Can India catch up with China?

The rankings of world economies have shifted quite a bit in recent years. While emerging economies such as China and India have surged ahead, traditional powerhouses like Japan and Germany have slipped. According to the World Bank estimates for 2013, the US, with a total income of about $17 trillion, in purchasing-power-parity dollars, is still holding the global lead.  Closely trailing behind is China with an income of 16-plus trillion dollars. India, with an income of less than 7.0 trillion dollars, is the third - though a distant third (its economy is considerably less than one-half of China's).  If the  economies are ranked according to market exchange rates, the US and China retain their first and second positions, but India slips further -to the  tenth position,  behind such countries as Brazil , Italy and Russia.

China was growing at 10 per cent annually for three decades since 1980s, but its growth slowed to less than 8.0 per cent in the last three years.  On the other hand, since the 1990s, the growth rate of India accelerated to more than 7.0 per cent annually up to 2010; since then its growth fell to less than 5.0 per cent. Until this turn in growth in India, some investment banks and international organisations had predicted that India's growth rate would soon overtake China's, which did not happen.

However, the election of Narendra Modi, who comes with stellar credentials of reform as chief minister in Gujarat, as the prime minister of India has once again rekindled hopes, in and outside the country, for resuscitating growth in an otherwise flaccid economy. The question now being asked is: can India catch up with China?

Currently, China is far ahead of India in income as well as other economic indicators. China has a per capita income of around $12,000, which is more than twice the per capita income of India's. Similarly, compared to India's savings rate of about 30 per cent, China's savings rate exceeds 50 per cent of its income.

Although India has fallen behind China in income, a far greater concern is India's dizzying deficits in various indicators of quality of life, as Nobel laureate Amartya Sen so thoroughly catalogued:  life  expectancy at birth in China is 73.5 years, compared to  India's 64.4 years;  China's adult literacy rate is 94 per cent, while in India it is  74 per cent; India's literacy rate for women, between the ages of fifteen and twenty-four, is about  80 per cent, whereas in China it is nearly hundred per cent. A substantial proportion, almost half, of Indian children is under-nourished, compared with a very tiny fraction in China. And the list goes on.

India fares poorly not only in comparison with China, but also with other countries at a comparable level of income such as Vietnam or Nicaragua. Indeed, in most of these indicators, it does badly even in comparison with Bangladesh, which has half its per capita income.

It is often suggested that the most important factor that will work in India's favour in the future is its demography - the so-called demographic dividend - which causes the prime working-age population to expand. However, the demography is a double-edged sword - it cuts both ways. The demography adds to the country's productive capacity, competitive edge and potential output; but whether it becomes a real elixir of growth depends on the country's ability to attract sufficient investment to absorb the new entrants to the workforce. This might be an immense challenge for India, which will add 10m-13m workers a year into the labour force - the equivalent of a new Malaysia - for the next two decades. Compounding this is the fact that many of those who will enter the workforce are likely to be uneducated and unskilled. Moreover, the global trend towards automation of tasks is likely to shift some of labour-intensive manufacturing from poor to rich countries.

Although the service sector, particularly business process outsourcing, has in recent years delivered India a modicum of prosperity, it, however, has not generated sufficient jobs to absorb the millions that enter the labour force every year. That will require rapid expansion of the manufacturing sector - currently contributing about 14 per cent of India's output, a figure that is much lower than China's 31 per cent. A less known fact about the Indian economy is that, in terms of manufacturing's share of output, it is one of the least industrialised of developing Asia: in the ladder of industrialisation, it lies on a much lower rung than the Philippines, Malaysia or Indonesia.

While India has acquired global fame in software, its Achilles' heel is hardware: it produces nothing that is world class - be it computers, automobiles or military hardwire, of which it is the largest importer in the world. Its exports have increased considerably in recent year, but they are only a sliver, about one-fifth of China's.

To revitalise growth and expand employment, India needs to pursue a vigorous strategy of outward-oriented, labour-intensive industrialisation; but that is not going to succeed, unless India enhances its global competitiveness. As it stands, India ranks 60th in the world (among 148 countries that were rated) in the global economic competitiveness index (which measures a country's  macroeconomic environment, the quality of its institutions and the state of infrastructure). India ranks below Thailand, Indonesia and Kazakhstan - much lower than China, which is closing ranks with high-income countries.

In health and education, India's ranking is miserable, 102nd worldwide, despite considerable improvements in recent years. In the quality of infrastructure, its gaping deficits in transport, communication, and energy place it far behind China in ranks. To attract adequate investment and accelerate its long-term economic growth, India needs to face these deficiencies head on.

However, even if India successfully addresses the deficiencies in priority, policy and institutions - in corruption, inefficiency, restrictive labour laws, etc. - and keeps on churning serial miracles, the economic gradient  between the two economies is  such that it is a virtual statistical impossibility for it to catch up with China in a few decades.  

However, the fundamental challenge for India goes much beyond its lacklustre economic growth - into its appalling development deficits in various indicators of quality of life, which are even worse than those that exist in many poorer economies.

To meet this challenge, India needs to jettison its growth fetishism that dominates its current development thinking and to make the well-being of the teeming millions of the poor and socially excluded the centrepiece of its development strategy. It also needs to foster a more congenial and cooperative relationship with its neighbours - to control its galloping defence expenditure that is eating into the core of its development budget, so badly needed for the welfare of its poor. Only with such a strategy of development that is attentive to the poor and friendly to its neighbours can India have its "tryst with destiny" - a vision of greatness so movingly articulated by its founding prime minister.

Dr M.G. Quibria, Professor of Economics, Morgan State University, US, is currently Senior Fulbright Visiting Fellow at Bangladesh Institute of                     Development Studies (BIDS).  mgquibria.morgan@gmail.com