Will China always overshadow India? A Morgan Stanley report released in August provocatively declares that by 2015, India will begin outpacing China’s rapid GDP growth. Given the current economic divide between the two countries, this looks unlikely at first glance.
Yet, Subramanian Swamy comes to a similar conclusion in his book Economic Development and Reforms in India and China: A Comparative Perspective.
Citing new reforms in the financial system, inclusiveness of education and intelligent manipulation of the demographic dividend as crucial determinants of growth, the author predicts that India, with its sustained democracy, will overtake China by 2020.
Swamy, an early advocate of Indian economic liberalisation, attained his PhD from Harvard University, where he taught for 10 years before becoming a professor of economics at IIT, Delhi. He has been elected to Parliament for five terms and has been a Cabinet minister twice.
He presents his main reasons for the focus on India and China early in the book. Swamy emphasises the similarities the neighbours share in terms of size, population and their economic history; the common growth models of socialist persuasion till the 1980s, followed by market-oriented reforms. He also points to the contrast of India’s democracy and China’s authoritarianism which provides an interesting case-study of what each political model has to offer in terms of development. Finally, as China aims to create a “Harmonious Society” and India wants an “Inclusive Society”, the possibility of a future ideological convergence warrants analysis.
From 1952 to 1980, China and India grew at 4 per cent each. It was only after economic reforms under Deng Xiao Ping in 1978 that China began to grow at 10 per cent, while India grew at 5.5 per cent. This trend continued throughout the 90s, with China growing at 8 per cent, compared to India’s 6.5 per cent. From 2003 to 2008, both grew at more than 8 per cent, but with China always leading the pack.
By beginning reforms more than a decade ahead of India, China was able to take advantage of a new surge in global capital and rising costs of labour in the East Asian economies. Despite the fallout from the financial crisis, China and India have continued to grow at 11.9 per cent and 8.8 per cent, respectively — the fastest in the world.
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Yet, amidst predictions of China and India’s upcoming superpower status, Swamy discusses the on-ground reality of both countries. Poverty, regional inequalities, structural weaknesses in the financial sector and the need for an extensive set of reforms remain to be dealt with.
He alludes to democracy and the prevailing demographic dividend as India’s trump cards over China’s authoritarian government. While Beijing’s political style allows for quick decision-making compared to India’s arduous bureaucratic process, he predicts that the lack of citizen participation will lead to greater social unrest in the long run. Also, he notes that with more than half of India’s population under the age of 25, the ratio of the working population will not decrease before 2051, giving the government time to train and empower the youth to fuel future development.
The book also repeats the well-worn statement that “what China is to manufacturing, India is to services”. The service sector constitutes 50 per cent of India’s GDP. While an admirable jump from agriculture-led growth to service-led growth is uncommon in developing countries, a concerted effort to develop the manufacturing sector in India needs to be made. This is crucial to creating adequate employment for those who are semi-skilled and cannot get work in the agricultural sector.
The author points out a number of competitive disadvantages that India faces in comparison to China in the area of manufacturing. The prohibitively high cost of power in India (nearly two-and-a-half times that in China), which results in higher input costs, is one such disadvantage. Another is the negative externalities that result from the inefficiencies of Indian ports; China handles four times the amount of freight that India handles. In terms of policy measures, China’s consistent creation of new town and village industries (TVEs) allowed for a more substantial labour shift from agriculture to industry than in India. Combined with high market incentives, these TVEs have been more successful than India’s small scale businesses.
A McKinsey Global Institute (MGI) study revealed the three main barriers retarding India’s annual growth by 4 per cent as “the remaining multiplicity of regulations governing product markets, distortions in the land markets and extensive government ownership of business”.
The book points to removing these obstacles as labour productivity would increase by 8 per cent, creating 75 million new jobs which, in turn, would translate into the 10 per cent growth rate that India needs to overtake its behemoth neighbour.
In the 1600s, China and India accounted for more than half of the world’s GDP. Imperialistic nations, colonisation and exploitation of the two giants resulted in a lull in their world economic dominance. Yet, if the IMF is right, that economic powerhouse image is being rapidly reinstated, with a combined share of 22.8 per cent of global GDP predicted by 2014.
ECONOMIC DEVELOPMENT AND REFORMS IN INDIA AND CHINA
A Comparative Perspective
Subramanian Swamy
Har-Anand Publications
328 pages; Rs 795