India & China – Seventy Years of Relative Economic Progress – Guest Author: Nirmalya Chatterjee
India and China established their present political systems seventy years ago roughly around the same time. India achieved its independence from the Britain’s colonial rule on August 15, 1947 and established world’s largest democracy. Chinese Communist Party formally took control over People’s Republic of China on October 1, 1949 after a prolonged war with the Kuomintang forces. China embarked on its major economic reforms in 1978 whereas India started its more serious efforts in 1991. Starting from a comparable base, both countries have made significant strides since the reforms were put in place. However, China with its early start and a more aggressive approach, has pulled far ahead of India. This article will review the relative reform paths the two countries have pursued and the results achieved so far.
China’s Economic Reforms
China experienced a very slow economic growth during the first twenty-five years after the revolution under Mao Zedong’s leadership. Economic planning was controlled by the top communist party bosses in the Soviet model. Economy was dominated by state ownership. Farming was done in a ‘commune’ or joint ownership system lacking individual ownership and incentive. This was also the time when economies of China’s Asian neighbors, namely Japan, South Korea, Taiwan, Hong Kong and Singapore were thriving. China was falling way behind.
The Chinese Communist Party, under the leadership of Deng Xiaoping, launched the reforms known as ‘socialist market economy’ in 1978. The new policy was to pursue a western style capitalism governed by the one-party system. In the first phase, the farm communes were broken up, the country was opened up to foreign investments and entrepreneurs were allowed to take business ownership. The party, in the second phase, privatized state ownership, removed price controls and allowed the economy to become more market driven. China became the destination for the foreign investors and consequently the manufacturing hub for the world. The results of these reform moves were astounding. Annual growth rate hovered around 10% after the reforms compared to 2 to 3 percent under Mao. China’s GDP or the total economic value of output of goods and services is now second in the world after the United States. United States now considers China the greatest economic competitor and a formidable military threat as well. The sophisticated Chinese weaponry paraded through Beijing’s Tiananmen Square this past October 1, including new long range hypersonic missiles and stealth combat drones sending a clear message that the technological advantages of the United States are shrinking fast.
India’s Economic Reforms
India also pursued a Soviet styled centrally planned economic system for the first forty years. With the long history of colonial rule as a backdrop, India was pursuing a protectionist economic policies and kept the economy virtually closed to foreign investments. Regulatory barriers, like difficult licensing process and high taxes, were hard to overcome to start or grow new businesses. Much of the new investments were state owned and inefficient. Economic growth remained low in 2 to 3% range – significantly behind its neighbors such as Pakistan (5%), Indonesia (9%) and Thailand (9%). Due to lack of significant exports compared to crucial needs of energy needs, India started to have a serious ‘balance of payments’ problem that brought the country close to default by 1991.
World Bank and International Monetary Fund, in offering a $500 Million bail out in 1991 for India, mandated that the government open up the economy to foreign investments, reduce regulations and lower taxes. The then government of Prime Minister Narasimha Rao and Finance Minister Manmohan Singh had to take steps of initiating economic reforms. These reforms somewhat eased the grip of old ‘License Raj’, reduced tariffs, ended public monopolies in many sectors and relaxed approval of foreign direct investments. India began to transform towards a free market economy by the turn of the 21stcentury. Annual growth rate started to move closer to 10%. Successive administration of Vajpayee and Modi took further steps to reform financial services and retail industries to spur economic growth in the consumer sector. After many years, the government has introduced the uniform ‘Goods & Services Tax’, commonly known as GST, in 2017 which replaced a slew of indirect taxes and simplified the process of doing business in India. However, criticisms continue persist that India’s reforms are not enough yet.
The Stark Differences
China and India had roughly the sameGDP Per Capitaof $180 back in 1978 when China started its reforms. GDP Per Capita is measured by dividing a country’s GDP or total annual economic output of goods and services by its population. It is considered one of the best measures of a country’s standard of living. While India has made great progress in the last thirty-year period, China’s GDP has soared during the same time. Purchasing Power Parity(PPP) is a way of making an ‘apples to apples’ comparison of two country’s GDP Per Capitaby adjusting for their respective cost of living. On that basis, per World Bank data, China’s GDP Per Capita (PPP) in 2018 was $18,110 which is close to two and half times of India’s GDP Per Capita (PPP) of $7,874. As a reference, the GDP Per Capita (PPP) for the United States in 2018 was $62,606.
China has very successfully transformed itself into a manufacturing powerhouse for the world. Its major trading partners are the United States and the developed economies of Europe and Asia. Just as an order of magnitude, China’s 2018 export of $2,490 Billions is seven and half times that of India’s $330B due to its vast superiority in manufacturing. And, this has been largely achieved due to their policies resulting in much greater direct foreign investments in China – $1,513 Billion in 2018, compared to $367 Billion in India. Being a very strong export driven economy that China is, its foreign reserves are $3,160 Billion compared to India’s $429 Billion – almost eight times in size. China has clearly established itself as the preferred source of manufactured goods as well as the preferred destination of investments for the advanced economies. A very enviable position for China to be in.
A superior economy has helped China achieve better results in certain critical socio-economic fronts. China’s average life expectancy is currently at 76 years versus India’s 69 years. Similarly, China’s infant mortality rate (measured by the number of deaths of infants under one year per 1000 births) is 12 compared to India’s 39. China’s overall literacy rate of 96% is also significantly higher than India’s 71%. Annual per capita electricity consumption in China is 4,292 KWH while that for India is 817 KWH. Education and electricity are critical building blocks for a strong manufacturing based economy.
Despite making significant strides in many of the economic fronts, both China and India are criticized for creating serious economic inequalities. A disproportionate portion of the fruits of the economic progress have benefitted those in the upper income segments. Critics contend that ‘crony capitalism’ has been one of the reasons whereby policies, regulations and resources have been tilted in favor of the rich. China still has a very high level of poverty at 27% (earning less than $5.50 per day), compared to the US which is 11%. India is way behind in this category at 60% (earning less than $3.20 per day).
Near Term Outlook
The curious mind wants to know – can India’s economy ever catch up with China’s? Recent data suggest that China’s growth rate is slowing down whereas India’s growth rate remains robust with occasional encounter with rough patches. The trade war with the United States is starting to have a significant impact on the Chinese economy. Some of the grievances that the United States has against China, namely unfair trading practices, protection of intellectual property and China’s military expansion, are likely to pose continued challenges for China to navigate through. Hong Kong is the gateway to mainland China’s financial systems. The current protests there against the authoritarian rule of Beijing could also cast a dark shadow on China’s economic outlook.
India, on the other hand, has continued to improve its alignment with the western world as a desirable trading partner for a variety of reasons. A vibrant democracy, a reliable legal system, and the wide use of English language are some of the key appeals to the foreign investors. India must continue to make its economy more ‘business friendly’ with less regulations, have complete transparency and fairness for domestic and foreign investors, and focus on vastly improving education for the larger masses in order to make a compelling case for the investors. These are certainly some radical improvements for India. But, a singular focus on these imperatives would certainly help bridge some of the gap with China.
Nirmalya Chatterjee is an 11 year resident of Las Vegas. He is a management consultant for consumer products and the hospitality industry. During his professional career, Nirmalya had several senior levels and ex-pat assignments. He was the Chief Financial Officer for Coors Brewing Company; Vice President of Finance for Las Vegas Sands Corporation; Sr. Vice President of Finance, Galaxy Entertainment Macau; and General Manager of Revlon India. Most recently, Nirmalya served as the Chairman of the Hindu Temple and Jain Center of Las Vegas. Nirmalya holds an MBA from the Rutgers University.
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