INDIAN ECONOMY -II

COMPARING THE
INDUSTRIAL GROWTH
BETWEEN INDIA AND
CHINA
BY:

B.GURUVISHNU
22-UEC-083
 Introduction
Using independent estimates of China’s industrial output, this
paper compares the performance of the manufacturing sectors in
China and India over the past half century at disaggregated level.
It finds that China’s industrial growth rate is close to one and half
times that of India’s over the entire period, with the gap widening
gradually.

But Indian growth has been more stable. China’s superior

performance seems understandable in terms of its faster
agricultural and exports growth. Does it mean there is little
prospect of India catching up with China in the foreseeable
future? China seems to suffer from huge excess capacity,

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misallocation of resources and a gross wastage of capital – as
evident from the persistently high capital-output ratio.

China’s impressive industrial edifice seems to be built on

somewhat shaky microeconomic and institutional foundations. In
comparison, India’s relatively strong foundations and domestic
entrepreneurial capital seem to have the potential to improve
performance, with a sounder macroeconomic environment: a step
up in fixed investment to augment infrastructure supply and

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agricultural productivity, revival of long-term finance to boost
industrialization , and easier credit delivery to small and medium
enterprises.

INDIA VS. CHINA: IS THERE EVEN A

COMPARISON ?
The GDP growth rate of India overtook the GDP growth rate of
China in 2015. This has fuelled many newspaper articles in India
stating that India is also on the path to replicating the Chinese
growth story. However, the truth seems far from it Despite the
Indian media’s frantic efforts to put India and China in the same
league by using statist that are misleading to compare the two
economies, India is still a long way behind China. True, that
India has made rapid strides on the path to becoming an
economic powerhouse. However China has been doing so for
decades. In this article, we will explain why India–China
comparisons are totally baseless.

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China’s Economy is Four Times Larger Than
India’s Economy
The GDP of India is close to $1.5 trillion. At the same time,
the GDP of China is close $7 trillion. The economy of China is
at least 4 times as big as the economy of India. This means that
even if China grows at the rate of a meagre 1.5% and India
grows at a rate of 7%, the Chinese economy would have added
the same amount in output as the Indian economy would have!

Comparing the GDP growth rates of India and China is therefore

a pointless exercise. China’s growth rate has been consistently
higher than India’s growth rate over the past three decades or
so.

India has barely overtaken the Chinese growth rate for a couple
of quarters. Only if India can continue to beat the Chinese
growth rate by a huge margin for the next two to three decades,
does India stand a chance of overtaking the Chinese economy.

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Inflation in India is 6 times higher than it is in
China
India’s GDP growth has been accompanies by runaway inflation
in the country. Growth rate accompanied by inflation cannot
last for a long period of time. Instead, such growth rate is
indicative of the short term impetus that has been given to the
economy by the monetary policy.

On the other hand, China’s inflation has been relatively

stable at a negligible 0.8% for many years. This has been
accomplished despite the fact that China has been recording
fiscal surplus for the past many years and ideally should be
reeling with inflation. To the contrary, China has established
sovereign wealth funds, which invest the additional cash in
foreign assets keeping the inflation rate low.

Given the fact that Indian economy is severely marred by

inflation, it seems unlikely that they will be able to compete
against China in the long run.

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China’s Manufacturing Productivity is 1.6 times
than that of India
China produces a lot more than India does. It also does so
remarkably more efficiently. Given the better quality
infrastructure and better production techniques at China’s
disposal, it is not astounding that the average Chinese worker
produces 1.6 times more output than that of the average Indian
worker. This means that the productivity of China as a nation is

60% higher.

The Indian manufacturing sector has multiple problems. These

problems include erratic electricity supply, slow and expensive
transport systems as well as lack of skills that increase
manufacturing productivity.

Given that a large portion of these problems are structural in

nature, it seems unlikely that India will be able to overcome
them in the near future.

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 Workforce
The Indian economy on the other hand, has a clear strategic advantage
when the workforce is considered.

The Indian education system was created by the British. As such,

Indian workforce is global in nature. They can speak fluent English
which gives them an edge over Chinese nationals who face language
barriers.

Also, the Indian workforce does high end jobs for the information
technology industry and BPO industry as compared to the Chinese
workforce which works menial jobs on the factory shop floor. Given that
the future of the world lies in high skilled knowledge jobs, the Indian
workforce may soon rise in prominence while the Chinese workforce may

soon become redu

One Child Policy

Also, China faces what many economists call a demographic time
bomb. For the past couple of decades, China has followed the one child
policy to control population. However, now China faces a situation
wherein there are more people out of the workforce than in it. On an
average, every Chinese worker is expected to pay for the costs of at least
two Chinese retie India, on the other hand, is facing a demographic
dividend.

It has a huge, extremely skilled workforce. Hence, if the government is

able to provide jobs to these workers, the Indian economy is expected to

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 grow by leaps and bounds. Given the fact that there will be a lot more
people in the workforce than out of it, India is poised to become an
economic superpowe

Entrepreneurship
China is still more or less a communist country. This means that all
the enterprises there are run by the state. State run enterprises are
usually not efficient and definitely not innovative. On the other hand,
the Indian industry is based on innovative enterprises.

Given the competitive nature of the world economy, the Indian industry
stands a better chance at success in the future. This can already be seen
as capital intensive Chinese industries such as coal and cement are
going bankrupt whereas knowledge intensive industries such as
information technology are thriving!

The China India comparison is therefore absurd at the moment. China is a

full-fledged superpower that has begun to show signs of decline
whereas India has just started rising.

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 Conclusion
China’s industrial growth, using independent estimates, is About one and half times
that of India’s during the last half a Century or so. However, India’s growth has been
much more Stable. Although economic reforms in the two countries were Expected to
remedy the heavy industry bias of the plan period, In China the share of capital goods
has steadily gone up, while In India it has stagnated since the mid-1980s. The sustained
Development of capital goods perhaps contributed, among Other factors, to China’s
competitiveness in export of labour- Intensive manufactures. From an Indian
perspective, it is sobering To know that the Chinese performance is not ‘out of this
world’ (as it is often made out to be in popular discourse), but under-Stand able in
terms of its faster agriculture and export Growth. Gradual reforms during the last two
decades in India Have not narrowed the gap in output growth rates between the Two
countries.

Is The Financing of unprofitable investment on such a scale seems pose-Sable on

account of the high domestic savings (about 40 per cent Of GDP) deposited with the
state-owned commercial banks in the Closed financial system, which has little
autonomy but to follow Political guidelines in its investment decisions. Thus the real
brunt Of such a pace and pattern of industrial development seems to be Borne by the
financial system with bad loans varyingly esteem Acted to be anywhere between 20-50
per cent of GDP; with the Government repeatedly writing down bad loans with fresh
infusion Of capital .

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