India and China: Parity within sight

China has had an export-oriented development strategy since the 1980s, while India began to globalize in the early 1990s.
China has had an export-oriented development strategy since the 1980s, while India began to globalize in the early 1990s.

Summary

  • A left-behind India could plausibly catch up with China as both seek an economic rebalance in the decades ahead. An Asian Century looks close.

China and India have had a long history of convergence, with around the same per capita income from 1500 to 1980, but have since diverged. Their growth paths are expected to converge in the next two decades, with the rise of India’s middle class and changing geopolitics. China and India will account for more than half of all global growth. Mention the two countries to economists and their first thought will be their differing economic-emergence paths: China is a manufacturing-led growth success and the world’s big exporter of goods, while India had services-led growth and has a global reputation for service exports.

In 1991, India’s services sector had a much larger share of national output than the global norm, while its manufacturing sector’s slice was well below. China’s sectoral profile was the inverse. In the next two decades, the outlier status of both got amplified. The Indian government has been trying to ramp up manufacturing through initiatives like ‘Make in India’ with fiscal incentives for manufacturers. On this sector’s annual output, India’s global rank improved from 14th in 1990 to sixth in 2015. In 2023, it accounted for 3.3% of the world’s total manufacturing output, ranking it fourth. However, the sector’s contribution to GDP has declined, falling from around 17% two decades ago to 13% in 2022.

Meanwhile, China accounted for 28.4% of global manufacturing output in 2023 and has held the top spot for a decade, with the sector making up nearly 30% of its GDP. Its gross production is three times that of the US, six times that of Japan, and nine times that of Germany.

Consider services. As of April 2024, India ranked eighth globally on this sector’s output, placed at about $1.5 trillion. It is over half of India’s GDP. Thanks largely to IT services, the country’s share of global service exports increased from 3.7% in 2019 to 4.9% in December 2022. China’s services sector has also grown since the late 2000s, with the wholesale and retail trade, real estate, hotel and catering services making up its bulk.

Have the trade patterns of China and India diverged?: In 1982, the shares of service exports in total exports for China and India were in line with the global norm. Only the US was a significant exporter of services. But then, India became a services major, with its share of services in total exports greater than the global norm. China went for factories.

China has had an export-oriented development strategy since the 1980s, while India began to globalize in the early 1990s. India remains far less involved in global supply chains than China, with low participation in cross-border networks. However, the imports of both are similar. Both mainly import goods (75-80% of total imports), particularly manufactured products and raw materials.

Which will grow faster in the future?: China’s GDP per capita is a multiple of India’s today. To catch up, India must outpace China.

Neither country can afford to remain a one-trick pony. New Delhi is focusing more on manufacturing to create jobs, while Beijing aims to ascend the services value chain through modern skills, a strategy that may also help China avert a middle-income trap, which it remains vulnerable to.

The growth paths of the two economies are expected to converge over the next two decades. Apart from changing growth strategies, a rising middle class and the remaking of global politics, this would be influenced by cooperation on climate action and China being India’s largest trading partner. Both countries are trying to rebalance their economies on the sectoral slice-up and external fronts. China is easing its goods fixation by developing a big domestic market for services. There is enough room for India to use factory output as a growth escalator, while China uses services.

Both countries are also focusing on environmental concerns that must be balanced with their economic imperatives. Both are also accelerating their push for energy security in times of geopolitical turbulence, even as a clean-fuel drive is altering the landscape. India’s upcoming elections and government stability could revive the interest of foreign oil companies in investing here, though this may depend on the policy framework.

The growing economies of India and China are a major source of global demand and also a growing influence on other developing economies. China’s effort to rebalance its economy may create new opportunities for exporters of factory products, but it may also reduce demand for commodities over the medium-term. China’s producer prices have contracted for the past 10 months, which means the cost of goods being shipped from the country is falling. This is good news for people around the world who are still struggling with high inflation.

India has the world’s largest youth bulge, and this could be a source of future growth. India has also invested heavily in physical infrastructure and is the fastest urbanizing country in the world. It needs its young population to contribute to economic development by starting and expanding businesses, using their education and training to develop new products and services, and contributing otherwise through their knowledge and skills.

China and India are expected to contribute 50.3% of global economic growth in 2023: 34.9% and 15.4% of it respectively. The Asia-Pacific region, seen as driving about 70% of the world’s GDP, is clearly the world’s action spot this century.

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