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How India can overtake China in economic growth

NewsHow India can overtake China in economic growth

New Delhi: At least for more than 750 years the Indian economy was larger and growing faster than China’s economy; and it was ahead of China until 1750 AD.

China began to close the gap with India after the Islamic invasion of India began, which this writer would place as from 1192 AD, when Maharana Prithviraj Chauhan was betrayed by his father-in-law Raja Jaichand, and thus lost to Mohammed Ghori who got crowned as Badshah in 1192 in Delhi.

There was a continuing loot of India thereafter: first by the sporadic invaders who came after Ghori; then after 1526 by the Mughals who established a kingdom that lasted about three centuries in various parts of India. This enabled China (where was established the Ch’ing dynasty lasting till 1911), which was relatively free of invasions, to get ahead of India in terms of the size of the economy and in its growth of GDP.

The looting of India continued after the defeat of the Peshwa Baji Rao II in 1815 by the English owned East India Company. India was thereafter more scientifically exploited by the British. In 1857, after the British compradors managed to defeat us in what Veer Savarkar called our First War of Independence against the British, India was formally declared a British “colony” and the then Queen of Britain was declared as the Empress of India. British India was looted methodically post the 1857 imposed Zamindari system in agriculture; and India’s industrialization was denied by blocking patriots like Jamshedjee Tata and Tagore from setting up steel plants and railway systems: the two innovations that had ushered in the Industrial Revolution in Europe. India also was bled of resources which were taken to Britain. In my recent book Reset [published by Rupa in September 2019], I have placed an estimate of this loot siphoned off to Britain at $71 trillion [our GDP in 2018-18 was $2.5 trillion].

The purpose of this review of our past is to emphasise that India, having at one time been the most developed nation, should not despair today when faced with the huge crisis caused by a conjunction of two decades of mismanaged economy, a coronavirus pandemic that has paralysed us for four months running, and a looming cross border war with China.

India has always prevailed in the end no matter what crisis or holocaust is imposed on us. The Islamic invasion and brutal rule of six centuries, followed by 150 years of extracting India’s resources and the brain washing of the Indian mindset by the British (which served to create a Stockholm Syndrome) was ultimately defeated without our getting converted to the Islamic faith. Nation after nation capitulated when Islamic or Christian led forces imposed conversion to their religion. Iran, Mesopotamia, Babylon, Egypt are examples of almost 100% of the population converting to Islam. So too Europe converted to Christianity, 100%. But not India—despite 600 years of Islamic rule followed by 150 years of Christian-favouring British rule. Today, despite amputation of its territories, India is still 82.5% Hindu.

After 1947, India has stumbled on an unsuitable economic ideology of socialism and crony capitalism, faced a famine like situation (1965-68) and a crippling foreign exchange crisis (1990-91).

Especially abroad, dire predictions were made of the imminent collapse of the Indian economy; and yet not only did India come through but it got onto a new higher path of growth termed as “green revolution” and “great liberation”. Left wing economists sneered at India as a “beggar” or predicted that India was condemned to live with the “Hindu rate of growth” of 3% per year in GDP. But not only did India become self-sufficient in food grains, but it also achieved an 8% growth per year in GDP till 2016. The world over it was discussed as to when India would overtake China.

But since 2016, because of the lack of a deep understanding of how economies can be made to grow, India’s growth rate declined steadily. In the financial year 2019-20, that is the pre-coronavirus pandemic onset, India’s GDP growth rate had declined to 4%. For a projected estimate for 2020-21 it is estimated to be less than minus 5%. Is it credible anymore that India can catch up with China, leave alone overtake that country?

How wide is the China-India gap today, measured in four dimensions of economic progress: (1) Growth factors; (2) Globalisation; (3) Financial structure; (4) Human Development Index.

GROWTH FACTORS: Between 1980 and 2004, the GDP growth rate of China was maintained at a much faster pace that made for a widening gap with India’s growth rate. During this period, typically the Chinese average growth rate was 75% higher than the Indian rate of growth. The per capita income (which was almost the same in 1980 for both countries) diverged sharply in the two decades that followed—to China’s advantage.

Evaluated in purchasing parity terms (PPP), the gap was 86% in favour of China, not only because of a higher growth rate of GDP but also because of a lower growth rate of population.

In 1952, China’s population was 57% higher than India’s. In the 1990s, it was just 28% higher. At present, China’s population is growing at less than 1.0% per year while India’s population is expanding at 1.7% per year.

At these rates, India will overtake China’s population by 2025 AD. Earlier China had an ambitious plan to reach zero population growth by 2020 to level at 1.5 billion people. If that were so, then India would have overtaken China in population size by 2016.

But since 2005 China has realised that the drastic one child per family was aging its population (to be judged by the average age of the population). Thus, the one child per family target has been abandoned. At present the average age of the Indian population is 27 years, while for China it is 35 years. India’s population projected to 2019 is about 1.28 billion while China is 1.36 billion.

China has a higher growth rate of GDP than India ever since 1980. However, it should be noted that the gap has narrowed partly due to the slowdown of China’s growth rate since 2005, and partly because India’s growth rate rose during P.V. Narasimha Rao’s tenure as Prime Minister from less than 4% average during the 1980s to 8% in 1995-96.

China’s higher growth rate was made possible by a much higher rate of growth of gross domestic investment (as a ratio of GDI)—which was about 70% more than India’s. The rate of growth of GDP was double the rate in India.

