015 

For years, economists have argued that the Indian economy should grow faster than China’s. Is it finally on track to do so? 

Rupa Subramanya is a Mumbai-based economist and co-author of Indianomix: Making Sense of Modern India.

In 2003, MIT’s Yasheng Huang and Tarun Khanna of Harvard Business School argued in Foreign Policy that India would eventually overtake China. It was a case of fundamentals: Driven by fickle and unreliable foreign investment and technology, the Chinese economy would peter out while India, buoyed by more reliable drivers such as domestic savings and entrepreneurship, would one day thrive — and at China’s expense. Huang and Khanna’s controversial argument made a big splash at the time. To many then and now, suggesting that India could overtake China seemed outlandish.

Outlandish or not, many experts were sympathetic to the notion that democratic India ought to do better than authoritarian China. But China stubbornly refuses to undergo the existential political crisis that many Western observers have predicted for decades. And India’s democracy, especially during Manmohan Singh’s left-of-center government, failed to accomplish much in the way of structural economic reform and instead became a case study in policy paralysis.

Yet here we are in the first weeks of 2015: China finally seems to be cooling off, and India may, at long last, be warming up. Could Huang and Khanna’s theory be ready to bear fruit?

According to the World Bank’s latest Global Economic Prospects report, India’s real GDP growth will reach 6.2 percent this year, 6.8 percent next year, and 7 percent in 2017, just overtaking China, whose growth is expected to slow to 6.9 percent. And the International Monetary Fund’s World Economic Outlook predicts that in 2016, India’s 6.6 percent growth rate will overtake China’s 6.3 percent. If these forecasts hold true, India will become the world’s fastest-growing large economy for the first time in living memory. The World Bank and the IMF say these improved growth projections are due, at least in part, to the Narendra Modi government’s renewed vigor for economic reform.

But let’s keep things in perspective. When Huang and Khanna made their original bold prediction, the Chinese economy was experiencing blistering double-digit growth. 

India surpassing China in the future has as much to do with its economy as it does with New Delhi’s renewed growth impetus.

India surpassing China in the future has as much to do with its economy as it does with New Delhi’s renewed growth impetus. But given the enormity of the challenge facing Modi — transforming his country into a manufacturing powerhouse — predicting that India will achieve China-style economic expansion anytime soon would be an awfully big gamble.

Also, let’s recall some basic economics. Textbook growth models predict that economies beginning from a lower base will grow more rapidly than their richer counterparts, all else being equal, due to what are known as diminishing marginal returns. India’s economy is still a fraction the size of China’s — so in theory, excluding other important differences between them, India shouldbe growing more rapidly than China. The fact that it is not reflects that China has continued to grow rapidly despite already have achieved a very high GDP level in such a short time, while on the flip side India has failed to live up to its potential.

In fact, to beat China, India must become more like China — in a sense, the opposite of what Huang and Khanna originally argued. As it happens, this is indeed what the Modi government is trying to do, with its emphasis on building top-notch infrastructure and promoting large, labor-intensive manufacturing projects, both for export and for the domestic market — a model that will require foreign investment and technology, key drivers of China’s success.

The government’s initiative to create 100 new “smart cities” — aimed at attracting large-scale, foreign investment-led growth — fits this paradigm perfectly. So does the government’s larger commitment to revamping the country’s creaky roads, bridges, highways, and power plants. If India can do all this while leveraging its demographic advantage — a youthful population whose median age of 25 bests China’s aging population — it has a legitimate shot at beating Beijing at its own game.

If India overtakes China, it will most likely be because it emulates the best practices of Beijing’s growth miracle. Whether or not that goal is achieved, it’s clear that Prime Minister Modi’s economic team understands what needs to be done. What remains to be seen is whether it can overcome India’s fractious democracy and get the job done.