Economic power shifts between China and India?

Dry statistics show a shift of economic fortunes emerging between India and China during 2015. The first, second and third quarter figures for 2015 GDP growth were 7.0%, 7.0% and 6.8% for China; but were 7.5%, 7.0% and 7.4% for India. This change of fortunes can be seen in the Global Economic Prospects report drawn up in June 2015 by the World Bank, which followed GDP growth rate figures for 2000-14 with forecasts for 2015-17.

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Similarly, in October 2015 the IMF’s World Economic Outlook prediction for 2016 was of India’s 7.5% GDP growth rate ahead of China’s 6.3%. The Chinese leadership itself set a target of 6.5% for the 2016-2020 period. The International Growth Predictions from the Center for International Development (CID) at Harvard University published in May 2015 saw longer-term Indian acceleration and Chinese slow-down for the 2015-2023 period; “important reversals”, whereby “after decades spent trailing the growth of its northern neighbor and economic rival” India was projected to record average annual growth rates of 7.9%, nearly double China’s 4.6% projected growth over the period.

Both states are engaged in economics-driven rise in the international system, but now India’s economic rise may be starting to impact more in the international system? How has this come to be?

At the start of the 1970s China and India had similar size GDPs. However, the Dengist economic revolution, in which capitalist economic models were adopted by China, delivered high growth from the mid-1970s onwards. This left China with a subsequent quarter of a century of high economic growth at a time of continuing low economic growth rate for India.

Furthermore, even when two decades later the India pursued economic deregulation, which did deliver higher growth rates during the 1990s, China’s recorded GDP growth rates remained higher than India’s. This is reflected in the World Bank average for China of 10.5% growth during the 2000-2010 decade, whereas India’s average during that decade was 7.2%. This economic growth was why there was widespread talk at the start of the century of the 21st century being China’s Century.

The result was a Chinese economy almost triple the size of India’s, as for example in World Bank figures for 2014 which, taking into account Price Purchasing Parity (PPP), estimated China at $18,031 and India at $7,393 billion trillion. Did such a gap matter? Economic size affects the potential size of military budgets. The Stockholm International Peace Research Institute (SIPRI) 2015 Fact Sheet has China’s military spending of $216 billion (2.1% of its GDP) overshadowing India’s $50 billion (2.4% of its GDP).

Despite this previous widening gap in the size of their respective economies, the official emphasis by the two governments has been on economic cooperation, on Chindia synergy between these two neighbours, with both countries’ economic rise underpinning an Asian Century, and both economies described as complementary to each other. This ignores some serious trade asymmetry. Figures from the Indian Department of Commerce’s Import-Export Data Bank show that though bilateral trade had risen over the decade to $60.4 billion in 2014-2015, this masked an equally rising all-time high Chinese surplus (and corresponding Indian deficit) of $48.5 billion. Such imbalances cause increasing political frictions and are increasingly resented by India.

Of course this is not to say that economic success is certain for either country. Both countries suffer from heavy burden of corruption, and India has further constraints of caste impediments, and the challenge of creating employment for its rapidly growing potential workforce.

Furthermore it remains true that high growth is easier from a low base, whereas it is more difficult from a higher level. Successful economies thus tend to naturally slow down. China may then be a statistical victim of its own success. Conversely India’s higher growth rate figures on a lower base are easier to achieve, as China earlier had done so. This still leaves a situation whereby China’s lower growth from a bigger base means that in size its economy increases more than that generated by a higher Indian growth rate from a lower base.

Nevertheless, this slow down in Chinese growth figures (already subject to some scepticism about them being massaged) come in the wake of growing analysis pointing out the structural shortcomings of the Chinese economic model, hampered by a heavy statist hand, privileged position of state enterprises, and growing debt figures become an increasing drag on economic vitality. Politically, China’s one party system is indeed able to deliver short term quick direction and infrastructure projects, but in the longer-term may well be unable to open up a free economy. An aging population means a declining workforce and rapidly ageing pensions/care time bomb. This aging population was a direct result of the One Child Policy enforced since 1979, with its replacement in October 2015 by a Two Child Policy, representing an attempt to reverse this process. However in demographic terms the pattern for China is already set for the next half century.

In contrast, India has been posited as a long term economic bet. In such a vein, India saw the highest Foreign Direct Investment FDI inflow for new projects among all nations in the first half of 2015, attracting $31 billion in capital expenditure from foreign companies, and overtaking the hitherto China at $28 billion. Politically, India’s democracy may indeed be more chaotic in the short term, but it permits greater entrepreneurial centres of power to flourish. Its young population profile gives it a growing work force for the next half century, along with a so-called “demographic dividend” of income growth and savings through a higher proportion of its population being able to contribute to the economy. Talk by the Modi administration of the 21st century being India’s Century reflects a sense of economic shift, with India now set to outperform China over the coming decade. This is of economic but also political significance.


This article was first published in Centre on Asia and Globalisation’s China-India Brief #67. The article is written by David Scott, an ongoing consultant-analyst and prolific writer on India and China foreign policy, having retired from teaching at Brunel University in 2015. He can be contacted at davidscott366@outlook.com.

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