China and India: A comparison of recent economic growth trajectories

Jayati Ghosh

Asian century?
Both China and India have large populations covering substantial and diverse geographical areas, large economies with even larger potential size. Current success stories of globalisation: two economies that have apparently benefited. Success defined by the high and sustained rates of growth of aggregate and per capita national income; the absence of major financial crises; and substantial reduction in income poverty.

Not similar economies

These economies are often treated as broadly similar in terms of growth potential and other features. But there are crucial differences between the two economies which render such similarities very superficial .

Institutional conditions
India was mixed economy with large private sector, so essentially capitalist market economy with the associated tendency to involuntary unemployment. China mostly a command economy, which until recently had a very small private sector; still substantial state control over macroeconomic processes that have differed from more conventional capitalist macroeconomic policy.

The financial sector

India: financial sector was typical of the mixed economy without comprehensive government control over the financial system; financial liberalisation since early 1990s meant further loss of control over financial allocations by the state. China: financial system still under the control of the state, despite recent liberalisation. Four public sector banks handle the bulk of the transactions in the economy, and can regulate the volume of credit to manage the economic cycle, and direct credit to priority sectors.

Rates of GDP growth

The Chinese economy has grown at an average annual rate of 9.8 per cent for two and a half decades, showing volatility around high trend. Indias economy has grown at around 5-6 per cent per year over the same period, breaking from Hindu rate of 3 per cent. But very recently the average growth rate for the last four years is 8 per cent.

India: Rates of GDP growth

P e rio d G r o s s D o m P se tri cc a p i t a N e t e ( y e a r s t a r t i n g A p r i lP) r o d u c t N a t i o n a l P r o d u c t 1 9 5 02 t o -6 92 6 0 -5 1 3 .9 1 .8 1 9 6 02 t o -7 92 7 0 -6 1 3 .5 1 .2 1 9 7 02 t o -8 92 8 0 -7 1 3 .5 1 1 9 8 02 t o -9 92 9 0 -8 1 5 .6 2 .9 1 9 9 02 t o -0 02 0 0 -9 2 5 .6 3 .5

China: Rates of GDP growth

Chart 7: Trend Rates of Growth of GDP: Sub-periods 16.0 14.0 11.8 11.1 10.3 10.0
Per cent

13.5 12.2

12.0 9.8

10.1 8.7

9.3

8.0 5.9 4.4 4.0 3.7

1980-90 1991-2003 1980-2003

6.0

2.0

0.0 Overall Primary Secondary Tertiary

Rates of investment
The investment rate in China (investment as a share of GDP) has fluctuated between 35 and 44 per cent over the past 25 years, compared to 20 to 26 per cent in India. Aggregate ICORs (incremental capital-output ratios) have been around the same in both economies. Infrastructure investment from the early 1990s has averaged 19 per cent of GDP in China, compared to 2 per cent in India.

India
Chart 4: Investment as per cent of GDP
20 18 16 14 12 10 8 6 4 2 0 1953 1956 1965 1968 1977 1980 1989 1992 2001 1950 1959 1962 1971 1974 1983 1986 1995 1998

Public

Private

30.0

32.0

34.0

36.0

38.0

40.0

42.0

44.0

46.0

China

Investment rate and rate of growth of GDP

I/GDP rog GDP 2.0 4.0 6.0

19 7 19 9 8 19 0 19 81 8 19 2 8 19 3 8 19 4 19 85 8 19 6 19 87 8 19 8 8 19 9 9 19 0 9 19 1 9 19 2 9 19 3 19 94 9 19 5 19 96 9 19 7 19 98 9 20 9 20 00 0 20 1 0 20 2 03

8.0

10.0

12.0

14.0

16.0

Role of FDI in China

Argued that China can afford to have such a high investment rate because it has attracted so much foreign direct investment (FDI. But FDI has accounted for only 3-5 per cent of GDP in China since 1990, and at its peak was 8 per cent. In the period after 2000, FDI was only 6 per cent of domestic investment. Recent inflows of capital have not added to the domestic investment rate at all, macroeconomically speaking, but have led to the further accumulation of international reserves, now increasing by more than $120 billion per year.

Structural change
China: classic pattern, moving from primary to manufacturing sector, which has doubled its share of workforce and tripled its share of output. India: Move has been mainly from agriculture to services in share of output, with no substantial increase in manufacturing, and the structure of employment has not changed much. Share of the primary sector in GDP fell from 60 per cent to 25 per cent in four decades, but share in employment still more than 60 per cent.

Trade patterns
China: Rapid export growth involving aggressive increases on world market shares, based on relocative capital attracted by cheap labour and heavily subsidised infrastructure. India: Lower rate of export growth, with cheap labour due to low absolute wages rather than public provision and poor infrastructure development. So exports have not yet become engine of growth, except in services.

Trade policies
China: export employment was net addition to domestic employment, since until 2002 China had undertaken much less trade liberalisation than most other developing countries. India: increases in export employment were outweighed by employment losses especially in small enterprises because of import competition.

Poverty reduction
China: Officially 4 per cent of the population now lives under the poverty line, unofficially around 12 per cent. (Reflects earlier asset redistribution and basic need provision in China under communism, plus larger mass market and role of agricultural prices.)

