Tuesday, 30 November 2010

India v China - Crouching Tiger, Roaring (or Slowing) Dragon

Comparisons between India and China have always evoked enormous interest but in recent times this has taken the top slot for discussion in economic forums and cocktail circuit alike.

The graph below (source: EIU) shows the expected growth rates of the two Asian engines of global growth and refers to a slowing growth rate in the Chinese economy.  It is important to recognise that slowing growth rate of China’s is by design as it turns its focus on the quality of its growth (balanced economy and wider distribution of prosperity). 

World Bank expects India to eclipse China’s growth rate in 2011/12 when China is expected to grow at a rate of 8.5% as opposed to India’s 8.7%.  Obviously one has to remember that India is growing from a smaller base and the absolute growth will still be higher in China. India may also outpace China’s growth rate as it is coming off a lower base. India’s income per head would have to grow at 8% a year for 17 years to match the level China enjoys today. One year of faster growth does not, then, mean that India is somehow overtaking China.

Both countries have large population and huge income disparity. Both countries are grappling with the challenge of keeping the economic growth inclusive, though unsuccessfully with increasing economic disparity. And that’s where the similarity begins and ends.

China is essentially a manufacturing powerhouse while India has focused on services to drive economic growth.  China is much bigger (about 4x of India) and stronger with much better execution of infrastructure projects compared to India (a glaring example is - Beijing Olympic Games v New Delhi Commonwealth Games).  China has the ability to execute projects within a predictable time frame and at reasonable cost as it has less legal hassles to deal with.

It is expected that both countries will continue to grow strongly, however, the future bodes well for India. The reasons are largely demographic. China’s one-child policy, introduced in 1978 will result in the number of young Chinese (15-29-year-olds) falling sharply after 2011, depriving the country’s factories of mobile young workforce. Within a couple of years, Chinese youngsters will be outnumbered by their Indian counterparts, even though India’s population will not match China’s until about 2025. In 2020 the average age in India will be 29 versus 37 in China and 48 in Japan.


The focus in China is moving to quality of growth rather than pursuing quantitative growth targets.  Where does this ‘quality of growth’ likely to reflect?

§         Reduce economic and social disparity – Pursue policies to help the weakest strata of society through wage support, self employment programmes and the development of health care and social security;
§         Boosting domestic consumption as a share of overall GDP growth – increasing domestic consumption is a priority for China to further insulate its economy from external shocks; India scores well in this respect.
§         Restraining the current account surplus.  China is increasingly coming under pressure from the US to revalue the CNY.  As part of this, increased flexibility of the CNY is likely to persist, including more appreciation and further steps to boost its usage. The developments currently taking place in Hong Kong are interesting as China aims to further boost the usage of CNY for trade settlements.
§         Reducing carbon footprint- steps to deliberately restrain the output of energy polluting industries.


While China opened up to foreign direct investment in 1978, India opened much later, in 1991 following the balance of payments crisis. India still has massive catching up to do, particularly in infrastructure. While the level of infrastructure is clearly substandard and fails dramatically in any direct comparison with China, India has planned to invest US$ 1 trillion in infrastructure projects during the plan period 2012-17. Poor infrastructure, it is estimated, knocks off a full 2% of the GDP growth.  It remains to be seen as to how much of the spend in projects is realised in quality infrastructure and how much of it is consumed in graft and scams! 

India has remarkably positive demographics. India is also turning its focus on pursuing policies to boost agricultural productivity which, if successful, might help boost trend growth considerably. The above factors will have positive influence on growth rates.

India is about to experience some years of Chinese growth rates.  It is not yet certain whether India will become the world’s fastest-growing big economy in 2011. If it does so, it will have to be thankful to China for shifting its focus to quality of growth, more than its own effort!

The debate should be India & China

The combined GDP of the BRIC nations might exceed the US GDP before this decade is over.  Below are two interesting graphs that show the composition of world GDP over time and it is quite telling.

Interesting data points: 

1) In 1700 India, China and Europe had about the same GDPs at 20% of world GDP each;
2) From early 1800s China and India are straight down hill while the US is straight up;
3) Around 1973 India and China awoke and are starting to climb back, while US and Europe fell respectively.

A peek at the history tells us that up to the 1830's, India and China were 50 percent of the world's G.D.P., and then they missed the entire revolution of industry.  It may well be time for the Asian giants to dance!

Both countries are expected to enjoy strong economic growth.  To put this in the context of the world economy, there is a decisive shift in the balance of economic power from the West to the East.

So if you take a long view of this game, this journey has just begun! Enjoy the ride!!


  1. Good points.

    But India's mindless pursuit of GDP growth, to the exclusion of everything else (including internal and external security; and shocking levels of corruption) is hardly a recipe for sustained development.

    Once before in its history, Indian became far wealthier than it was secure, and that resulted in Indians being plundered and massacred on a huge scale by foreigners from practically all over the world. Even though the 21st century is not as lawless as the 13th or 14th ot 18th, it is worth remembering that those who fail to learn from history are condemned to repeat it.

