- Shankar Ananth
Switching roles?
The 19th century - the height of the British Empire - could safely be called the British century. The 20th century is inevitably the American century. The Americans created an empire, perhaps the most powerful in history. In contrast, the last few decades have seen the rapid rise of China, accompanied later by the rise of India and many other smaller East Asian economies. This has led many to call the 21st century the 'Asian century'.
The term has been around for some time, and with good reason - it is the world's most populous continent that is set to drive global growth, fuelled by a young, educated population as the rest of the world ages. Most of that growth is expected to come from the world's two most populous countries - India and China.
Both economies have grown at breathtaking rates in recent years and have captured the world's attention. However, India remains a fundamentally poor country facing a myriad of problems, while China is, by many, predicted to stagnate or even collapse.
Let’s look at the journey of these two giants, their problems and their ambitions, to better understand the future that they are both facing.
Asia post WW2
Seeds of the Asian century actually predated Indian and Chinese economic boom, and even started immediately after the atomic bombs decimated Japan. While in aftermath of the war, the United States and Europe boomed economically, Asia was still struggling to find its political direction after centuries of colonization – with the exception of five economies.
Japan was the first to bounce back from devastation, at a point challenging the United States for world domination. Fuelled by its innovative, cost-efficient manufacturing industry, the Japanese economy was the first to set the template for an export-oriented resurgence. This was followed by Hong Kong, Singapore, Taiwan and South Korea - transforming into world-beating ‘tiger’ economies fuelled again by exports and rapid industrialization. Much before the world came to know China as the industrial backbone of the globe, these Asian tiger economies had taken on the mantle of low cost manufacturing, churning out mass electronics and budget automobiles in an era where the video games, TVs, and cars were becoming ubiquitous in the western world.
Complementing Japan, these tiger economies spearheaded Asian growth starting in the 1960s, eventually becoming some of the world's wealthiest regions.
India and China meanwhile had very different stories from these rapidly advancing Asian economies. While mainland China was still reeling from the effects of communist rule and Mao’s radical economic policies of rapid nationalization, Indian economy was struggling under an economic system reminiscent of the Soviets. Active discouragement of private sector enterprise, coupled with an inefficient, corrupt, governance kept Indian growth rate at around 4% from 1951-1980, a stark contrast to the other Asian peers clocking upwards of 7% during the same time.
And so it was China that was to wake up first.
China’s economic pivot
In 1960s, Chinese GDP per capita lagged many sub-Saharan African nations. China had a centrally-planned, soviet style economic model, favouring collectivisation. Market forces were more or less eliminated from the picture, with central planning dictating the industrial inputs and outputs. Wages and job allocations were also run in accordance with state’s plans.
These rigid economic controls led to inefficiencies within the system resulting in man-made disasters, such as the 1959-1961 famine, in which about 30 million people are supposed to have perished. The economic onslaught was only made worse by Mao’s ‘cultural revolution’ launched in 1966, today widely interpreted as an attempt to consolidate power. This threw the country into a decade-long turmoil, which, according the China’s rulers themselves, brought nothing but “grave disorder, damage and retrogression”.
Deng Xiaoping took over the reins in 1978, two years after the death of Mao which finally put an end to the disastrous cultural revolution. He followed a policy of “reform and opening”, which included allowing Chinese nationals a degree of product ownership, and welcomed foreign investment into China. Simultaneously, he normalized diplomatic relations with the United States, the world's leading economy. In 1979, he also enshrined the one-child policy to stem China’s population growth, with a goal to curtail the burgeoning size of the country.
China’s gradual move into a market-based economy yielded great dividends, the impact of which is visible today. China started creating ‘special economic zones’ or SEZs to experiment with flexible market policies, starting with the southern city of Shenzhen, gradually transforming the city from a fishing village to an economic powerhouse based on shipping and manufacturing. These zones offered tax incentives to foreign investors to set up and own facilities – enabling these regions to act as low-cost manufacturing hubs for global players.
Today, SEZs are spread out across China, with many different variations depending on geographical locations, industrial preferences and resource availability. SEZs are expected to have contributed around 22% of China’s GDP, account for 45% of foreign direct investment, and around 60% of exports in the last few decades.
Indian politicians may have viewed this development with envy, but Delhi's economic potential was also about to hit fertile ground.
India’s Hindu rate of growth and economic pivot
While communist China was warming up to free-market policies, democratic India was pursuing a policy of nationalization, increasingly discouraging private investment. Starting in 1969, and then in 1980, India incrementally nationalized its private banks. While this helped spread banking into rural India and accelerate the agricultural Green revolution, the flipside was the decline in the overall quality of the banking system. This aggravated the problem of accumulating non-performing assets, or NPAs, with banking scams becoming commonplace.
Opening and running businesses was incredibly difficult. ‘License raj’, as it was called, denoted the strict government regulation actively dissuading private ownership. The already dilapidated industrialists were given multiple shocks with wealth tax and an additional inheritance tax, demotivating the industry even further. Indian income tax at a point in the 1970s for the highest tax slab was an astonishing 97.7%.
