Accounting for 40 percent
of the world’s population and almost 20 percent of
world’s output, China and India are two of Asia’s—indeed,
the world’s—economic giants. In addition to their
size, these countries have other traits in common. Both are
the fastest-growing economies in the world, and both are transitioning
state-controlled and regulated economies
to more market-based economic systems.
Although both countries
are experiencing rapid economic transformations, there are
significant differences in the ascent of each region.
China’s reforms started some 25 years ago in response
to the failures of Maoist economic policies. Since then, its
economy has recorded a phenomenal average annual growth rate
of better than 9 percent. India’s reforms began
in 1991, triggered by a fiscal budget and balance of payments
crisis. Its average annual growth rate over that period has
been closer to 6 percent. The sources of this difference
in growth performance may be found in some key differences
the two countries. For example, China’s higher rate of
saving has enabled domestic investment of 35 to 40 percent
of its GDP, while India’s investment rate is about
China and India have taken
different paths to economic growth and development. China’s growth strategy, like that of its East Asian neighbors, has involved
the expansion of labor-intensive manufacturing, such as textiles and consumer
goods, to take advantage of an abundant supply of labor. India’s emphasis
on protecting workers and small-scale businesses has paradoxically limited
the scale of growth of its manufacturing sector. Consequently, the relatively
less-regulated service sector has been the growth engine of India’s economy.
The service sector now accounts for over 50 percent of India’s output,
much higher than the norm for developing economies. India’s most visible
example of success is the information technology sector; it has burgeoned because
of economic reforms and because of the country’s abundance of English-language
speakers, strong technical education system, and professional talent with
programming and managerial experience.
In terms of global trade,
China is a much bigger player—its exports and
imports of goods amount to about 50 percent of its GDP, compared to around 20
to 30 percent for India. China has experienced huge foreign direct investment
inflows. Until recently, India has been much less interested in attracting foreign
capital and therefore, less successful. China spends substantially more on infrastructure
than India. China’s public finances are in better shape than India’s
finances: India’s consolidated fiscal deficit is running at 8 to 9 percent
of GDP, one of the highest among developing countries, against less than 3 percent
in China. Compared to India, China’s labor market has been much more flexible.
Labor can move easily from the agricultural sector to the industrial sector,
which allows Chinese manufacturers to keep labor costs low. China’s
overall education level is higher than that of India, with a much higher
and a larger percentage of children completing primary school. That said,
India has a world-class university system that produces a core of well-educated
China doesn’t have
the edge in everything. India has a more developed legal
system, including more
of intellectual property rights. India’s financial
system also is in better
China’s system. Although both countries have been
hampered by the involvement of state-owned banks in directed
nonperforming loans are a much smaller problem in India.
India’s bond and equity markets also
are much more efficient.
What challenges do China and India face? Each country is
seeking to find the right balance of political and economic
liberalization to fulfill long-run growth possibilities.
Since 1979, China has followed a “full steam ahead” process
of economic reform that has emphasized growth, even at the
risk of major social upheavals. The country is simultaneously
trying to manage the transition from a one-party state to
a more popular and responsive political regime that many
believe is necessary to deal with China’s increasingly
sophisticated economy and society. Compared to China, India
has followed a more cautious and gradual reform process.
India’s current coalition government, led by the Indian
National Congress Party, is attempting to perform a difficult
balancing act of maintaining the progress of economic reform
while keeping its promise to reduce the
grinding poverty that still afflicts the majority of its
population. To close the gap with China, India must address
infrastructure problems and make its labor markets more flexible.