Is this the much-awaited moment when the Indian tortoise starts to catch up with the Chinese hare?
It does not require a journey from Mumbai to Shanghai to realize that China has steamed ahead of India in the race out of poverty. The International Monetary Fund’s latest World Economic Outlook database tells the story in hard numbers. Average incomes in India were a bit higher than those in China in 1990. But by 2007, India lagged behind, with a per capita income of $941 while China was way ahead at $3,180 (at market exchange rates).
Most of the difference in the growth rates of the two countries can be explained by the three components of the standard theory of economic growth: higher investment, increase in employment and productivity growth.
Will the economic crisis that is now rippling through the world help India close the gap and then start moving ahead of China?
Both countries are now in the early stages of a growth slowdown. Most economists still expect China to grow faster than India in 2009. For example, a recent report by Citi—Emerging Markets: The Rocky Road to Recovery—says that the consensus forecast for Chinese economic growth in 2009 is 8.1%, while that for India is 6.6%. That essentially means the average 3 percentage points gap between economic growth in India and China over the past two decades or so will continue to be maintained.
But then, there are many longer-term estimates that India will start outpacing China in the second decade of this century. Consider the famous Goldman Sachs report by Dominic Wilson and Roopa Purushothaman published in October 2003. Their main prediction was that Brazil, Russia, India and China—the Bric countries—would account for a far bigger slice of the world economy by 2050 because of their superior growth rates.
But the two Goldman Sachs economists also said that some of these four emerging stars would lose momentum earlier than the others. They said in their report that while China would continue to run faster than India in the first decade of this century, it would be a different story after that. India would overtake the Chinese growth rate in 2010-2015—and maintain the difference all the way to 2050.
Other forecasters have come to similar conclusions: China’s growth rate could be close to its peak and will fall as the population ages and incomes and productivity levels converge with those in richer countries. That is likely to happen sometime in the next five years, while India is likely to maintain a faster growth rate because it had a late start and has a younger population. Hence the question in the very first line of the column.
All long-term forecasts do not take short-term business cycles into account. But it would be worth speculating whether the current downturn signals the moment when the tortoise starts catching up with the hare.
China will almost definitely grow faster than India over the next couple of years. But the news there is grim. The anecdotal evidence on offer in the international press suggests that China’s economy is headed into a severe downturn. The Pearl River Delta that spewed out exports to the rest of the world has now been hit by collapsing demand, factory closures and unemployment. The New York Times cites government statistics in a 13 November report that at least 67,000 factories have closed in the first six months of 2008, even before the world economy went into a serious tailspin. The unemployment situation, too, is said to be grim. There are early signs of reverse migration, as workers who have lost their jobs move back to the villages they came from.
This pain finally exposes a fatal flaw in the Chinese strategy of being heavily dependent on foreign demand to power economic growth, helped by a cheap currency and committed mercantilism. India is far less dependent on foreign demand, spending on both local consumption and investment. It is thus in a relatively better position to weather a severe global recession.
It would be rash to predict the final act of the Chinese economic miracle. China still has economic strengths and healthy public finances to support demand in a downturn such as the current one. And let us also not underestimate the competence of those who manage its economic policy.
But the road ahead will be a tough one for China, as it comes closer to global productivity standards and its population ages even more. India should ideally take advantage of this almost inevitable trend, with policies to support a competitive economy: a more open economy, investments in health and education, high-quality physical infrastructure, lower fiscal deficits and much more. There will be no free ride here.
The global recession of 2009 should be an opportune moment for India to start closing the lead that its great Asian rival has built over it in the past decade and more.
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