THE emergence of China as a major world player has so far been the dominant geopolitical event of the new millennium. In the last decade China has emerged as the largest exporter of manufactured goods to the USA with a merchandise trade surplus of about US $180 billion. This has also helped it in becoming the biggest holder of US currency (US $721 billion) as reserves. This powerful ascent of China has also resulted in the world’s spotlight being focused, from time to time, upon India as the other big Asian story, leading inevitably to a number of comparisons between the two.

The trend was set by the article, ‘Can India overtake China’ by Yasheng Huang and Tarun Khanna.¹ These scholars on their own admission discount the macroeconomic facts of higher growth rates and foreign investment in China that give her an advantage over India. Instead, they opine that India may edge past China in the future due to institutional reasons such as more competent indigenous entrepreneurship, a sound capital market, an independent legal system, respect for private property and a grassroots approach to development. They point out that these reasons ensured that India’s growth rate is only 20% lower than that of China’s, which they call a ‘remarkable achievement’.

 

However, is such optimism that India will better China warranted? When analysing growth rates, social indicators, industrial production and more, it becomes clear that not only has China left India far behind but these gaps are set to widen in the future. Clearly, even to come abreast with China by 2050 will be an uphill task for India.

Even with their impressive growth rates in the recent decades, and despite their emergence among the world’s top ten in terms of GNP, both China and India remain excruciatingly poor countries – India more so than China. In 2003 in terms of GNP, China with US $1146 billion ranks fifth while India with US $568 billion ranks ninth. During the two years since, China has surpassed France and moved into fourth place, while India has overtaken Mexico and South Korea and moved into seventh position.

However, when it comes to ranking in terms of per capita income, a truer indicator of the economic condition of the people, China and India drop off from sight. India ranks 159th and China is now in 134th place.² Even when these rankings are adjusted for purchasing power parity (PPP), India’s ranking improves only to 146, while China moves up to the 119th rank.³

China and India also face stubborn problems with poverty. If we adopt the UNDP’s yardstick of $2 a day to provide for basic human needs with a modest modicum of quality in living standards, both China and India fare poorly. Again, India more so than China. While 47% of the Chinese population lives with an income less than $2 a day, 80% of Indians are below that line.⁴ Even according to the national poverty lines of India and China, India fares much worse. While over 26% of Indians were below the Indian poverty line in 1999-00, only 4.6% of Chinese were below China’s poverty line.⁵

 

In the last couple of years India’s economy has been growing at 7% or more. In fact, the first two quarters of 2005-06 saw the economy growing at over 8% per annum. While such rates of growth are good, evidence suggests that the underlying basics of the Indian economy remain unchanged. Nothing makes this more explicit than a comparison with the economic and social indicators of China after both countries went through economic reforms. Far from catching up with China, India seems to be falling well behind.

But even if we accept that India is indeed ‘shining’, how good is that shine? Is it a burnish that reveals the quality of the metal beneath or is it a thin coat of varnish that just puts a superficial gloss? The first decade after the so-called economic reforms saw a GNP growth of 5.9%⁶ which was only 0.2% higher than the previous decade. With a performance like that, it would be extremely difficult to make a case that these reforms have made much of an impact on the nation as a whole. More on post-reform comparisons below.

 

Of course, some have benefited; there are no queues for telephone and gas connections. But with India’s teledensity a mere 5.2 per 100,⁷ and with just 16.7%⁸ of India’s households having LPG connections (and that too mostly in urban areas) clearly suggesting that most households are without cheap and subsidized energy, we seem quite some way off from a satisfactory distribution of benefits. Ironically enough, the lack of queues should be a matter of grave concern given that an overwhelming majority in India still doesn’t have telephones or gas connections. Such news hardly warrants an outpouring of self-congratulation, for it is indices for infant mortality, life expectancy, etc. that make the reality. However well we might have done, we have fallen well behind China in these spheres and it will take some effort to catch up. (See Table 1 and 2)

The rate of change reflected in the Human Development Index, a composite index of longevity, education and income, clearly shows the vast superiority of China’s achievements in these areas. While India’s HDI rose from 0.254 in 1970 to 0.602 in 2003,⁹ China’s rose from 0.372 to 0.755 in the corresponding period.¹⁰ This is a remarkable performance by China considering that its per capita income in 1970 was considerably lower than that of India.

