The spectacular rise of China in the last few decades is first and foremost the story of its unparalleled economic growth and development. It is the economic might of China that underpins its national strength. It is thus crucial to have a dispassionate look at China's rise as an economic power in comparison with India.
We all know how India had a higher per capita income than China in 1978. What we often don't know is that despite its license-permit raj India was at this time still ahead of China in manufacturing, innovation, higher education, science, and technology. China was ahead of India mainly in terms of social indicators, such as literacy, Infant Mortality Rate (IMR), life expectancy at birth, etc. The divergence between India and China in terms of their per capita income and GDP started only from about 1990.
We started opening our economy from 1991, but by this time China had already stolen a march over us, having more than a decade of solid growth behind it. Moreover, our economic reforms were nowhere as drastic or thorough-going as the Chinese reforms, tied down as we were to the inertia of our recent past of socialistic dirigisme. While India did manage to grow at about 6 per cent per annum in the 1990s, this was vastly exceeded by the over 10 per cent growth of China during the same period.
Thus by the turn of the millennium, China's GDP in exchange rate terms had risen to almost double of India, and its per capita income had risen to one-and-a-half times that of India. This was still not an unbridgeable gap between the two countries. But there were other developments which bolstered the strength of the Chinese economy.
These were the rise of China as a cheap manufacturing hub for the developed world, large scale infusion of Foreign Direct Investment (FDI), and a multifold rise in its international trade. Closely related to one another, these trends created a virtuous cycle of economic growth and development for China, which catapulted it into the league of major economies. Trade and FDI helped the emergence and consolidation of the China lobby, especially in the United States and Europe. In 2000, the special millennium issue of the Time Magazine devoted a large section to the rise of China, and how it was fast emerging as a rival to the US.
Meanwhile, India had carried out many economic reforms under Narasimha Rao and Atal Behari Vajpayee. These reforms started paying dividends from 2003, a year in which India's growth exceeded 9 per cent. It was around this time that India came to be seen by the world as a serious rival to China in the economic arena and as a strategic counterweight to it.
The famous 2003 report of the Goldman Sachs, Dreaming with the BRICs, which predicted the emergence of India by 2050 as the second-largest economy after China in exchange rate terms; the well-known Foreign Policy article Can India Overtake China? by Harvard Professor Tarun Khanna, who followed it up by a book on the subject; the optimistic long-term projections of the IMF and the World Bank on the rise of India as an economic giant; the vastly increased international media coverage and the highly optimistic tenor of it; the spike in FDI and in Foreign Institutional Investment; India's emergence as a serious manufacturing power and an export hub for many multinational companies; and the rapid rise in India's international trade - all these were sure signs of India's arrival as a leading economic power of the world.
We did manage to maintain this optimistic scenario till about 2010; from 2003 to 2010, India grew at more than 9 percent annually,which was only slightly below the Chinese growth rate of 10 percent plus. Catching up with China seemed to be an entirely realistic goal to Indians and our friends everywhere. And what is also important, the emergence of India was seen as a welcome development by the world.
But the disastrous performance of the UPA 2 threw a spanner in our work. The growth rate plummeted to less than 5 per cent. Both domestic and international businesses grew increasingly wary of investing in India because of its reversion to anti-business policies under the garb of retrospective taxation and environmental clearances, the burgeoning fiscal deficit resulting from unsustainable welfare schemes like MNREGA, the double-digit inflation, and a series of scams - these undid many of our hard-earned achievements. Across the world, India's image was seriously dented.
In the meantime, China was the biggest beneficiary of the global recession setting out in 2008. While growth in the United States and Europe came nearly to a halt, China escaped without experiencing any major downturn, and continued to grow at more than 9 per cent annually. Moreover, its vast forex reserves, the highest in the world, came to be seen as an important force of stability in a world where the US and many other developed countries were heavily indebted.
So great was the impact of the recession on the developed world that it gave rise to the talk of the decline of America as the leading economy of the world and of its inevitable as well as imminent replacement by China. Many commentators around the world frankly acknowledged the vastly increased heft of the Chinese economy in the changes circumstances of the post-recession era.
Some went too far. Thus the American economist C. Fred Bergsten mooted the idea of G-2, an exclusive grouping of the US and China, which was thought to be necessary for managing the world. The idea found resonance with the Harvard historian Niall Ferguson, former US National Security Advisor Zbigniew Brzezinski, and the World Bank President, Robert Zoellick. Even though the G-2 failed to take off, the mere talk of it was enough of an indication of the future shape of things. Interestingly, the talk of the 2-G was taken somewhat seriously by China, which seemed to be abandoning the sage advice of Deng Xiaoping to maintain a low profile, and never claim leadership.
The last 5 years have thus created a more favorable world scenario for China, which should be a matter of concern for India. We need to do a cold analysis of facts to see where we really stand vis a vis China in 2014 in terms of our economic strength. Is China already beyond our reach?
While the Indian economy has suffered grievously in the last few years and China has moved ahead, India is very much in the race. On the face of it, the gap between the two economies would appear to be really huge in exchange rate terms. The latest data peg China's GDP at more than USD 9 trillion while India seems to be stuck at USD 1.7 trillion, which would seem to be vastly different from the figures of 2004 when China's GDP in exchange rate terms was less than USD 2 trillion or so and India's was around USD 700 billion.