  2. Abhay Pandey said.......


    Excellent piece ..some points

    Ø 1 child policy is entirely reversible in China…if they could make 1 child policy succeed…they could change and make that succeed too…India on the other hand was unable to control its demography…I am not sure India has any advantage here…the quality of demography is hugely important too…

    Ø India’s security issues are going to worsen, its defence spending is going to be a real spanner in the works…few people see this…it has problems at home and abroad…broadly, long-festering border issues with Pakistan, China and Bangladesh leading to hefty defence expenses….its defemce policy is not forward looking and strategic but largely defensive – containment. Under pressure, it will lose ground as in 1962, 1965, 1971…as a state its monopoly on violence is increasingly challenged by extreme left making a mockery of its law and order…its effectiveness against terror politics is also worth examining

    Ø Everybody talks of India’s infrastructure and that it needs to execute better (as you too have said)…but we are not able to….perhaps its time to stop hunting for answers in economics and commerce and planning and project management but the nature of the Indian political class (and I am not talking of corruption) and what motives are its drivers and the resultant power – politics its spawns

    The question is I think how does China score on all of the above…I would say better than India…

    Abhay Pandey

  3. Balaji Rajan said......

    Good Analysis. Lots of things happen to India "inspite and despite" of the Government and the planning commission. India will also get the fruits of the population dividend.
    Couple of things India needs to do
    a. Ensure agriculture productivi...ty increases (should look to countries like Israel)
    b. Heavy Dependence on monsoons and usage of fossil drivers of agriculture economy like underground water to be addressed. (Next war would be fought for water)
    c. Address the falling sex ratio. Prosperous states like Punjab and Haryana have falling females to males ratio. Will contribute very heavily to the increased crimes and falling female literacy. (Educate the woman to educate the family. Educated woman also contributes to reducing fertility in family)
    d. Equatable distribution of wealth (India's gini coefficient has been increasing...a sign of more trouble). While food poverty is decreasing, the measures used is far from useful. Is socialism the answer? Cannot say because every socialism becomes crony. Can capitalism be inclusive...seems like an oxymoron.
    e. Investment in Education. We invested in temples of modern india by having IIT, IIM and super speciality institutions. These cater to maybe 40,000 to 50,000 students per year. Consider the school going population of 25% in a 1.4Bn population. We have failed miserably in building our education pyramid. This also shows in the services work we do primarily voice and BPO. Hopefully Sarva Sikhsha Abhiyan will address it.
    f. Ensure we do not squander our excellence in manufacturing. India is still a leader in lean manufacturing and Supply chain
    e. Food Security and development of cold storage. A poor country like India wastes 20-35% of its produce every year.

    There was a joke when I was young. Obama went to God and asked when would US become high and mighty again. God said make this and that policy, and US will become great in 50 years. Obama cried and said "I may not long enough for that".
    I asked God when would India become high and mighty... God started crying...

  4. Gene Jn said...

    Well written article in easy to understand format esp for non specialists in this field. I do hope as India and China grows and in the passage of time both these countries will come together and there will be more culture and economic interactions between them augumenting each others growth in the long run. Thank you for this wonderful article.

  5. Mahesh Iyer said...

    Sridhar, this is a very introspective analysis. Good job.

  6. Hi Sridhar, India is progressing inspite of government apathy to building basic infrastructure, but how long will this last? At some point things could come to a grinding halt if roads, hospitals, schools, railways don't expand rapidly. And one more thing people like us seem to miss about India is the massive and growing income disparity-because it doesn't affect 'our world'. Surely that's going to lead to more internal security issues that can be an impediment to growth. I don't mean to gripe but China is building infrastructure for 50 years hence and while by the time something gets built in India its 10 years behind.

  7. Manish / Abhay

    - very valid points with respect to paying attention to both internal security and external security.

    India's defense capability needs to be enhanced, however, with the nuclear deterrent, both china & Pakistan would not wish to escalate any border skirmish and it will reamin a proxy war through terrorist attacks or any direct engagement will not be allowed to escalate.

    With respect the internal security , this is also related to the points raised by both Balaji and Janani of inequitable distribution of economic prosperity and further divergence in socio-economic divide.

    As mentioned by most of you, the government's focus needs to be on delivering the big infrastructure agenda (water, energy, hygiene, roads, ports, hospitals, education etc...) and that is a tough ask with the levels of corruption and lack of transparency and lack of accountability.

    The judiciary should be strengthened and stricter deliverance and enforcement of punishments / consequential remedial actions can only deter unabashed levels of corruption...

    With the information age and the right to information act, we can hope for greater levels of transparency and accountability....but it is the people who will need to drive this change through raising public awareness and pressuring the government through action groups...

    We, the people, have to be the agents of change....

  8. I think India is too overrated in a history of world GDP.

  9. Illuminating and thought provoking. Thank you