Why India Will Not Emulate China
In recent years, China has emerged as the world’s leading driver of growth for the global economy, surpassing the United States and the rest of the developed world as a contributor to the expansion of the global economy. Thanks to its massive scale and 35 years of world-beating levels of economic growth, China is well-suited for this task. However, the recent economic turmoil in China has raised fears that the Chinese economy could be in for a hard-landing, causing it to struggle to continue driving global economic growth in the years ahead.
As a result, eyes are increasingly turning to India in the hope that the world’s second-most-populous country will emerge as a leading driver of growth for the global economy in the years ahead. These hopes have been bolstered by the recent high rates of economic growth in India, despite the fact that the methodology behind India’s economic growth data remains highly suspect. Unfortunately, while India is likely to overtake China as the world’s fastest-growing economy in the coming years, it is highly unlikely that India will be able to provide the same boost to the global economy that China has done in recent years.
To understand why India will struggle to emulate China and become a leading driver of global economic growth over the next 10-to-15 years, it is necessary to appreciate just how much China has achieved over the past few decades. In 1980, China’s per capita GDP (at PPP) was just 2.4% of that of the United States (India’s was 4.5%). Today, China’s per capita GDP is 23.6% of that of the US (India’s is now 10.7%). This is due to the fact that the Chinese economy has grown by an average of nearly 10% per year since 1980, easily the highest sustained rate of economic growth in the world. While China was desperately poor in the wake of the Chairman Mao era, such sustained growth in a country of China’s size means that the country’s economic scale is once again returning to the levels last seen in the 19th century, when the Industrial Revolution led to the West dramatically overtaking China in terms of economic size and expansion. Now, China is either the first- or the second-largest economy in the world (depending on how you measure it) and without question will be the largest economy in the world for much of the 21st century.
As China’s economy is slowing, there is a growing hope among companies and other economic players that India will step up and follow in China’s footsteps as the next giant emerging market that can put together decades of near-double-digit economic growth rates. The most obvious comparison between the two countries is the fact that they both have populations that are four times the size of the next-most-populous country (the United States), giving them huge domestic markets and a vast potential for growth. Moreover, while China’s population is rapidly-aging and will peak at less than 1.5 billion in the next 20 years, India’s population continues to grow and will reach nearly 1.6 billion by the middle of this century.
However, India faces a number of constraints that are likely to prevent it from achieving sustained economic growth rates such as those seen in China since 1980. For example, India is not as centralized of a country as China is, both in terms of the power of the central government as well as the homogeneity of the population. This makes it difficult for India to emulate the policies that allowed China (as well as Japan and South Korea) to grow from poor agrarian economies to some of the most sophisticated manufacturing economies on the planet.
Second, India faces dramatic resource shortages that dwarf those that are in place in China. For example, land, water, energy and other natural resources are all in short supply in India and their scarcity will worsen as the country’s population and economy expand. Finally, China has proven to be a much more stable country than India in recent decades in terms of political continuity and internal security and this has allowed for China to attract massive amounts of foreign investment, something that India has been unable, and somewhat unwilling, to do.
As we look to the coming years, it is clear that, even as its economy is slowing, China will remain the world’s leading driver of global economic growth, while India, despite overtaking China in terms of GDP growth, will remain a relatively small player in the global economy (remember, India’s economy today is slightly smaller than Italy’s). For example, over the next five years, China will contribute 23% of the total growth for the global economy, while India will account for less than 5%.
In the next decade (2020 to 2029), China will account for fully one-quarter of all global economic growth, even as its economic growth slows to around or a little below 5% per year. In contrast, India’s economy will account for just 6% of the expansion of global economic output during that period, even as growth rates there hover near 7% per year. As a result, while India will provide the global economy with higher rates of economic growth, the overall contribution to growth by China will continue to dwarf that of India for at least the next 15 to 20 years. As such, India is in a poor position to offset any severe downturn in China for the foreseeable future and this could prove to be a serious threat to the global economy as it searches for new engines of growth.