The rub lies in the fact that in the last few years the Indian rupee has declined by more than 50 per cent, while the Chinese yuan has appreciated by nearly 25 per cent. The combined effect of the twin movements accounts for the major part of the increase in China's GDP compared to India. In fact, it has doubled the gap that would otherwise exist between the GDPs of the two countries, making it appear as if the Chinese economy has suddenly become more than 5.5 times larger than the Indian economy. Minus the effect of this exchange rate movement, the Chinese economy would still be less than three times the size of the Indian economy. Most of this revision in the values of the two currencies has taken place after 2008, when the rupee was still around 43 per dollar and the Renminbi at slightly above 7 per dollar; and is very substantially caused by persistently high inflation in India in the last 6 years.
One can clearly see this when one takes into account the GDPs of India and China in Purchasing Power Parity (PPP) terms. India has a GDP of USD 5 trillion and China USD 13 trillion in PPP terms. In fact, even the PPP value of the rupee was revised down by the World Bank some years ago leading to Japan once again becoming the third-largest economy replacing India, which had gained that slot more than ten years ago. India has regained that position now, and is again the third-largest economy in the world after US and China.
It is not my argument that PPP measurement is the only one that really counts, but rather that one should see the GDP figures in exchange rate as well as PPP terms. There are certain purposes, such as international trade, for which the use of exchange rate or Atlas method GDP is more appropriate, and there are others, such as the per capita income, where PPP is more so.
The point that I do wish to make is that India is still very much in the reckoning as a world economy whose weight is only going to increase in the future. Currently, China has a per capita income of USD 9,800 as against the USD 4,000 of India, but this is only partly a product of China's high GDP growth rates.
India's higher population growth rate compared to that of China has eaten up a much larger share of its GDP growth, resulting in lower per capita income growth. But the population growth rate in India is steadily coming down, and is currently at 1.25 per cent per annum as against China's 0.44 per cent. The gap is less than half of what it was for the last three decades.
So, in the near and medium-term future India too can enjoy the same advantage as China did with a low population growth coupled with high GDP growth, which naturally leads to the fastest growth in per capita income. This would obviously be possible only if we are able to resurrect the India growth story.
At any rate, India's lower per capita income can become an asset now that wages have started rising in China, and the gap between the wages of the two countries has become large enough to encourage shifting of manufacturing to India. Again, this is a factor which we can take advantage of only if we are able to carry out fundamental reforms in our labor laws and other regulations that make manufacturing more difficult in India than in most other parts of the world.
It has been now a very long time that China had left us far behind in international trade. This gap has only widened in the last decade, so that now India's international trade is a modest USD 800 billion, compared to more than USD 4 trillion of China, which has emerged as the leading nation of the world in international trade. There is a silver lining, though. India's trade-GDP ratio of around 50 per cent is not much different from that of China.
India has the demographic advantage. With a median age of 27 years only, India is still a very youthful nation; China has already reached the median age of 36.7 years. So India's percentage of working age population is set to steadily increase over the next few decades, while China's is declining precipitously thanks to its one-child-policy. But we will have to create millions of more jobs every year to tap into this tremendous source of strength.
Agriculture can be another source of strength for India. Despite the fact that India is only one-third the size of China, we have more arable land, because roughly 48 per cent of our total area is agricultural land as against only 12 per cent for China. Where India lags behind China is productivity. China's per hectare agricultural productivity is almost double that of India for many major crops, which makes it the largest producer of food grains in the world leaving India second. And herein lies the great opportunity for India. With some crucial reforms in the agriculture sector, and a second green revolution, India can even surpass China in total output, since its lower productivity gives it a much bigger growth potential.
My assessment is that growth and the size of GDP are not going to be our principal sources of weakness vis a vis China. With the new Modi government being strongly committed to growth and development, Indian economy would be able to pick up pace sooner rather than later. Within the next few years, our GDP growth can even surpass that of China, provided we go for aggressive economic reforms.
It is in other areas where India's position vis a vis China is of concern for us. Infrastructure, literacy rates, poverty reduction, health indicators, urbanization, higher education, research and development are some of the areas in which India will have to do a lot of catching up without losing any time. These are the things which affect the lives of our people more closely than many others, and improvement here would go a long way towards building our national strength.
No country can become powerful or create prosperity for its people without good governance, which has always been India's Achilles' heel. The last few years of the Manmohan Singh government clearly proved disastrous for governance, and we paid a heavy price for that. With Narendra Modi's promise of focusing on good governance, there is now abundant hope that this enduring weakness of India as a nation and as a state would finally become a thing of the past.
The rise of China is a matter of great concern for India, but it is not at all my intention to argue that China is our only or even principal problem. Most of our problems are internal, and we need to handle them ourselves. The competition with China should spur us to put our own house in order as soon as possible, so that India can play the power game effectively.
I showed in my last article how the world was never Sino-centric in history, and that India itself was a great power and civilization. India still has the great potential to rise again, and assume its rightful place. There never was a time when China ruled the world; there need not be a time when China rules the world. What we need is a world of many great powers, including India.
India has in the past frittered away many opportunities. We are fortunate in that Shakespeare's famous saying 'opportunity knocks at the door, but once' is not true for us. So once again we have an opportunity to become a great power equal to, if not more powerful than, China. A decade of rapid progress on all fronts is all that is needed. We must grab the opportunity. Shakespeare has put it so aptly in Julius Caesar:
There is a tide in the affairs of men,
Which taken at the flood, leads on to fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.
On such a full sea are we now afloat.
And we must take the current when it serves,
Or lose our ventures.
And, unlike the first one, this is a saying which could be very true for us, because if we don't take the tide now, the ship of our nation might remain 'bound in shallows and miseries'.
Ravi K. Mishra is a professional historian and contemporary scholar of Asian affairs. He can be reached at [email protected]
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