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Posted by: Deepa Vasudevan on Fri, Jan 23rd, 2015

One Swallow does not make a Summer: Comparing India and China

In its latest update of the World Economic Outlook, the IMF has predicted that the Indian economy will grow faster than China in 2016-17. Real economic growth for India is projected at 6.5%, as compared to 6.3% for China. If this happens, it would be the first time since 1991 that India has overtaken China in GDP growth. The IMF announcement pushed up Indian stock markets to all time highs- the NSE Nifty index gained 1.6% and the BSE Sensex rose 1.8% in one day!

 

Markets have been bullish since the Modi government took over last May with the promise of generating growth and employment. Now, as expectations build up for a reform-oriented Union Budget, any news that supports the India growth story leads to a strong rally. Last week it was the 25 basis points cut in the repo rate, this week it is the conviction that India is “racing ahead” of China. Stock prices move on rumours, and markets tend to be volatile. But economic analysis should be driven by facts and supported by a thorough understanding of theory, past trends, and possible future developments. In this context, it is necessary to de-sensationalize the “India Overtakes China” headlines and understand where India stands relative to China in terms of economic progress.

 

Picture 1 compares real GDP for India and China from 1980 onward. Growth rates for 2015 and 2016 are IMF estimates; growth rates for earlier years are sourced from the National Accounts data of the respective countries. The vertical bars represent the growth differential, in other words: China’s growth rate minus India’s growth rate. China has grown faster than India for 32 of the last 35 years. The average growth differential between the two countries during 1980-2014 was 3.6%.

 

Pic 1  Growth in Real GDP: India Vs. China 

Growth in Real GDP: India Vs. China

Sources: CSO, National Bureau of Statistics China, IMF
Note: The year 1980 for China is considered to be comparable to the financial year 1980-81 for India. Real GDP for India is GDP at factor cost.

 

To put that in perspective, between 1980 and 2014, on an average, China’s real GDP grew by 3.6% more than India annually. The impact of that continuously higher growth shows up in China’s per capita GDP. In 1985, India’s per capita GDP, at $313, was higher than that of China, at $295 (Pic 2). But by 2014, China’s per capita GDP at $7572 was nearly five times more than India’s achievement of $1625! One can argue that per capita income does not take into account actual disparities in income levels within a country; but given the vast difference in per capita incomes between India and China, there can be no dispute that China has achieved a significant overall improvement in living standards.

 

Pic 2 Per Capita GDP in US$: India Vs. China

Per Capita GDP in US$: India Vs. China

Source: IMF database


There are at least three areas in which China has a head start on India. First, balance of payments. China is an exporting powerhouse: it has run a current account surplus for many years (Pic 3). As a result it has accumulated forex reserves of over $3.8 trillion, the highest in the world. India consistently runs current account deficits, which are funded through foreign capital inflows. This makes us vulnerable to external shocks which have the potential to dry up the inflows and set off a currency crisis. Our forex reserves, at $300 billion, are about one-tenth of China’s reserves.

 

Pic 3 Current Account Deficit: India Vs. China

Current Account Deficit: India Vs. China

Source: IMF


Second, fixed investment. In China, capital formation as a percent of GDP has been in the range of 30% to 50% since 1980, and consistently above 40% in the last decade (Pic 4). India’s capital formation crossed 30% of GDP only during the 2004-07 boom, with a peak of 38% achieved in 2007-08. Since then the decline in private investment has kept it below 35% of GDP. As a result India has a large infrastructure deficit, which is one of the main reasons for supply side constraints on growth.

 

Pic 4 Capital Formation: India Vs. China 

Capital Formation: India Vs. China

 

Finally, employment generation. Both China and India have large working populations, but China has maintained a healthy balance between sectoral growth and sector-wise employment. In 2011, about 10% of China’s GDP came from agriculture, 47% from industry, and 43% from services. The corresponding employment shares of these sectors were 35%, 30% and 36% respectively. In India, agriculture employs nearly half of the population, but generates only 14% of India’s GDP. On the other hand, services employ about a quarter of the workforce, yet contribute nearly 60% to GDP! India’s growth story is based on the fast growing services sector, which is not labour intensive. So we run the risk that a good part of our workforce, which is unskilled and inadequately educated, will end up unemployed, unless we take immediate steps to make them employable.

