India-china economic gap can be bridged
present the average age of the Indian population is 27 years, while for China it is 35 years. India’s population projected for 2020 is about 1.32 billion while China is 1.36 billion.
China has had a higher growth rate of GDP than India ever since 1980. However, it should be noted that the gap has now 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’s in the 1990s.
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 higher growth rate in GDP because of a much great investment effort in
China.
India cannot close this per capita income gap by 2030, 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—which is easier said than done.
Since 1997 onwards, the GDI [gross domestic investment] as a ratio of GDP has been falling, albeit erratically due to consumerism, a very high rate of interest [prime rate of interest fixed for banks was 12%] 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 by raising the fixed deposit interest rate and lowering the rate of interest for loans.
However, judging by the indicator of productivity, China is not that far ahead of India. Moreover, the proportion of irrigated land in agriculture is only 16% higher in China. Gross cropped area under cash crops was, however, 30% lower, although yield per hectare in China was 2.87 times higher.
Agriculture value added per agricultural worker is just 17% more in China. Surprisingly, while commercial energy use per capita (in kg) of oil equivalent of energy is almost double 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. Hence, it is clear that if productivity in agriculture is systematically raised in India, then India can overtake China with ease.
At the Chinese yield per hectare level, India can produce today about 600 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 outstripped India in hardware items, 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’s.
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 an information controlled society, the per 10,000 people ratio is 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, Russian and Irish engineers can, sometime in the future, be lower cost alternatives to Indians, and Fortune 500 companies would not hesitate to give up sourcing from India then. Therefore, in information technology, India has to move from being servers, or blue-collar workers 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 technological capacity.
Surprisingly, therefore, an open democratic market economy such as India has to make special efforts to catch up with a controlled communist “social market” economy like that of China, and that too ironically in the area of globalization!
In terms of growth 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 4.5 to 3.8.
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 5.4%.
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 2.20 times ahead of India. Chinese banks extend credit, measured as a ratio of GDP, at a rate two and a half times than 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 Centralized 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 Chinaindia 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 than India’s.
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 Indian households and corporate sector are encouraged by the abolishing 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— for example by introducing innovations or computerizing routine procedures to lower the capital output ratio—then 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 4.5), 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 the present 29%.
2. Then improve efficiency in the use of capital by lowering incremental capital ratio from present 4.5 to 3.8.
And if we can keep going thus for 12 years. India will then overtake China in economic growth. More details can be had from my book: Economic Growth and Reforms in India and China: A Comparative Perspective [Haranand Publications, New Delhi].
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 & Justice.