Will tiger catch up with dragon?

It is true that India’s growth rate is projected to surpass the Chinese growth rate for the year 2015 (by IMF). However, the fact remains that Chinese growth rate has consistently outperformed India in the past 30 years. That means China is already far ahead of India in absolute value terms. An astounding gap of approximately $7.3 trillion is there between the two economies as of 2013 as per World Bank figures.

Put another way, it means that the Chinese economy in 2013 was already roughly five times bigger than the Indian economy in current dollar terms. A brief look at the growth history is pertinent. Chinese leaders, most specifically, Deng Xiaoping, initiated reforms in 1978 under the ‘responsibility system’ that made farmers a kind of entrepreneurs.

These, along with several other reforms such as birth control, modernization and a more open approach to trade with the US and Japan led to the Chinese economy becoming export competitive. The 1990s and 2000s saw a greater role for entrepreneurs, Chinese state-owned enterprises as well as a greater integration of China into the world economy.

India under PV Narasimha Rao initiated reforms in 1991 primarily due to a balance of payment crises. However, when comparing India and China since the 1980s, the Chinese growth has been astounding (average growth rate close to 10 per cent). It is due to greater integration with the world economy both in terms of trade as well as in terms of FDI inflows. On an average, from 1982-2013, the FDI inflows into China were more than eight times that into India.

A look at the sectoral contributions and their change over time also helps in understanding the transformation that has taken place in these economies and what can be expected in the future. While China saw broad-based growth post its reforms, the Indian growth story is seen to be restricted to very select sectors of industry and broadly, service sectors. The speed of change too is a defining feature of the Chinese economy.

The contribution of China’s manufacturing sectors as a per centage of GDP mildly went down from 37 per cent in 1983 to 31 per cent in 2013. In India, the per centage contribution remained more or less stable at 16 per cent. However in absolute (current value) terms the Chinese manufacturing grew over 35 times while the Indian one grew only nine times since 1983.

In the services domain, the per centage contribution doubled from 23 per cent in 1983 to 46 per cent in 2014, while in India it increased from 41 per cent in 1983 to 51 per cent in 2013. In absolute (current value) terms, China's services sector grew 83 times since 1983 while the Indian services grew 11 times. Agricultural contribution in both economies went down from roughly 33 per cent in 1983 to 10 per cent in China and to 18 per cent in India. In absolute terms, Chinese agriculture grew 12 times while India’s grew just 5 times.

This shows that China has outperformed India in each of the sectors in the past 30 years. To close this gap in the future, the Indian economy will have to outperform China's in a significant manner. Just to understand, it was assumed that the Indian economy grows from 2017 at 8 per cent and the Chinese economy decelerates to just 5 per cent by 2017. Even in such an unlikely scenario, India will have to wait until 2073 (another 58 years) to overtake the Chinese economy in current value terms.

There are two primary assumptions in this analysis. First, that the growth remains consistent at 8 per cent for India while it remains 5 per cent for China. The fact of the matter is that over time, growth rates tend to fall so it will become increasingly difficult for India and China to grow at these rates.

Rather than catching up with China, it is advisable that the Indian policymakers focus on lifting people out of poverty through growth and bettering the living standards of those residing in cities and towns. Also, a boost to manufacturing not just for exports but also for more choice within the domestic economy (as the RBI governor has pointed out recently) will help India immensely.

By Amit Kapoor