 

Indian media often compares India and China, and every small data point in India’s favour is a cause for celebration. But it is necessary to understand the back story of China’s present success: it has been growing at a fantastically high rate for three decades, adding investment and jobs, exporting goods of various types, and improving standards of living. It is now slowing down to what its policy makers are referring to as the “new normal”. The growth slowdown is the outcome, at least partly, of a deliberate shift to cut back investment and revive consumption, to improve environmental standards, control the unchecked growth in credit, and to create a more balanced economy. India is not in a position to opt for a slowdown. It has to grow rapidly, and for many years, before it can reach the level of income that China has delivered to its citizens. Until then, just as one swallow does not make a summer, a single year of higher GDP does not make India a winner.

Deepa Vasudevan on Fri, Jan 30th, 2015 2:10:05 pm

It will take a few decades of consistent growth for India to reach the level of China. For this, the key strategies required are political stability, structural reform, education and skilling of labour force, and better poverty management through techniques like targeted food subsidies.

Website CMS Administrator on Fri, Jan 30th, 2015 2:04:09 pm

This blog attempted to compare India and china on some key economic parameters. It is usually difficult to get social and political data from China, as you may be aware. The National Bureau of Statistics China website is a useful starting point for looking at basic social data on China. Hope this link is useful for you.

Rajesh kr singh on Wed, Jan 28th, 2015 3:45:59 am

it's a fantastic clarification on basics but required more clarification how chaina is differ from india in context of political, economical,technocal and social and education ???

C R GOPINATHAN NAIR on Tue, Jan 27th, 2015 3:32:59 am

Is there any hope of Indians achieving per capita GDP comparable with China, if not US in few decades? If there is no hope as per current strategies, what strategy can make it possible?

Madan Jit Singh on Tue, Jan 27th, 2015 11:16:23 am

Like balancing the Economy, balancing one's life is to know the reality & work hard. The above article is an excellent work of information. As a financial advisor ,please accept our thanks & gratitude.

Amitabh Arora on Tue, Jan 27th, 2015 10:55:11 am

Extremely good analysis. Wouldn't it be nice if start highlighting the importance of agritcultre as a core sector and reforms are more favouring increasing agicultural output and exporting the same.

Amol Chitale on Tue, Jan 27th, 2015 10:51:11 am

I entirely agree with your views.One simply cannot compare India and China on any economic parameter.China is decades ahead.

Sagar Das on Tue, Jan 27th, 2015 10:09:35 am

If we measure in absolute terms then it will be clear who is frontrunner.Obviously it is China.We shouldnt get influenced by this media hype but should get into the fundamentals to know the truth.

krishna kishor tiwari on Mon, Jan 26th, 2015 8:41:14 pm

We are growing in a democratic set up.Our growth will be more sustainable than China provided we have stable govt.( which we are now having)

AMARISH SHAH on Mon, Jan 26th, 2015 1:54:05 pm

TO GROW INDIA IT IS ONLY ALTERNATIVE TO USE SWADESHI PRODUCTS AND ESPORT OUR PRODUCTS

Biswa Ranjan Satapathy on Mon, Jan 26th, 2015 8:08:04 am

Keep sending reports

kapil nire on Sun, Jan 25th, 2015 5:03:32 am

Hmmm how should we plan to overtake China ??

Rajesh J Mehta on Sat, Jan 24th, 2015 10:52:07 pm

Three major points to be noted here. firstly, China's outperforming India in GDP growth rate over years. secondly, china is ahead of India in per capita GDP,almost five times..Thirdly, China's ahead of India in Forex Reserve,almost ten times. Basically, China is export oriented country, So its GDP depend mainly on export. Where as India's GDP constitutes almost 15% through export. So, our GDP will not be hit by slowdon of export but due to fall in crude price recently globally will help to raise India's forex reserve as India's a large importer of it. We have a mismatch in GDP growth rate compare to % of sector from where it comes. Either it should be balanced or otherwise we must have more numbers of recruitment of skileed force so GDP growth rate from service Industry will increase. So, IMF'S forecasting that India's GDP will overtake China ia a matter of joy for us but to sustain that momentum, "we have to increase our PER CAPITA GDP, FOREX RESERVES & EXPORT EVEN.' So, I am expecting a real favourable scenerio for India once it passes China's GDP & remains stable for couple of years to come.

Jitendra Vyas on Sat, Jan 24th, 2015 9:34:49 pm

Agree with your perspective ... It would require consistent long out performance to beat China .. One off year will not do

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