Macroeconomics

Elephant vs. Dragon: Growth and development

  • Blog Post Date 11 December, 2015
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The Indian economy expanded by 7.4% during July-September 2015, as compared to China’s growth rate of 6.9% over the same period. In this article, Mahendra Dev, Vice Chancellor of IGIDR, examines the prospects of the two economies in terms of economic growth, manufacturing and social indicators. He contends that the slowdown in China presents opportunities for India; however, even if India grows faster than China, it can catch up to it only after 25 years or so.



The Chinese economy has grown at historically unprecedented rates of 10% or more since the 1980s, and has contributed a lot to the global economy post the financial crisis. India is seen as the other emerging giant in Asia; this view has gained momentum particularly with the recent slowdown in China. While India’s growth rate started accelerating in the early 1990s, it was at much lower rates of 6.3% in the 1990s and 7.2% in 2000s.

Size of economy and growth rates

According to International Monetary Fund (IMF) projections, India is likely to grow at 7.5% in 2015 and 2016 compared to China’s growth rates of 6.8% and 6.3% respectively. Similar projections have been given by the World Bank. Therefore, India is currently the fastest growing economy in the world. It is suggested that China’s loss is India’s gain and it is a great opportunity for the Elephant to replace the Dragon.

Table 1. GDP of India and China, 2014-15

Source: IMF, 2015.

However, Table 1 shows that China is now a US$10.4 trillion economy – about five times the size of India’s US$2.1 trillion economy. The per capita GDP (Gross Domestic Product) of China (US$7,600) is also nearly five times that of India (US$1,600). China has US$3.8 trillion foreign exchange reserves as compared to India’s US$350 billion.

Even if India grows faster than China, it can catch up only after 25 years or so. If China grows at say 5.5% per year between 2015 and 2030 and India grows at 8% per year from 2015 onwards, India can catch up to China only in 2035. If India’s growth rate is lower than 8%, it may take much longer to catch up with China. Yes, we can celebrate the higher growth rates of India but we are still a long way from catching up with China on levels (if at all we catch up). Even for maintaining high growth rates of about 8%, India needs to have appropriate policies.

Opportunities and adversities

China is rebalancing from manufacturing to services and from investment to consumption. Is China’s loss India’s gain, particularly in manufacturing? In an interconnected world, China’s loss can be India’s loss as well. As China contributes substantially to the global economy, the slowdown in China can have adverse consequences for India due to a slowdown of trade with China as well as with other countries.

At the same time, the space vacated by China could provide opportunities for Indian manufacturing, although India has to continue to strengthen its advantage in services as well. Reserve Bank of India (RBI) Governor Raghuram Rajan has rightly said that India may not be able to follow the typical East Asian model of export-led growth as the circumstances now are different as compared to the last few decades. The global economy may not be able to absorb exports due to a lack of demand and slower growth in incomes. According to him, India should concentrate on the domestic economy while not ruling out exports. Therefore, India can have a two-pronged strategy of ‘Make in India’: manufacturing for domestic economy and for export.

One of the important opportunities for India due to the slowdown in China is the decline in commodity prices. For example, the price of crude oil has declined by 50% in the last 1.5 years. The savings can be used for infrastructure development. Similarly, prices of other commodities that India imports such as minerals have decelerated. This and the declining domestic prices of inputs are being reflected in the low inflation figures.

Another opportunity is in terms of foreign capital. Chinese firms can invest in India, and other investors in the global economy will also be looking for new growth centres. Thus, India can have a bigger pie of global investment including Foreign Direct Investment (FDI).

However, to make use of these opportunities, we need to have policies to enhance the manufacturing sector. Recently RBI reduced interest rate by 0.5 percentage points. Reduction in interest rate may help in investment revival but this alone will not be sufficient. Infrastructure development, ease of doing business and other reforms are also needed. However, focus on manufacturing does not mean India should neglect services. Both manufacturing and services should be simultaneously developed. Development of the manufacturing sector can create employment for unskilled workers. At the same time, development of ‘Skill India’ is also important.

MDGs led by China; Can India take lead in SDGs?

Apart from economic growth, the more important comparison with China should be on social indicators. Millennium Development Goals (MDGs) were adopted for the period 1990 to 2015. China has done extremely well in achieving many of the MDGs. In September this year, the United Nations (UN) adopted the Sustainable Development Goals (SDGs) for the period 2015-2030. Table 2 gives an overview of the performance of India and China in terms of social indicators. In many indicators, China is way ahead of India at present. In terms of the percentage of population living on less than US$1.90 per day, the poverty rate in China is 6% and 21.2% in India; in terms of the percentage of population living on less than US$4 per day, these figures are 49% and 91% respectively. Life expectancy in China is 75 – seven years more than that in India. Female literacy rate is 93% in China as compared to 65% in India. China has more than twice as many physicians per head of population than India. Only 4% of children suffer from malnutrition in China as compared to India’s 30%.

Table 2. Social sector performance of India and China, 2013-14

Sources: (i) For Poverty: World Bank Poverty and Inequality Database, 2015; (ii) World Health Statistics, 2015, World Health Organization (WHO); Human Development Report 2015, United Nations Development Programme (UNDP), New York.

In terms of changes over time, India has also done reasonably well in social sector performance in the post-reform period. Poverty declined faster in 2000s. There has been significant progress in reduction of infant and maternal mortality, improvement in female education and so on.

China has been much ahead of India in achieving MDGs, in terms of both absolute levels and change over time in the last three decades. In SDGs, India has to really do well to compete with China.

Reasons for the success of China in economic growth and social indicators are well known. Initial conditions matter for development. Moreover, China introduced agriculture reforms, developed labour-intensive manufacturing and invested in infrastructure, health and education.

One of the key SDGs is environment protection to reduce the impact of climate change. In terms of carbon emissions, India is doing better than China: per capita carbon emission is 8.1 tonnes in China and 2.4 tonnes in India (the figure is 19.9 for US). Therefore, India can focus more on development while developing renewable energy sources and other sustainable practices. India also announced recently that it would cut intensity of carbon emissions (ratio of carbon emissions to economic output) by 33-35% of 2005 levels by 2030 and make its economy more energy efficient. It would also raise the share of non-fossil fuel power to 40% by 2030, and produce 175 GW of renewable power by 2022. Forest cover would be expanded to absorb 2.5 billion tonnes worth of carbon dioxide and fossil fuel dependence would be reduced by levying taxes as well as cutting subsidies.

Concluding remarks

India does have an opportunity due to the slowdown in China. However, even if India’s growth rate is higher than China, it will take nearly two decades for it to catch up with China because the Chinese economy is five times the size of the Indian economy. Hence, China will continue to play an important role in the global economy. Similarly, in terms of the MDGs, India lost to China. The social indicators in China are much better than India inspite of significant progress in the latter. Only in carbon emissions, India is better than China.

The SDGs adopted by the UN recently give India an opportunity to do well and compete with China in social indicators. In fact, India’s role is crucial for the success of SDGs during 2015-2030. Higher growth in India will lead to higher tax-to-GDP ratio and can help in raising social sector expenditures. However, effective delivery systems are important for better outcomes. The role of both Centre and states is crucial for increasing economic growth and improving social indicators including human capital. PM Modi already mentioned at the UN that India’s programmes are in tune with the SDGs. For example, Swachch Bharat Mission can improve sanitation. Thus, India can play a leading role both in economic growth and achievement of SDGs in the next two decades.

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