In terms of electricity, China’s lead over India is truly astounding. It produces 1472 billion kwh annually, which is two-and-a-half times more than the 577 billion kwh produced annually in India. The average Chinese consumes just about that much more too. The Chinese lead in electricity production and consumption is not the full story. That China has almost three times India’s generation capacity is understandable. However, its far superior power distribution is really telling. The transmission and distribution losses in China are just 6.8% while India loses 23.4%, much of it to simple old-fashioned theft.¹¹ It is little wonder that the average electricity tariff in China is US $3.20 per 100 kw lower than that of India. Despite the high tariffs in India last year the cumulative loss made by the power sector was Rs 22,013 crore.

 

In recent days we have seen crude oil prices piercing the US $60 a barrel level and may reach US $100 a barrel within the next twelve months. Apart from stagnation in refining capacity that is causing refined petroleum product prices to climb, it is the rising demand in India and China that is also a major contributor to the price rise. In both countries the oil sectors are largely controlled by the state. But the Chinese are demonstrating that they can move with far greater alacrity when it comes to securing international sources of production. More than once in the recent months the Chinese oil industry has outbid Indian attempts to buy into international oilfields for an assured share of the output. China’s CNPC outbidding India’s bid for PetroKazakhstan, a company that accounts for 12% of Kazakhstan’s oil, is the most recent example. Quite clearly in the years to come India and China will begin to compete more rigorously for international oil and markets for their goods to have the money to pay for it. Commercial rivalry between India and China seems inescapable. So far China seems better placed.

 

Value addition is indicative of the stage of development of any sector. The major point of comparison is that China’s value addition in industry (51%) is almost twice that of India’s (26%).¹² This coupled with the fact that China’s industrial sector contributes twice as much as India’s industrial sector to their respective GDPs clearly suggests that India has some way to go before it can catch up with China. Additionally, note the higher gross capital formation (GCF) in China. While GCF accounts for 42% of China’s GDP, it only accounts for 24% of India’s GDP.¹³ This suggests that the Chinese lead will continue till such time India embarks on a more determined bid to step up industrial production.

The output of the services sector as a percent of GDP stood better for India with 51% in the year 2003, whereas China’s gross output in the services sector remained 33% in the same year. Moreover, India saw greater value addition in this sector (48% in India vs. 34% in China), mainly due to the burgeoning government administration which is growing at 32%, and the IT sector which only employs 0.8% of the services workforce and yet has exports worth $9.2 billion. It seems, therefore, India has entered the post-industrial ‘services phase’ without ever having industrialised.

 

It’s true both countries have transformed themselves after they embarked on the path of economic reforms. But the transformations were entirely different. In 1980 the sectoral break-up of China’s economy was as follows: agriculture 30%, industry 49% and services 21%. Over the next 20 years until 2003, the share of agriculture fell while industry and the services sectors grew. Especially remarkable was the growth of industry from 1990 to 2003; it grew from 42% to 53%.

The Indian sectoral picture makes for a study in contrasts. While the share of agriculture fell from over 40% to 23% from 1980 to 2003, it was not industry that took over this share; instead, the services sector became the dominant sector contributing over half of India’s income.¹⁴ This is in sharp contrast with China where over half the present income accrues from industry.

The trends observed in the sectoral shares of industry, services and agriculture are also reflected in the growth rates. >From 1990 to 2003, industry grew over 13% annually in China, while the growth rate in India was less than half at 6.1%. However, despite over half of India’s income accruing to services, in terms of growth, the services sector in China performs better with a growth of 8.9% annually compared to India’s services sector growth of 7.9% per annum.¹⁵ Indian agriculture also saw a growth of only 3.1% during this period, while Chinese agriculture grew at 4%.

