Economies of India and China A Comparative Analysis

Economies of India and China : A Comparative Analysis

In Economics
11:00 PM, Nov 16, 2015
Ramaharitha Pusarla

India and China, besides being the oldest civilizations of the World, are also geographically large countries in Asia. Both of them together are currently home to around 40% of the global population and hence rapid economic strides of these countries will have major impact on global economy. Incidentally, both countries embarked on their economic odyssey after 1950. The consistent higher economic growth posted by China over the past three decades has marveled the World. India had a slow start and the real economic progression began when economic liberalisation was officially flagged off in 1991. Prior to 1991, India had dubious distinction of scripting stagnating growth rates of 3.5% or the Hindu growth rate as it was popularly referred. Post economic reforms, India registered a steady growth and its growth rate in the past decade was 7-7.4% against 9.9 of China. Angus Deaton, an Economist of Princeton University won the Royal Swedish Academy of Science Award in Economics or popularly known Nobel Laureate of Economics in 2015 known for his work on measuring poverty and his studies on how growth can reduce poverty. (1). He was upbeat about the gradually diminishing poverty rates in the World and owed the success to the impressive economic growth achieved by these countries. China’s unparalleled growth magic has indeed compelled numerous analysts in declaring that twenty first century belongs to China.

While economic progress of both the countries was driven by economic liberalization there has been an inherent difference between the economies. India has mixed economy with substantial private sector participation, characteristic of a capitalist economy. China has a command economy with state-controlled enterprises largely looming with meagre presence of the private sector. While the backbone of the Chinese economy is its robust manufacturing sector, India has moved away from agriculture to services with a little increase in manufacturing sector. The share of manufacturing sector in India is 17% way below Thailand 33%, China 31%, South Korea 31% and Indonesia 22%. Even countries like Philippines, Sri Lanka, Vietnam, Turkey, Mexico and Bangladesh have higher share of manufacturing (in terms of GDP) (2). The agricultural sector in India still continues to provide 50% of employment though its contribution in GDP has fallen to 13.7% (3). Chinese economy propelled by its exports and manufacturing, has become a remunerative enterprise with the availability of cheap labor and subsidized infrastructure.

Currently, China is the largest exporter and its manufacturing sector is 8 times more than that of India. On the obverse, India has poor exporting potential and its manufacturing sector has been throttled by poor infrastructure, cumbersome taxation, high interest rates etc. Manufacturing is the only sector that has potential to create more job opportunities and has multiplier effect on interiliac segments of economy. Realizing the urgent need to revamp and boost the Indian manufacturing sector, the Modi government has unveiled ‘Make in India’ (MII) program in October 2014. It has been a year of its launch, and its progress is encouraging so far. India’s economy is boosted mostly by the IT-enabled services sector.

According to World Bank estimate, economic liberalization in China has uplifted nearly 500 million from poverty since 1978 while the figure for India stands at 175 million from 1993 through 2011. Economic reforms were introduced in China in 1978, 13 years ahead of India’s globalization process and its growth spectacle is consistent. By 2001, it has comprehensively overtaken developed countries like UK, France, Italy, Japan and Germany to become the second-largest economy with $10 Trillion GDP. In the process, it has accumulated world’s largest foreign exchange reserves of $3.7 trillion 10 times more than India. India with its $2 trillion GDP is eventually dwarfed by its neighbor. All these positive attributes held Chinese economy in a good stead whereas red tape and corruption punctured India’s financial reputation presenting a dim picture of India in the international arena. Even the decade long period of steady growth stumbled in 2013 and just managed to recover in 2014.

Coincidentally, China too started exuding symptoms of slowing down with labor becoming expensive, economy relying on low-priced exports and with government’s unabated obsession for infrastructure building spree. The grim picture is exacerbated by humongous levels of corruption and eruption of housing bubble. For the first time in over three decades, China’s growth rate slipped to 7.4 in 2014 and the prediction for 2015 were bleak as its markets were hit by stock market volatility. International Monetary Fund (IMF) reported a growth rate of 6.9% in the third quarter for China (4).

