How growth stories of India and China stack up
3 min read . Updated: 17 Jan 2023, 12:59 PM IST
PremiumChina’s great strength, and India’s weakness over the past 15 years or so, has been investment.
New Delhi: Come Union budget day on 1 February, a central point of analysis would be if it’s enabling economic growth adequately. That question is framed by the short-term challenge of a slowing global economy. It’s also framed by the long-term context of how India can grow at a healthy clip for decades, and lift millions to new income levels. In this journey, it is natural to look at China, which did that beginning 1980 at a scale that India needs to. But look closer, and there are differences in those two narratives.
A key difference is the drivers of economic growth. By one definition, the gross domestic product (GDP) of a country is the sum of household consumption, investment, government expenditure and net trade (exports minus imports). For India, consumption—essentially, spending by households—has been the economic driver. It accounted for 84% of India’s GDP in 1980 and still accounts for about 60%. By comparison, consumption accounts for 39% of China’s GDP.
China’s great strength, and India’s weakness over the past 15 years or so, has been investment, or the net addition to capital goods like machinery and equipment. The share of investment in India’s GDP surged from about 25% to 35-40% between 2004 and 2012, but has since declined. China powered its growth through exports, and invested surpluses from there to create infrastructure to become the world’s manufacturing hub. Recent Indian initiatives such as the production-linked incentive (PLI) scheme are intended to lift capital formation, but the challenge is immense.
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Manufacturing Mainstay
Economies are in flux, with a pandemic and war nudging them to consider greater self-sufficiency. For example, the covid-19 pandemic increased demand for chips and disrupted supply chains, impacting downstream sectors. For India, the urgency to expand manufacturing also comes from increasing growth and exports, and creating jobs. Between 2011 and 2021, the share of the manufacturing sector in India’s GDP has shrunk from 18.4% to 15.1%.
China scripted its story around manufacturing. In none of the 17 sectors tracked by the World Trade Organization did China’s global export share cross 10% in 1980. Even by 2000, it crossed 10% in just two sectors. But, this shot up to nine sectors by 2020, as it made large investments in domestic infrastructure. In none of the 17 sectors does India’s export share cross 10% even now. But there are pockets of strength, such as textiles, iron and steel, and food, where it has something to build on.
Performance Code
This government is also trying to expand the pool of sectors where India can be strong, through the PLI scheme. Launched in 2020, this scheme gives incentives to companies in chosen sectors based on the production trend for five years. The hope is that after this initial support, they would reach a place to hold their own, globally. The scheme was launched for electronics manufacturing, but has since been extended to more sectors.
India has its own strengths. A key differentiator is the IT sector, where India is a key offshoring base to the world. According to Morgan Stanley, Indian IT exports have grown from $40 billion to an estimated $178 billion in 2021-22, and are likely to grow to $527 billion in 2031-32.
The sector’s share in the working-age population has grown from 0.3% in 2007-08 to 0.5% in 2021-22, and is projected at 1.2% in 2031-32.
Social Capital
One thing that enabled China to grow this fast, and for this long, was the social capital it had in place in 1980, when it initiated reforms like greater private participation. Although it was a developing nation then, China had in place building blocks in education and healthcare, helping it to harness the demographic dividend provided by a large young population.
For example, the life expectancy at birth that China had in 1980, of 64 years, was something India achieved in 2003. Similarly, China’s infant mortality rate in 1980 was something that India matched in 2009. China’s progress in education and healthcare gave it a skilled workforce that could service the investment-led growth. A large skilled workforce is another piece for India to solve, underscoring the myriad elements that make up the construct of growth.
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