 

The impact of sectoral growth rates is reflected in the job creation patterns for the two nations. In 2003, China’s workforce was 705 million (1999). About half of this workforce or 373 million was employed in agriculture, 29% or 221 million in services, and 22% or 167 million in industry. By contrast India’s total workforce was 482 million in 2004. The major employer is still the agricultural sector with 60.0% or 289 million, industry is relatively small at 17.0% or 82 million, and services though rising employs only 23% or 111 million. Many in India think of the IT sector as the cause for growth in services. This is not so. Nearly half the employment of the services sector is in unorganized retail. Government employs another 20 million. By contrast the IT sector only employs 0.82 million or a paltry 0.8% of the total workforce in the services sector. Also, in the coming few years, we cannot rely on the IT sector to create jobs. Even by 2008, IT will employ only 0.4% of the total Indian workforce! Therefore, while IT will contribute over $50 billion in exports by 2008, it will remain a minor employer. Evidently in terms of employment we are still an agrarian society.

With significantly higher exports, the Chinese economy has registered a positive trade balance of US $79.2 billion, whereas India has a negative trade balance of US $32.4 billion.¹⁶ When the Chinese trade figure factors in Hong Kong we see a still more dramatic picture emerging with a combined current account surplus of US $87.2 billion, whereas India has a current account deficit of US $4 billion. Though the reform years in India have seen a significant growth of foreign reserves, it still remains at US $127 billion in July 2005, while for China and Hong Kong together it was US $833 billion.

The lower tariff structure in China has boosted its imports and as a consequence added much value to exports. It has also ensured higher investment in the last decade. The simple mean tariff in case of all products in China was 40.4% in 1992, which has come down to 9.8% in 2004. In India’s case there has been a decrease but not as marked as China’s. Similarly, simple mean tariff on manufactured products in India during 2004 was 27.9%, whereas China’s tariff was one-third of India’s at 9.7% in the same year.¹⁷

 

The surge in Chinese industrial growth was made possible by overseas Foreign Direct Investment (FDI), which amounted to $475 billion between 1990 and 2003. Apart from the millions of new jobs created, the role of FDI in making China a major manufacturing hub is seen in the contribution of FDI enterprises to total exports, which rose from under 2% to 45.5% in 1999. In India at that time it was just 8%. Such disparity in investment in exports shows up in the shares of world trade in the GDP’s of the two countries. While trade accounts for as much as half (49%) of China’s GDP, it accounts for less than a third (29%) of India’s GDP. Also while China enjoys a 3.8% share of total world trade, India’s share in world trade is less than one per cent.

 

In recent days there has been much speculation as to whether the FDI gap between China and India is indeed as large as it is made out to be. One problem is that the Chinese FDI data is overstated.¹⁸ Since the early 1990s, researchers with the IMF, World Bank and other international institutions have developed an evolving view that about a quarter or more of China’s officially recorded FDI is in fact not FDI. Instead, it is mainland Chinese monies that have flowed out to access better financial, regulatory and legal services and ‘round-trip’ by returning to China as apparent FDI to access the fiscal incentives and improved investor protection offered in China to foreign investors.

If this argument by IMF and World Bank holds, then the total FDI inflows into China in 2003 spirals down to around $35 billion instead of the $53.8 billion that the Chinese official figures show. Chinese (and IMF) FDI figures include what are classified in India as Foreign Institutional Investments (FII) in equity markets, loans etc.; whereas in India, FDI implies only direct investment in industries.¹⁹ Even if these adjustments are accepted, FDI in China is still many times more than in India. In comparison to Chinese FDI inflows, India’s FDI in 2003 stands at 0.72% of GDP whereas it is 3.8% for China.

The emergence of China as the global base for manufacturing is also reflected in the surge in China’s R&D expenditure. The latest (2003) OECD science, technology and industry scoreboard²⁰ has ranked China as the fourth largest R&D spender in the world. China’s total R&D spending in 2003 stood at $85 billion (PPP). Though India ranked among the top ten spenders worldwide it spent just a third ($30.62 billion) of what China invested in R&D in 2003. Such huge Chinese investments in furthering knowledge suggest that India will only fall back further in terms of industrial growth rates and competitiveness.