The first symptoms of an impending financial crisis began to emerge when the stock market began to plunge for three-weeks in succession in July 2015. On August 24^th, dubbed as ‘Black Monday”, the stock markets of second largest economy of the World fell sharply with Shanghai share index losing 8.49% of its value. This nose-diving resulted in wiping of $5 trillion from the global stock markets since Yuan was devalued in July. Despite the government’s efforts of lowering interest rates from November 2014 for five times, the crisis couldn’t be averted. Chinese authorities have tried to revive the markets by pumping $200 billion even that failed to ease the crisis. The collapse of the stock market created tremors not only in Asia but also the major global stock markets tumbled. Soon commodity prices of crude oil and copper witnessed sharp fall, major Asian currencies weakened. Market analysts predicted a stock market crash or burst of the bubble as stock prices increased by 150% between June 2014 and June 2015. Shanghai composite index points was just 2050 in June 2014 and sky rocketed to 5220 in June 2015. One of the principal reasons that led to the crash was the Government policy of encouraging general public participation in stock market. Besides, slow economic growth, fall in exports, reduced investment spending and profit margins for companies stoked the crisis. India too felt tremors of the crash. But the effects have been moderate ranging from weakening of its currency to fall in stock prices. Among the emerging market economies (EME), India is stable wherein its slow pace of reforms has rescued it from several global crises (5). Interestingly, China’s fall has boosted global investors’ confidence in Indian markets as it remained relatively stable.

In a sharp contrast to China’s economic debacle, financial situation in India is receiving a great boost under the regime of Prime Minister Modi. People had great expectations from Modi and expected a quick financial turnaround. But India’s problems are deep-rooted and only systemic changes can make a larger difference. To this end, Modi government has taken many initiatives. These included- revamping of public banking system wherein a Bank Board Bureau was appointed which allows running of a bank like board managed company. Second, a National Infrastructure Investment Fund for development of infrastructure was setup and government will allot $3 billion annually. Additional investments can be raised from private sectors or from investors globally to expedite infrastructure development. Third, government has taken up transparent auctioning of the natural resources whereby cash started flowing into government exchequer. These finances can help in rejuvenating other sectors (6). Another important initiative in this direction would be implementation of the GST. Sadly, the fortunes of the GST are at the mercy of the opposition coalition. While India’s macroeconomic indicators present a rosy picture of the economy, India fails to draw global investment due to its poor micro economic indicators like- ease of doing business, execution of contracts etc. To break the grid-lock of the bureaucratic hurdles, government has launched the G2B eBiZ portal for single-clearance of the projects in April 2015. India’s whose ranking is 142 out of 184 countries in ease of doing business can climb up to below 50.

India is better placed than China in several aspects, heralding its potential to supersede China over a period of time. India has all favorable elements to be a lucrative market. The aging working population in China will pale out against large demographic advantage of India. Cheap labor thus far offered an initial competitive edge for China. Soon this dominance will erode due to the one child policy adopted by China in 1978. Though India hasn’t surpassed China its growth rate is on par with China as of now. While China’s growth is believed to stagnate over a period of time due to falling exports, low domestic consumption India is expected to perform well as markets can be driven by domestic consumption. China’s debt rates have reached an alarmingly high rate of 128% according to some estimate whereas India has still enough room to accelerate and develop. Market analysts are now speculating an impending property bubble crash in China (7). China has the distinction of having home ownership rate of 89% and there has been steep decline in the prices of the property which is a worrying development. Of late, the Dragon is battling with high deflation rates on the other hand, India is now taming inflation and has announced rate cuts to stimulate economy.

Latest reports now indicate that India has emerged as the most favored foreign investment destination (FDI) in 2015 trumping China and the US (8). FDI inflows into India between January to June 2015 is $ 31 billion against $ 28 billion of China and $27 billion of the US. Even India has jumped 16 places to 55 the position among 140 countries in the World Economic Forum’s Global Competitiveness Index. This statistical measure takes into consideration various parameters like institutions, macroeconomic environment, education, market size and infrastructure. Better performance reflects India’s marked improvement in the financial architecture. India is now fastest growing country among BRICS for the first time since 1999. World Bank estimates that India will continue to grow at 7.5 and if it can sustain its growth momentum Indian economy was take-off. While China is ahead in terms of various metrics like- life expectancy, literacy rate, child mortality rate India is relatively better placed for its democratic political system.

Historically too, India and China had several similarities with a meticulous distinction of steering global economy from 500 AD onwards. Both of them experienced the excesses of imperialist powers and stirred up economic resurgence after becoming independent. Around 1980 when China initiated reforms its per capita income level was on par with India. Now China’s per capita income is three and half times that of India and its GDP is five times. India has a long way to go and propitious reports of economic parameters clearly vouch for acche din.

Aside economic progress India is considered more potent and vibrant since people in India are free to express themselves unlike their Chinese counterparts’ ruing under authoritarian rule.

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Ramaharitha Pusarla

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