Growth rates slowed down to a trickle. This led an economist, Raj Krishna, to coin the term ‘Hindu rate of growth’ to describe India’s meagre growth between the 1960s and the 1980s.
Things came to a head in 1991 when India was forced to open up its economy in light of a crushing balance of payments crisis. With India on the brink of default, the reforms led to a more liberalized economy, which was a turning point for India. The ‘License raj’ had ended.
India and China today
Today, India and China are sometimes portrayed as the bulwark against global economic stagnation. The Asian giants have come a long way from their respective pre-reform eras, and are among the top five economies in terms of size. But both of them have very unique strengths and challenges, and also very different ambitions. While there are often side-to-side comparisons made between the two, they are in different stages of development.
China, as of 2023, had a GDP of around 19 trillion US dollars, while India had a GDP of 3.7 trillion US dollars. The Chinese economy was thus roughly 5 times the size of the Indian economy. This ratio also holds for the GDP per capita, which for China was around 13,000 US dollars, and for India was 2,600 US dollars.
Because the Chinese economy started reforms sooner, and had a more explosive growth in the 1990s and 2000s, the gap with the Indian economy started widening rapidly. Chinese growth from 1979-2018 was around 9.5% per annum, which meant the Chinese economy virtually doubled in size every eight years. India grew at a rate of around 4% until 1991, when growth picked up. But in the long run it never approached China's peaks. Over the past 30 years, it has averaged 6.2%.
The Chinese growth story was built around a low-cost manufacturing boom fuelled by large-scale capital investment, often from outside China. Foreign-invested enterprises, or FIEs, accounted for almost 60% of Chinese exports at their peak in 2005, and also 60% of Chinese imports. As of 2010, FIEs employed around 55 million workers, or around 16% of China’s urban workforce.
A critical second lever used by China was incremental labour productivity. China’s economic reforms meant a sharper rise in this key, often overlooked metric, driven by loosening controls of formerly centrally governed industries such as agriculture and manufacturing, allowing market forces to play a key role in improving productivity. Additionally, international investment brought in new technologies and processes that improved efficiencies. A number of globally established, as well as future behemoths set up shops in China to take advantage of the vast, cheap labour to scale their companies.
China’s rapid labour-intensive, manufacturing led-growth meant an immediate social step-up for its masses. The population that was earlier dependent on agriculture, almost immediately entered the manufacturing sector. In parallel, China’s incentive to improve the quality of its labour force led to an increase in literacy rate from 65% in early 1980s to over 97% in 2020.
The growth was so stunning, and the pace so unusual that an economic superpower was created in a matter of a few decades.
India’s growth story was much tamer, unlike China’s. While the reforms in India did bring in foreign investment, they were not of the same league as received by China. Growth was more broad-based, with all the major sectors performing much better vis-à-vis 1980s. But while manufacturing was China’s ace, Indian growth was pulled ahead by a very resilient service industry, driven by a vast sea of English-speaking middle class with growing IT competency.
India gradually became the global back office, the same way China occupied the place of the global factory. Call centres serving as customer service backends for thousands of leading companies formed a big portion of this eco-system.
In the last two decades, the Indian economy has also benefitted from certain government initiatives like the UPI or the United payments interface – this nationwide network for digital payments has had a significant multiplier effect on the Indian economy. Launched in 2016, the adaptation became so wide that in May 2023, it clocked 3,600 transactions per second, with 300 million individuals using it. India today leads globally in terms of real-time payments, with China a distant second.
But India did not replicate the Chinese rise. The growth has been more stop-start than exponential like that of China. Perhaps the most fundamental of reasons for this is the federal nature of the Indian state, which means that central authority was limited and the reforms often did not find their way into the states. Labour reforms, trade policy reforms and privatization reforms were often unfinished. Unlike China, where the central authority has the power to bulldoze any local obstacles, India’s democratic approach, while more accommodative of different interests, did not allow India’s reform process to take off. In fact, some reforms are still ongoing - India’s notoriously complex taxation system was reformed only in 2017, with the nation finally moving towards a uniform taxation system. The agricultural reforms remain pending even till today due to lack of political will and opposition to privatization. India’s farm yields today remain extremely low, and are currently one-third of China’s and half of Vietnam’s and Indonesia’s.
Chinese reforms have indeed been more effective, and placed China firmly on the path to becoming the largest economy in the world by the middle of the century. But China seems to have faltered along the way.
China’s challenges
Probably the most daunting of challenges China faces is that of a population collapse – both quantitative and qualitative, accelerated by its one-child policy.
Chinese growth came on account of a vast, young, trainable population in the 1980s and 1990s – an advantage that India holds today. Now when the population ages, if it is not being replaced one-to-one, as was the case in China, that advantage fades away. The median age in China in 1978 was 21.5 years. In 2020, that went up to 38.4. About 14% of China’s population is today over 65, a proportion that is predicted to keep increasing. This means that a larger population would leave the tax-paying bucket and instead will rely on taxes from a much smaller section of the population – a big headache for the state.
