The evolving economic rivalry between India and China is a saga that could very well define the future of global economic power dynamics. This tale of two Asian giants is not just about numbers and growth rates; it’s a story of contrasting paths and diverging fortunes, where one stumbles as the other surges ahead.
China, once the world’s growth engine, is now mired in economic challenges. The nation faces a deepening debt crisis, evident from the default of its second-largest property developer, Country Garden. This crisis is compounded by the country’s entry into deflation territory and the cessation of unemployment rate publications for the 16-24 age group. In stark contrast, India is experiencing an economic upswing, with a GDP growth projection exceeding 7 percent in 2023 and unemployment rates hitting a 12-year low of 4.1 percent.
The shift in global focus from China to India is not a mere geopolitical whim but a reflection of underlying economic realities. India’s per capita income, which was 47.5 percent of China’s in 2019, is on a trajectory to equal China’s by 2044. This remarkable journey is underscored by India’s higher per capita GDP growth compared to China’s over the last decade – 5.2 percent versus 4.5 percent. This marks a significant reversal, as it was the first decade after the 1960s when India outpaced China in growth.
The convergence of per capita incomes between India and China is underpinned by various factors, including labor, capital, human capital, and TFP. Education, particularly for women, is a crucial driver in India’s march towards convergence. The expansion of female education is not just a demographic shift but a revolution of aspirations. India now boasts more women in college than men, with a remarkable 43 percent of female graduates in STEM fields, surpassing the United States’ 32 percent.
The labor force scenario further accentuates the divergence between the two nations. China’s potential labor force is expected to decline annually by 0.7 percent, with little room for growth given its already high labor force participation rate. In contrast, India’s potential labor force is projected to grow by 0.72 percent per year. The stark difference in female labor force participation rates between the two countries – around 25 to 35 percent in India versus 70 percent in China – is poised to change, with India’s rate expected to reach at least 55 percent over the next two decades.
Physical capital investments also play a significant role. While China’s high aggregate rates of investment are set to decline, India is on an upward trajectory with increasing investment levels, particularly in public infrastructure. The expected convergence of investment levels in both countries will bolster India’s economic growth.
The narrative of TFP growth further tilts the scale in India’s favor. Over the past 20 years, Indian TFP growth has exceeded China’s by 0.5 percent annually, and over the last decade, this excess grew to 1.5 percent. This leads to a conservative conclusion that India could grow at an average rate 3.5 percent faster than China between 2020 and 2045.
India’s economic resurgence is not just confined to numbers. Its newfound swagger is evident in international arenas, such as the World Economic Forum in Switzerland, where India had a dominant presence, and the G20 leaders’ summit in New Delhi. The country’s space achievements, including safely placing a spacecraft on the moon, further underscore its scientific and technological ambitions.
However, India’s journey to economic greatness is not without challenges. The country’s economy, though growing robustly, is still significantly smaller than China’s. India must sustain a growth rate of 8 percent to overtake China as the largest contributor to global growth, a target that seems ambitious considering the IMF’s projection of a 6.3 percent expansion for India this year.
China’s economic slowdown, characterized by weak consumer spending and a property crisis, presents an opportunity for India. New Delhi is making strides in infrastructure development, digital transformation, and foreign investment attraction, laying the groundwork for sustained growth. Yet, India’s ability to recreate the economic miracle that China achieved decades ago remains uncertain.
India’s approach to diversifying global supply chains and attracting companies through incentives is a step in the right direction. However, the country still grapples with bureaucratic hurdles and unpredictability in business regulations, which could dampen foreign investor enthusiasm.
Despite these challenges, India’s demographic profile and potential for industrialization echo China’s past trajectory, offering hope for two more decades of rapid, sustained growth. The country’s expanding middle class and lower per capita energy consumption compared to China’s indicate substantial room for growth.
The economic contest between India and China is intensifying, with India potentially converging with China in per capita incomes in the coming decades. While India’s path is marked by significant opportunities, it is also fraught with challenges. The outcome of this economic duel will not only shape the fortunes of these two nations but also have profound implications for the global economic order. The story of India and China is not just about catching up; it’s about a reversal of fortunes, a tale of one rising power potentially overtaking another.