A Tale of Two Neighbors

A look at key reforms, successes and some failures in China and India

In both China and India, economic reform has been key to growth. However, it has ramifications as well. The two countries’ politico-economic backdrops as they sought to undertake massive economic reform varied sharply.

In India, an economic crisis in 1991 coupled with political instability and a historically low growth rate pushed the government to undertake structural adjustment programs. These mostly followed the recommendations of the Washington Consensus, a set of economic programs promoted by Washington, D.c.-based organizations like the World Bank and the International Monetary Fund (IMF).

China, as it emerged from prolonged dislocation and disruption caused by the “cultural revolution” (1966-76) coupled with isolation from the global economic and financial system, pursued a recovery path based on drastic, yet steady, structural and policy changes.

Reform measures and implementation have varied widely in both countries in terms of scheduling, sectoral coverage, intensity and sustainability, political commitment and public acceptance.

Each country is now in different phases of economic reform. The impact of economic reform have varied in terms of visibility, nature and extent. Both have witnessed remarkably visible structural shifts with the share of the primary sector in the GDP led by agriculture steadily dropping to less than 25 percent with a side-by-side increase in the tertiary sector.

Other indicators like the savings and investment rate, trade-gdp ratio, foreign direct investment (FDI) and foreign exchange reserves have also shown unprecedented changes.

A striking similarity has been the slow speed of implementation of reforms in the two countries’ particular regions.

In China, effectively implemented reform in coastal zones like Shanghai, Guangdong and Fujian created fortunes. The introduction of the policy to develop the western regions in 2000 showed that for almost two decades, reforms and their accompanying fruits rarely reached the southwestern landlocked provinces and autonomous regions such as Sichuan, Yunnan, Tibet and Qinghai.

In India, the southern and western states recorded progress and reeled out second-generation reforms while backward states in the north, east and central regions as well as mountainous states lagged for many years. However, over the last decade, many of these passed-over places in both countries have made exemplary development strides.

Poverty and inequality

Economic growth, increased productivity and greater consumption have been the conspicuous driving forces of poverty reduction in both countries. According to the 2018 Multidimensional Poverty Index released by the United Nations Development Program, India almost halved its poverty in the decade since 2005-06, from 55 percent to 28 percent. Flagship projects like the national rural employment guarantee, and right to education and food schemes have made a huge difference.

In his address to the 19th National Congress of the Communist Party of China (CPC) in October 2017, President Xi Jinping said that more than 60 million people had been lifted out of poverty in China in the preceding five years. Earlier, the World Bank assessed that “some 407 million Chinese citizens rose out of poverty” from 1990 to 2004.

A clear vision, specific structural interventions and sound trickle-down mechanisms for higher growth are the broad strokes credited for this success. The National Development and Reform Commission set the 13th Five-year Plan (2016-20) as the deadline to achieve late Chinese leader Deng Xiaoping’s goal of establishing “a society in which people lead a fairly better-off life.” This goal was reiterated by the 16th CPC National Congress in 2002.

Shift in production

In India, a range of interventions have been made from disinvestment to FDI participation. There are visible upward shifts in manufacturing sectors like automobiles and domestic consumer items such as food and textiles. However, compared