How China overtook India in growth — early start and better decisions

J Mulraj | Updated on May 10, 2019 Published on May 10, 2019

A recent IMF study titled ‘The Future of China’s Bond Market’ reveals the reason why China has marched ahead of India in economic growth. China’s GDP was over $13 trillion in 2018, whilst India’s was $2.7 trillion, just under a fifth of China’s. The two main reasons for this differential is the early start by China and their more sensible policy decisions.

According to the IMF study mentioned above, China started opening up its economy in 1978, under the Chairmanship of Deng Xiao Ping, who succeeded Mao Tse Tung. He famously stated, “I don’t care if the cat is black or white, so long as it catches mice.” Hitherto a closed economy, Deng opened China up to the world, built up a manufacturing base, and achieved a nearly 10 per cent CAGR growth rate for the economy.

In 1978 Morarji Desai was India’s PM, who, following India’s socialist bend, levied a 97 per cent income tax and a 3 per cent wealth tax, effectively killing enterprise and planting the seeds of rampant corruption. He was succeeded, briefly, by Charan Singh and later by Indira Gandhi, who was famous for bank nationalisation (1969), introduction of MRTP (1969), FERA (1973) and coal nationalisation (1973), again, killing private enterprise.

As a result, China’s GDP grew at around 10 per cent and India’s at around 3 per cent. Give or take a bit, over a 20-year period, this explains the difference in the GDP of both countries.

Having a larger economy gives a country more global clout (China could stall, e.g. the international community’s efforts to name Hafeez Saeed a global terrorist). China also has vastly superior defence capabilities.

In commercial fields, too, China’s larger economy gives it resources to develop technologies. Much has been written about Huawei being a global leader in 5G, the technology that will shape the future, with its impact on various sectors including autonomous vehicles, the Internet of Things, artificial intelligence (AI), robotics (which will enhance machine productivity), remote medicine (surgery can be done with doctor and patient in two different locations), and many other areas.

India, meanwhile, is struggling to cope with a different AI, Air India! A perennially sick business which the government has no business to be in but continues to fund only, perhaps, so that Ministers can fly free in first class! Not only does this harm the taxpayer, it has been a major factor in the death of Kingfisher and Jet Airways, who do not get continuous infusion of equity to pay for their losses. India continues to discriminate between the colour of the cat, not allowing it to catch the rat! Or consider the auto industry. China is now the largest producer of cars (23 million/a, versus 19 in all of Europe and 13 in the US) and has ambitions to be the largest electric vehicle (EV) market in the world.

India, too, has made plans for EV, as outlined by Amitabh Kant, CEO Niti Aayog, in a recent TOI article. But, given the opposition to autonomous vehicles (which would displace jobs), we would need to see if India derives all the benefits of the new technologies. It’s a tough call.

Stock markets have dropped after Trump threatened to hike tariffs on Chinese imports due to slow progress of talks. Then there are election results to be declared on May 23. Even if a party/coalition were to get a majority and form a stable government, the rally would be short-lived. The coffers are not empty, but depleted.

(The writer is India Head — Finance Asia/Haymarket. The views are personal.)

Published on May 10, 2019
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