Can India’s economy overtake China?

Can the lumbering elephant overtake the hyperactive dragon? What appeared unthinkable for decades, if not for more than half a century, may actually happen soon, perhaps as early as next year.

In 2010, the Indian economy may grow faster than that of China. What is more, experts contend that South Asia could expand at a more rapid pace than East Asia.

While there is no dearth of sceptics who believe that China will continue to grow faster than any other major economy on the globe in the foreseeable future, there are others who contend that the trend growth rates of the two most populous nations could change and that India could march ahead of the Chinese economy just a little faster than many predict.

China and India, accounting for roughly 40% of the 6.5bn plus people on Planet Earth, are not merely the two fastest growing major economies in the world at present, but are among the few countries that have continued to expand at a time when the economies of most countries have contracted.

In the early 1950s, in terms of per capita income and levels of economic development, there was little to distinguish between China and India. Half the populations of both countries were mired in abject poverty – in India’s case after centuries of colonial rule.

From the 1970s, the Chinese economy started growing at a fast rate while India’s economy grew sluggishly at an average rate of 3.5% – sarcastically described by the late economics professor Raj Krishna as the “Hindu rate of growth”.

India consumers

As China grew by double-digits decade after decade for nearly 40 years, economists kept claiming the bubble would burst, that data was doctored by smart statisticians in Beijing – but the metaphorical dragon continued to grow bigger and bigger defying all expectations.

The economy of India, on the other hand, started accelerating from the early 1990s onwards as Delhi loosened bureaucratic controls over industry, trade and services.

In the middle of the 1990s, for the first time since India became independent in August 1947, the country’s economy expanded by an annual average of more than 9% four years in succession, that is until the impact of the ongoing international recession saw the Indian economy decelerate.

Economists argue that one reason why India’s economy can grow faster than that of China in the near future is simply on account of what statisticians describe as a “base effect”.

Following this argument, India’s growth rate is higher because the base on which the rate is calculated is narrower.

China’s economy is roughly three and a half times bigger than that of India – Gross Domestic Product (GDP) measured in US dollars in 2008 for the two countries stood at $4.2 trillion and $1.2 trillion respectively.

But there is an important reason why India’s economy has been hurt relatively less by the ongoing international economic recession in comparison to China, whose growth has been largely export-driven in recent decades.

Exports and imports put together (including “invisible” earnings from tourists, workers’ remittances and exports of services) account for approximately half of India’s GDP whereas the comparable proportion for China is over 80%.

Forecasts revised

Two years ago, China overtook the US as India’s largest trading partner.

In late June, the World Bank in its Global Development Finance 2009 report projected that in 2010, the rate of growth of India’s economy at 8% would be faster than that of China, expected to be 7.7%.

The bank’s forecast for the current year was revised upwards for both China (from 6.5% to 7.2%) and India (from 4% to 5.1%) but these prognostications are lower than those made by the governments of the respective countries.

The Chinese government claims a rate of growth close to 8% for 2009, while various agencies of the Indian government would place the comparable figure at somewhere between 6.5% and 7%.

The bank report pointed out that the growth rate of all developing countries taken together had come down from 8.1% in 2007 to 5.9% in 2008 and is expected to be only 1.2% this calendar year.

“When China and India are excluded, GDP (gross domestic product) in the remaining developing countries is expected to fall by 1.6%, causing continued job losses and throwing more people into poverty,” the World Bank report stated.

Justin Lin, the bank’s chief economist, was quoted as saying that developing countries could “become a key driving force” in reviving the world’s economy, “assuming their domestic investments rebound with international support, including a resumption in the flow of international credit”.

Mr Lin is not alone. Speaking at a recent seminar in Delhi, Ajay Chibber, Assistant Secretary General of the UN’s Development Programme, said it would have unthinkable until recently that India could grow faster than China.

“I never thought I would see it during my lifetime but South Asia could grow faster than East Asia,” he remarked.

Kalpana Kochhar, deputy director of the Asia Pacific department of the International Monetary Fund, told me that it was no longer improbable that India could grow faster than China or that South Asia would expand at a faster pace than East and South-East Asia.

“I see these as distinct possibilities,” she said.  –Paranjoy Guha Thakurta,
Indian economic analyst