India vs. China: Is There Even a Comparison ?

The GDP growth rate of India overtook the GDP growth rate of China in 2015. This has fuelled many newspaper articles in India stating that India is also on the path to replicating the Chinese growth story. However, the truth seems far from it.

Despite the Indian media’s frantic efforts to put India and China in the same league by using statistics that are misleading to compare the two economies, India is still a long way behind China. True, that India has made rapid strides on the path to becoming an economic powerhouse. However China has been doing so for decades. In this article, we will explain why India–China comparisons are totally baseless.

China’s Economy is Four Times Larger Than India’s Economy

The GDP of India is close to $1.5 trillion. At the same time, the GDP of China is close $7 trillion. The economy of China is at least 4 times as big as the economy of India. This means that even if China grows at the rate of a meager 1.5% and India grows at a rate of 7%, the Chinese economy would have added the same amount in output as the Indian economy would have!

Comparing the GDP growth rates of India and China is therefore a pointless exercise. China’s growth rate has been consistently higher than India’s growth rate over the past three decades or so.

India has barely overtaken the Chinese growth rate for a couple of quarters. Only if India can continue to beat the Chinese growth rate by a huge margin for the next two to three decades, does India stand a chance of overtaking the Chinese economy.

Inflation in India is 6 times higher than it is in China

India’s GDP growth has been accompanies by runaway inflation in the country. Growth rate accompanied by inflation cannot last for a long period of time. Instead, such growth rate is indicative of the short term impetus that has been given to the economy by the monetary policy.

On the other hand, China’s inflation has been relatively stable at a negligible 0.8% for many years. This has been accomplished despite the fact that China has been recording fiscal surplus for the past many years and ideally should be reeling with inflation. To the contrary, China has established sovereign wealth funds, which invest the additional cash in foreign assets keeping the inflation rate low.

Given the fact that Indian economy is severely marred by inflation, it seems unlikely that they will be able to compete against China in the long run.

China’s Manufacturing Productivity is 1.6 times than that of India

China produces a lot more than India does. It also does so remarkably more efficiently. Given the better quality infrastructure and better production techniques at China’s disposal, it is not astounding that the average Chinese worker produces 1.6 times more output than that of the average Indian worker. This means that the productivity of China as a nation is 60% higher.

The Indian manufacturing sector has multiple problems. These problems include erratic electricity supply, slow and expensive transport systems as well as lack of skills that increase manufacturing productivity.

Given that a large portion of these problems are structural in nature, it seems unlikely that India will be able to overcome them in the near future.

Workforce

The Indian economy on the other hand, has a clear strategic advantage when the workforce is considered.

The Indian education system was created by the British. As such, Indian workforce is global in nature. They can speak fluent English which gives them an edge over Chinese nationals who face language barriers.

Also, the Indian workforce does high end jobs for the information technology industry and BPO industry as compared to the Chinese workforce which works menial jobs on the factory shop floor. Given that the future of the world lies in high skilled knowledge jobs, the Indian workforce may soon rise in prominence while the Chinese workforce may soon become redundant.

One Child Policy

Also, China faces what many economists call a demographic time bomb. For the past couple of decades, China has followed the one child policy to control population. However, now China faces a situation wherein there are more people out of the workforce than in it. On an average, every Chinese worker is expected to pay for the costs of at least two Chinese retirees.

India, on the other hand, is facing a demographic dividend. It has a huge, extremely skilled workforce. Hence, if the government is able to provide jobs to these workers, the Indian economy is expected to grow by leaps and bounds. Given the fact that there will be a lot more people in the workforce than out of it, India is poised to become an economic superpower.

Entrepreneurship

China is still more or less a communist country. This means that all the enterprises there are run by the state. State run enterprises are usually not efficient and definitely not innovative. On the other hand, the Indian industry is based on innovative enterprises.

Given the competitive nature of the world economy, the Indian industry stands a better chance at success in the future. This can already be seen as capital intensive Chinese industries such as coal and cement are going bankrupt whereas knowledge intensive industries such as information technology are thriving!

The China India comparison is therefore absurd at the moment. China is a full-fledged superpower that has begun to show signs of decline whereas India has just started rising. The path is long and uncertain and only time will answer certain questions!