One can therefore conclude that the wide gap between India and China in per capita incomes (which gap was about zero in 1980) was partly due to a lower population growth, but primarily due to a much great investment effort in China.

India cannot close this per capita income gap by 2025, without a much faster GDP growth rate (e.g. 10% per year); and for this, there will have to be made an even greater effort to raise the level of investment. This is easier said than done.

Since 1997, the GDI as a ratio of GDP has been falling, albeit erratically due to consumerism and low interest rates on fixed deposits and savings. Hence, a dynamic policy design for such an accelerated effort will have to be resolutely implemented to raise the level of saving.

However judging by indicator of productivity, China is not that far ahead of India. The proportion of irrigated land in agriculture is only 16% higher in China. Gross cropped area under good crops was however 30% lower, although yield was 2.87 times higher.

Agriculture value added per agricultural worker is just 17% more in China. Surprisingly, while in India commercial energy use per capita (in kg) of oil equivalent is almost double that in China, the efficiency in its use measured by its ratio to GDP is higher in India. This obtains despite China having 2.35 times more scientists and engineers in R&D activities than India. It is clear if productivity in agriculture is systematically raised in India, then India can overtake China. At the Chinese yield per hectare level, India can produce 579 million tonnes of food grains as compared to less than half that amount in India, at today’s technology and ground reality.

In information technology, China has completely out-stripped India in hardware items of technology, even if it is behind India in software. High technology exports in China as a percentage of manufacturing exports are almost double that in India.

The availability of computers per 1,000 persons in China is four times that in India. Even in number of internet hosts, despite China being a controlled society, the per 10,000 people ratio is only slightly higher than in India.

China has 10 times more mobile phones per capita than India, almost three times more telephone main lines, and four times more TV sets per capita.

China had 6.2 times more patent applications filed by foreigners. Chinese residents filed 7.1 times more such applications than Indians in their own country. Indians need not therefore be too smug in the thought that India is ahead of China in software because Indian computer engineers are already beginning to get outpriced by huge salaries being paid by Fortune 500 companies in outsourcing.

Thus, Chinese, Russians and Irish engineers can, some time in the future, be lower cost alternatives to Indians, and Fortune 500 companies would not hesitate to give up sourcing from Indian then. Therefore, in information technology, India has to move from being servers to being design and domain specialists.

Thus at present there is without doubt an unambiguous and large gap in lead of China over India in overall globalization.

Surprisingly, therefore, an open democratic market economy—India—has to make special efforts to catch up with a controlled communist “social market” economy—China—and that too ironically in the area of globalization.

In growth terms then, the China-India gap can be closed if India designs its fiscal architecture in such a way that the rate of investment rises to above 36% of GDP from the present 29%, while it reduces the incremental capital-output ratio—which measures the efficiency or productivity [the larger the ratio, the higher is the inefficiency] —from 4.0 to 3.0.

China has not only managed a high rate of investment, but has kept the prime lending rate (PLR) at a relatively low 8%; the interest rate spread between lending and deposit rates was confined to 2.6%. In India, the PLR is 12%, while the interest rate spread is at 3.4%.

Clearly, China’s configurations are more conducive for high domestic investment. Even though Indian stock markets were established much before China’s, nevertheless in market capitalization, China is ahead 2.20 times that of India. Chinese banks extend credit, measured as a ratio of GDP, at rate two and a half times that in India. In China, marginal tax rates on corporate incomes is at a maximum of 30%, while in India it is 40%. Even in fiscal decentralization, the Chinese Central government transfers 51.4% of the tax revenue to the provinces, while in India the equivalent transfer is 36.1%.

However, despite China being ahead of India in various financial factors, these gaps are not unbridgeable. A sincere and determined effort at financial restructuring by India can close the China-India gap in financial factors within a decade.

HUMAN DEVELOPMENT FACTORS: According to the Human Development Report of the United Nations, China had a higher ranking in human development index than India. The index for China was 1.29 times India’s.

Public expenditure on health in China as ratio of GDP was three times more. Surprisingly, the Gini Index of Income inequality was also higher in China than India, because the urban average income as ratio of rural per capita income was much higher in India. This is no surprise because China’s modernization and foreign investment is urban focused. Economic reforms in China had caused a sharp increase in urban incomes in the eastern sea board areas, and this caused the ratio to rise, since the rural and western provinces lagged behind.

To put it simply, India can overtake China if the Indian households and corporate sector are encouraged by abolition of income tax, reducing corporate taxes and raising fixed deposit rate of return to encourage savings, to save more for national investment; and if interest rate for loans is lowered, the nation will have a boom in savings which can be converted to investment.

If production can become more efficient by making the processes more efficient—e.g. by introducing innovations or computerizing routine procedures to lower the capital output ratio—the growth rate will rise without more investment. For example, if the rate of investment as a ratio of GDP is 36% and if the incremental capital ratio (which at present in India is 4.0), is reduced to 3.6 (by reducing waste and cost), then 36 divided by 3.6 is equal to 10.0% growth rate. So to overtake China, India has to grow at 10.0% per year for 12 years continuously. This task can be simplified in two sentences:

(1) Raise total investment as a ratio GDP to 36% from present 29%.

(2) Then, improve efficiency in the use of capital by lowering incremental capital ratio from present 4.0 to 3.6.

And if we can keep going thus for 12 years, India will then overtake China.

Dr Subramanian Swamy is an MP nominated by the President for his eminence as an economist. He is a former Union Cabinet Minister for Commerce and Law.


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