 

A comparison of the first ten years of the economic performances of India and China after reforms (from 1992 for India and from 1979 for China) is instructive. China entered the first decade of reforms as a fast developing and modernizing country with an average decadal growth rate of 5.52%. But more important than this was its performance, by 1980, of reducing infant mortality to 42 per 1000, elevating life expectancy to 67 years, and raising adult literacy to 66%. India by contrast had a better growth rate of 5.7% in the 1980s but came burdened with an infant mortality of 119 per 1000, life expectancy of 59 years, and adult literacy of 48.4%. Many reasons have been advanced for China’s stupendous performance. Few are as valid as what Amartya Sen wrote: ‘China’s relative advantage over India is a product of its pre-reform (pre 1979) groundwork rather than its post-reform redirection.’

Yet another comparison would be even more instructive. In 1978, at the inception of its reforms, China’s per capita GDP (in constant 1995 US$) was $148, whereas that of India in the same year was $236. Seven years after it began reforms, in 1986, China caught up with India in per capita GDP terms ($278 vs. $273) and a decade after reforms in 1988 was comfortably ahead of India with a per capita GDP of $342 compared with India’s $312. In the first post-reform decade the Chinese economy grew at 10.1% while the Indian economy grew at 5.7% in the corresponding decade. Quite clearly that was India’s lost decade. (See Table 3)

But what did we achieve in the first decade of our reforms? In 1992, the first year of its reforms, India’s per capita GDP was $331. This grew to $477 in 2001. In the same period the Chinese per capita GDP surged from $360 to $878 in 2001. In the 1990s China grew at the rate of 9.7% while India grew at 5.9%. Far from beginning to catch up, we fell well behind.

 

But there is something else we must also understand here. China’s population in terms of age composition is currently passing through a phase of great demographic advantage. The cohort in the productive phase (15-60 years) of the life cycle is at its peak, whereas the dependency ratio in India is, relatively speaking, somewhat adverse. While 64% of China’s population currently falls in the productive cohort, the corresponding figure for India is 59%. However, 20 years hence, when China’s productive population will stagnate at 64%, India’s productive cohort will rise to 64% and attain parity with China. Moreover, the trend will further alter by 2050 with India (61%) overtaking China (55%) in terms of a favourable dependency ratio.

 

This transformation is, however, not just limited to percentage terms but is more importantly palpable in absolute terms as India would have become the most populous country in the world with 1.5 billion people. Thus, while at present China’s productive population stands at a whopping 812 million, and India is seemingly way behind at 599 million, by 2050 India’s productive population will be a huge 962 million and China would be way behind at 824 million. But whether India will be able to convert this into economic advantage is still to be seen. That entails India tooling up to create a more productive and able workforce, stimulate investments and create a much bigger market for goods and services.

This favourable demographic trend is as much a window of opportunity as it is a danger. If we grasp the opportunity we can elevate our nation to a much higher level of prosperity. On the other hand, if we fail to do so, we will move into a period of unfavourable demographic distribution when we will be saddled with a rapidly graying population that will act as a natural brake against fast economic growth. China has so far successfully seized this opportunity, but will India follow?

On the face of it China seems to be deploying just about the same proportion of its GNP towards education and health as India. Yet it seems to be achieving better results. Quite clearly there are lessons to be learnt. While under the Communist system supreme power may be centralized with a small un-elected leadership, it is equally true that the management of the economy and services like education and healthcare are greatly decentralized. By contrast, India with a supposedly different political system has become highly centralized and nothing reflects this better than the pattern of expenditure on salaries for government employees. The percentage share of central government salaries and expenses of the total under this head in China has been continuously declining and has come down from a high of 73.9% in 1953 to 28.9% in 1998.²¹ The corresponding trend in India is quite discouraging as it hovers at around 40%.²² Quite clearly in China, government is moving downwards to the tiers that have greater interaction with the people, whereas in India decentralization is as distant a goal now as it was in the early years of the Republic.

