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Will Democratic India Overtake Communist China?

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In the global economic theater, the two Asian giants, India and China, are creating ripples. And while China has long been in the limelight, India is gaining momentum and shows promising signs of catching up. A study by Brookings paints an intriguing scenario of an economic seesaw that may see India rising and China facing challenges.

As the global landscape grapples with shifting economic standards and the repercussions of higher interest rates, China is facing some economic challenges. They’ve resorted to cutting rates, and alarmingly, have stopped publishing unemployment rates for those between 16-24. Their economy has also been challenged by the debt crisis, evident in the default of their second-largest property developer, Country Garden.

Contrastingly, India’s economic health is robust. Predictions for 2023 suggest a GDP growth of around 7%, with unemployment rates at a 12-year low. Historically, India’s per capita incomes in 2019 were just 47.5% of China’s. But Brookings estimates that this gap might bridge by 2044, suggesting a faster growth rate for India than China in the upcoming years.

Between 2010 and 2019, India’s per capita GDP growth surpassed China’s, marking the first instance since the 1960s. As we unpack this convergence, multiple factors come into play. Here’s how India might catch up:

  1. Labor and Education: India is witnessing a significant transformation in female education. More Indian women are now pursuing college degrees than men, and notably, around 43% of these women are graduating in STEM fields, a figure that is globally competitive. This upward trend in female education and STEM degrees indicates that India’s female labor force participation rate (FLFPR) could potentially touch 50% in the next two decades. While China’s potential labor force is on the decline, India’s is predicted to increase annually by 0.72%. This, combined with rising female participation, paints a promising picture for India’s labor force growth.
  2. Physical Capital: Investment trends in China seem to be declining, especially in the housing sector. India, on the other hand, is set to benefit from massive public infrastructure investments. Projections suggest that Indian investments will surpass China’s in the coming years, offering a growth advantage to India.
  3. Total Factor Productivity (TFP) Growth: India also enjoys an advantage here. Over the past decade, its TFP growth was notably higher than China’s.

When these factors combine, they present a scenario where India could potentially grow 3.5% faster than China between 2020 and 2045. Using this projection, it might take less than 22 years for India’s per-capita incomes to match China’s.

Looking at historical data, India and China enjoyed similar per capita incomes for nearly 480 years until 1980. The subsequent divergence peaked in 2014 when China’s per capita income was a staggering 2.34 times that of India. But as history suggests, such trends tend to follow cycles, and India’s resurgence seems to be on the horizon.

April marked a significant milestone for India as it overtook China to become the world’s most populous nation. This demographic advantage combined with robust economic growth has rekindled debates about India potentially becoming the next global superpower. As the Indian Prime Minister meets U.S. President Joe Biden, the implications of a stronger, more prosperous India become even more relevant. A thriving India could serve as a counterbalance to China, fostering a geopolitical balance beneficial to the U.S.

However, there are some caveats. Analysts have previously overestimated India’s growth potential. And despite impressive recent growth, India’s economy remains significantly smaller than China’s. China also has a decisive lead in tech and science, outspending India in research and development and dominating the global AI race. Additionally, China’s workforce is more productive, and it has made remarkable strides in eradicating poverty, whereas India still grapples with significant poverty and malnutrition.

Given the recent belligerence of the Chinese Communist Party, it make sense for the West to put more resources into India and to start to help build infrastructure there to make up for a potential loss of manufacturing power, should China attack Taiwan.

But does the Biden Administration have that much sense? Not sure.

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