WILL INDIA OVERTAKE CHINA
Monday, 3rd December, 2007
China grows at 8 %, India would take 56 years to beat its GDP. The Indian economy performed better between 2003-2004 and 2005-2006 than during any other three year period since independence. During theses three years, India’s gross domestic product - a measure of the country’s total income has grown 45% in dollar terms
Merchandise exports have doubled and services exports have trebled. The total number of vehicles produced during these three years exceeds the entire stock of registered vehicles in 1990-91. In telecommunications, India has gone from a total of five million telephone lines in 1991 to five million additional telephones every month.
These developments have placed India among a handful of future economic powers. Discussions of success stories are now centered not on the East Asian tigers of yesteryears, but on India and China. And given the uncertainty surrounding the long run stability of China’s authoritarian regime, many place greater faith in the future of a democratic India.
Therefore burning question these days is whether India can overtake china and if so when. The question is phrased in a very opens ended manner since we can compare the two countries along many dimensions such as GDP, per capita GDP, poverty alleviation, life expectancy, infant morality education and health. Moreover the outcome would critically depend on whether we expect china to sustain the current authoritarian regime and if not, whether the transition to democracy would be smooth.
To narrow down the possible answers let us focus on the GDP as the measure of future performance and assume for now that political upheaval will not cause a serious disruption in the Chinese economy. Measured at the market exchange rate, China’s GDP is currently 2.8 times that of India. Taking the best case scenario for India, let’s assume that it would grow 10% per annum- instead of the current 8% rate of growth in the foreseeable future. If china grows at 5% per annum compared to 10% currently – India would overtake it in 23 years. And if china grows at 6% India would take 28 years to cross its GDP. If China grows at 8% India would take another 56 years to beat its GDP.
No serious economist believes that growth predictions going even two decades into the future can be made with any accuracy. When such predictions turn out to be true, it is entirely by fluke. Therefore, all long run predictions must be treated with great scepticism.
To assess the likelihood of the above scenarios against this background, the first question we must ask is whether a case can be made for a significant slowdown of the Chinese economy in the next five-l 0 years. The answer is a qualified yes. History is proof of the fact that even the fastest growing developing economies have not sustained growth rates of 8-10 per cent for more than three decades. South Korea, Singapore and Hong Kong, which grew at super-high rates until the 1980s, registered annual rates of only 5.6 per cent, 6.4 per cent and 4.5 per cent, respectively, between 1991 and 2005. Growth rates in these countries have been even lower in the last five years.
However, the slowdown of the Chinese economy need not necessarily happen. Unlike Korea, Singapore and Hong Kong, China is a very large country and a substantial proportion of it has not grown rapidly yet.
Logically, it is possible that even as southern and eastern China slow down, other parts of the country would compensate for the slack. The other important question is whether India can sustain 8-10 per cent growth for the next three decades. This is no cakewalk either.
Despite the spectacular developments in the last three years, there remain questions as to whether this performance represents an especially strong business cycle effect rather than a shift in the trend growth rate. More importantly, till date, India’s growth has been propelled principally by services. And within services, the bulk of the output comes from unorganised activity in trading, transportation and personal and community services.
Organised services such as those in software, telecommunications, banking and insurance are still a small proportion of the GDP.
In virtually all miracle economies, manufacturing has grown at significantly higher rates than services in the early stages of economic transformation. For instance, the share of manufacturing in the GDP rose from 18 per cent in 1965 to 31 per cent in 1980 in Korea. In India, manufacturing has been stagnant, with its share in the GDP stuck at 17 per cent since 1990-91. Labour-intensive manufactures such as apparel, footwear, toys and other light manufactures which generate well-paid jobs for unskilled workers, and which China exported in massive volumes in the 1980s and 1990s-continue to do especially poorly in India.