 

Yet another notable feature of the Chinese economic reforms and decentralization has been the degree of autonomy conferred on the state owned enterprises (SOEs). Most SOEs in China (except for the large ones like China Telecom) have been either privatised or handed over to local government authorities for management using local capital. In sharp contrast to this, Indian PSUs have become adjuncts of administrative ministries with all entrepreneurial spirit crushed by mindless bureaucracy and uncertain politics.

The challenge ahead of us is not catching up with China’s growth rate, which inevitably must slow down, but to do what China did to us in 1986. Can we come abreast with it in terms of GDP? To do that in 2020 we need to grow at 11.6% and to do that long after most of us are gone in 2050, India must grow at 8.9% every year. Catching up with growth rates is not good enough. If that were the game, we are already doing much better than the USA, Europe and Japan! However, a study by Goldman Sachs projects that India’s growth rate over the next half-century will not reach such high levels. It is set to peak at 6.1% in 2005-10 and yet again in 2030-35.²³ However, the study also predicts that India’s growth rate will come abreast with that of China by 2010 and overtake it by 2015.

 

Despite this, India will not catch up with China even by 2050. While China’s GDP will be about US $44500 billion, India’s GDP will be 60% of that at US $27800 billion. More dismal is the fact that in 2050 China will be two times richer than India in per capita terms, very similar to the present situation. Therefore, catching up with growth rates is just one swallow and doesn’t mean that our season in the sun is at hand. It remains to be seen whether India will manage to defy the Goldman Sachs projections and grow at 8.9% to catch up with China by 2050.

India and China are clearly set to emerge as two great economic powers. They are also neighbours who will increasingly compete for resources, markets and influence. It is unlikely that India and China will again become mortal enemies. Though the likelihood of war and conflict is minimal, yet economic circumstances will ensure that both countries remain competitors and rivals. But to ensure that this does not turn into yet another Cold War, India must close the economic gap with China. That will also largely close the strategic gap. Clearly, India’s leadership has its job cut out. But are they up to it?

 

* This article is an abridged version of a study conducted by the Centre for Policy Alternatives. For a copy of the full report, email us at cpasind@yahoo.co.in or visit our website, www.cpasind.com.

 

Footnotes:

1. Yasheng Huang and Tarun Khanna, ‘Can India Overtake China?’ Foreign Policy, July-August 2003.

2. World Development Indicators, 2005, The World Bank.

3. Ibid.

4. Human Development Report 2005, UNDP.

5. Ibid.

6. World Development Indicators, 2000, The World Bank.

7. Statistical Outline of India 2004-05, pp. 248, Tata Economic Services.

8. National Family Health Survey -II, Ministry of Family Health and Welfare, 1999-00.

9. Statistical Outline of India 2004-05, pp. 248, Tata Economic Services.

10. Human Development Report, 2004-05, UNDP.

11. Data on electricity from www. wakeupcall.org.

12. World Development Indicators 2003, The World Bank.

13. Statistical Outline of India, 2004-05, Tata Economic Services.

14. Information on sectoral shares from Statistical Outline of India, 2004-05, Tata Economic Services.

15. Information on sectoral growth rates from Statistical Outline of India, 2004-05, Tata Economic Services and World Development Indicators, 2005, The World Bank.

16. The Economist, 30 July 2005. (Data valid for previous 12 months ending July 2005).

17. Information on tariffs from World Development Indicators, 2005, The World Bank.

18. Unless indicated otherwise, estimates of the overstatement of FDI inflows into China are from Geng Xiao, ‘Round-Tripping Foreign Direct Investment in the People’s Republic of China: Scale, Causes and Implications’, Asian Development Bank Institute Discussion Paper No. 7, June 2004.

19. For a detailed discussion on this see, India’s Performance and Economic Reforms: A Perspective for the Future by Subramaniam Swamy, Konark, 2000.

20. R&D in non-OECD Economies, OECD, MSTI Database, May 2003.

21. China Statistical Yearbook, Government of China.

22. National Account Statistics, Government of India.

23. Goldman Sachs BRIOs Model Projections.