In parallel, Chinese population is also set to decline on account of falling birth rates. While China has already been succeeded by India as the most populous nation, Chinese population is expected to fall an astounding 50 per cent by 2100.
This Chinese phenomenon has often been compared with Japan, which has been grappling with similar population based concerns. But there is a stark difference. China still can’t call itself wealthy. Japanese average income was already at first-world levels before its population stopped growing. In other words, Japan became rich before it became old. China is unlikely to do so.
The second major challenge China faces is structural in nature. China’s property crisis, which has been threatening to take down the second-largest economy for the last few years, remains a quagmire for the Chinese state. In what began with Evergrande, China’s second largest property developer defaulting in 2021 due to untenable debt obligations, a wave of real-estate defaults followed. This is critical because China’s real estate sector is estimated to account for up to 25% of the nation’s economic activity. Chinese government has been cracking down on the debt levels of the property developers in an effort to stabilize finances. Decades of rapid construction has led to an excess supply, and now that demand is slowing, things are in a perilous state.
The third major challenge is geopolitical in nature. China grew as the world’s industrial backbone, where advanced nations shipped off their low-end manufacturing duties. China, cognizant that its low-wage advantage will end soon, is actively trying to move to the next stage of growth by jumping into innovation and advanced technologies such as AI. Given the Chinese government’s clandestine nature and west’s growing wariness against Chinese ambitions, this ascent has rattled a few feathers leading to trade wars and global embargos.
All this adds to a very worrying trend for Beijing. From the start of its opening to the world, China's share of world GDP grew steadily. Until last year, when it shrank slightly for the first time in 50 years. But now it is falling quite sharply, from 18.4% to 17%. This best illustrates that the problems described above are not exaggerated, but are a reality in China. Will this undermine the legitimacy of the Communist Party? So far, there is little evidence of this, but without a remedy for stagnation, the problem will grow and make every CCP member nervous.
India’s challenges
Meanwhile, India's economic challenges are starkly different from China's.
Perhaps the biggest obstacle delaying India’s growth is the weak and inept infrastructure. Lack of financing, red tape and bureaucracy along with poor planning has led to a creaking public infrastructure that often ends up being retrofitted when needed. In critical sections of infrastructure, such as power generation and supply, public transportation, road sufficiency, and freight transport – India significantly lags its peers. Certain high-value sectors like cement, steel and auto-mobile, which are critical to national growth, are highly susceptible to poor infrastructure. India’s initiatives like ‘Make in India’, focused on increasing India’s share of manufacturing in the world and effectively trying to capitalize on industries leaving China, has stagnated due to infrastructural inconsistencies despite abundant labour availability.
Another challenge that India, as a polity, has struggled with is its trade protectionism and refusal to join the global trade agreements. While India does have trade agreements with some South Asian countries, it does not compare with the likes of the ASEAN or the EU. Irrespective of the government, India has long harboured a cynical approach toward foreign investments. Be it in the retail space, or the automobile space, Indian protectionism has disallowed the nation to benefit from global technological growth.
India’s non-transparent business landscape has also emerged as a major obstacle, with a view that the government is in league with a few ‘national champions’. This is similar to large oligopolistic conglomerates that drove South Korea’s development. Given Indian society’s vast wealth gap, the public view has grown more contentious – especially after major conglomerates like Adani fell into a conspiracy with the Hindenburg reports, and bouncing back with government support. The Adani Group, valued at more than USD 200 billion, was accused of stock market manipulation, fraud and money laundering, among other things. Later, however, the giant returned to the surface thanks to government support.
China’s ambitions vs India’s ambitions
So China is essentially a superpower, given its economic size and military might and is eyeing replacing the US in the near-term. Unlike USSR, China has many tools in its shed – its economy is highly intertwined with the globe, and it does not suffer in isolation. It has a vibrant start-up culture driving its innovation, even if a lot of it is based on imitation. Compared to most western nations, Chinese AI is far advanced. Xi Jinping’s ambitions has already given us glimpses of China’s assertiveness in not only economic spheres, but also in geopolitical tensions in Hong Kong, Xinjiang and Taiwan. But China’s gap with the US is still huge, and given its mounting challenges, China may not succeed in dethroning the Americans.
India also sees itself as a future superpower, but the vision is more distant than China’s. Its near-term goal remains elevating the bulk of its population above poverty, and perhaps reach the status of middle-income country soon. While it has been garnering global attention with a vibrant space program and an active start-up ecosystem, bolder and more pragmatic policy interventions are the need of the hour to drive more inclusive and faster growth if it has to catch-up to China. India has only been able to match China's growth over the past eight years, but given its starting point, the opportunities remain much greater.
Despite their problems, both economies seem set to become their own economic poles for the foreseeable future. Time will tell whether, as Peter Zeihan predicts, China's growth, or even its entire social model, will collapse completely. If it does, India could be the main beneficiary. The seeds of this machinism are already visible, but Delhi has a long way to go to encourage foreign capital to expand on the Indian subcontinent.
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