India: poverty ratio much higher and persistent, between 26 per cent and 34 per cent depending upon how one interprets the NSS data.

Poverty in Rural China

90 80 70

60 Headcount Rate (%) 50 40 30

20 10 0 1980 1984 1985 1987 1990 1992 1993 Year NBS W orld Bank 1994 1995 1996 1997 1998 1999 2001

Poverty in Urban China

6

Urban Poverty Rate (%)

0 1981 1982 1983 1984 1985 1986 1987 Year Urban Poverty Rate (%) 1988 1989 1990 1995 1998 1999

India: Poverty estimates

Urban Planning Commission estimate 197778 1983 198788 199394 19992000 45.2 40.8 38.2 32.4 23.6 Method Method 1 2 45.2 40.8 38.2 32.6 27.9 24.8 Planning Commission estimate 53.1 45.7 39.1 37.3 27.1 Rural Method Method 1 2 53.1 45.6 39.1 37 31.6 28.4

Human development
China: earlier extensive public provision of health and education: universal education until Class X, and public services to ensure nutrition, health and sanitation. (Recently some privatisation of such services, which has led to worsening conditions especially in particular areas.) India: the public provision of all of these has been extremely inadequate throughout this period and has deteriorated in per capita terms since the early 1990s.

Inequalities
In both economies the recent pattern of growth has been inequalising. China: spatial inequalities across regions have been the sharpest. More recently, vertical inequalities, especially for migrant population vis--vis others. India: vertical inequalities and the rural-urban divide have become much more marked.

China: regional inequality

P e r C a p i t a aG Dc P n s t a n t 1 9 8 0 p r ic e s t o b y R e g io n Y ear 1 9 8 0 1 9 9 0 19 9 5 2 0 0 0 Y uan per year East 5 9 8 2 2 4 0 7 2 4 71 1 3 3 4 Centre 3 9 1 13 3 83 7 0 85 9 8 2 W est 3 0 8 115 6 3 0 3 54 6 8 7 A sp e r c e o f E a s t nt Centre 65 60 51 53 W est 53 52 42 41

Gini coefficients in China

(per cent)

1 1 1 2

9 9 9 0

R u U a rl bNa an t i o n a l r 7 28 2 1 6 3 0 8 38 0 2 3 3 7 9 37 3 2 8 0 32 7 3 4 4 5

India: Per capita real consumption

Political systems
India: Political democracy deeply entrenched, though not translated into economic enfranchisement. Plays a role in creating more confused but less extreme patterns of economic growth; allows for progressive legislation such as NREGA (National Rural Employment Guarantee Act). China: Potential future instabilities because of excessive top-down growth orientation.

Sustainability of current patterns

China: high export-high accumulation model which requires constantly increasing shares of world markets and very high investment rates. Already signs of reduced unit values of exports and stagnation of manufacturing employment. India: IT-enabled services experiencing current boom, but competitive threat from other countries, plus question about whether it will be enough to transform Indias huge labour force into higher productivity activities.

US clothing imports from Mainland China

30 6

25

20

15

10

0 1995 1996 1997 1998 1999 2000 2001 2002 Unit value 2003 2004 2005

Volume-based market share

US Clothing imports from Hong Kong China

10 9 8 7 6 5 4 3 2 1 0 1995 1996 1997 1998 1999 2000 2001 2002 Unit value 2003 2004 2005 4.4 4.2 4 5.2 5 4.8 4.6 5.6 5.4

Volume-based market share

The structure of IT production and exports in India

Year 1997-1998 1998-1999 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004E

Ratio of IT software and services to total IT market (%)

Ratio of IT software and services exports to total revenues (%)

Ratio of ITeS exports to software and services exports (%)

58.47 66.70 66.28 66.86 75.25 77.76 79.39

59.91 64.81 71.52 74.92 76.79 77.52 78.34

NA NA 14.26 14.96 19.55 24.10 29.51

C h art 3: M an u factu rin g g o o d s trad e b alan ce

80000 70000 60000 50000 40000 30000 20000 10000 0 1987-1988-1989-1990-1991-1992-1993-1994-1995-1996-1997-1998-1999-2000-2001-2002-2003-200488 89 90 91 92 93 94 95 96 97 98 99 2000 01 02 03 04 05 M anuf ex ports M anuf im ports M anuf trade balanc e 4000 2000 0 -2000 -4000 -6000 -8000 -10000 -12000 -14000 -16000

Chart 4: Indices of exports of manufactured goods

1000 900 800 700 600 500 400 300 200 100 0
1 1 3 5 7 9 3 5 7 9 19 80 -8 19 82 -8 19 84 -8 19 86 -8 19 88 -8 19 90 -9 19 92 -9 19 94 -9 19 96 -9 19 98 -9 20 00 -0 1 20 02 -0 3

Quantum

Unit value

W orkers remittances by source ($ mn)

900 800 700 600 500 400 300 200 100 0 1980-81 1985-86 1990-91 1997-98 1998-99 19992000 2000-01 2001-02 2002-03

Am erica

Asia

Europe

Current issues similar

Most important problems on both economies are the same: Agrarian crisis Need to generate more employment Reverse public neglect of social sectors Deal with growing inequalities.