The pandemic, various security concerns and the general mood among the investing community has been to look for an alternative to China. And to them, India offers a much stable respite. Amidst the economic turmoil across the world, India is a shining star of hope. With its strong geo political influence and increasing growth rates, the prospects for India are high. But to take over the place of mighty China is easier said than done. Nonetheless, it is not quite impossible.
India’s focused self-improvement measure and investment in infrastructure have been rightly timed, with the world looking for an alternative to China. If India encapsulates this rightly, it has the opportunity to become a global power. A major advantage that India has in this journey, is that it can emulate the successful measures from China while being way of the pitfalls.
2007 was an important milestone year for China. At the 17th National Party Congress, the most important political event then, the ruling party at the helm laid out a five-year plan that set off Chinese growth to an elevated trajectory. The major focus was: optimisation of economic structure, emphasis on growth quality rather than quantity, improvement of growth sustainability and creation of state capabilities for innovation. That agenda set China on a path of growth and led to its consolidation as a major global power.
During the same period, India was suffering majorly due to red-tapism, bureaucracy and corruption that deterred businesses from majorly investing in the nation. But much has changed in the world since then. India’s focused self-improvement measure and investment in infrastructure have been rightly timed, with the world looking for an alternative to China. If India encapsulates this rightly, it has the opportunity to become a global power. A major advantage that India has in this journey, is that it can emulate the successful measures from China while being way of the pitfalls.
India is 16.5 years behind China
A recent report by brokerage firm Bernstein Research states that India is a median 16.5 years behind China on business and economic parameters. Delving to specifics, India is 21 years behind in terms of patents, 20 years behind in terms of FDI, 19 years in forex reserves, 17 years in exports. On nominal GDP and per capita income India is 15 years behind, in consumption expenditure – 13 years and in gross fixed capital formation – 16 years behind. With the major markers in hand, India has a huge task ahead. Though the difference looks stark, the long-term picture might not be actually bleak. India needs to keep up with the growth momentum and at the same time concentrate on some key aspects like investment in infrastructure, manufacturing and furthering innovation and research amongst others.
India’s GDP will surpass China…
Among Asian countries, China and India account for more than half of the regions GDP. In 1987, the GDP (nominal) were almost equal. In 1990, China slightly edged India and since then has raced ahead. Its GDP is almost 5.46 times higher than India and China crossed the trillion-dollar mark in 1998. India crossed the same in 2007 (on an exchange rate basis). Historically, China attained a maximum GDP growth rate of 19.30 per cent in 1970 and a minimum of -27.27 per cent in 1961. India reached an all-time high of 9.63 per cent in 1988 and a record low of -5.24 per cent in 1979.
Like in any growth cycle, large economies reach a threshold and then their growth stagnates or starts to dip. China is at this threshold point now. All the measures taken till now, will not work to push forward the country into the next league of growth. It has to chart out new plans that address a different set of population which is rapidly ageing. On the other hand, India, with its large young population is embarking on this growth ladder faster.
With focused policies and stable government, India can surpass China’s economy in a decade or less. Focus Economics, in their forecast, estimate that by 2027, China would lose close to 8 million people while India would gain close to 75 million. This addition will be a gamechanger that will fuel GDP growth, in which India is expected to outpace China by a 2 per cent from 2024 onwards.
India currently has a per capita income of USD 2601. This is similar to China’s per capita income of USD 2694 in 2007. In the meantime, China’s has risen to almost 48 times India’s. In an analysis by Surjit S Bhalla, former executive director of IMF and Karan Bhasin from University of Albany, they expect this to converge by around 2044. For this to happen, India must have consistently high per capita growth rate and this has already begun. In the period of 2010- 2019, per capita GDP growth of India was 0.7 per cent higher than China. Given the current scenario this is expected to increase. In October, China’s Purchasing Manager Index (PMI) fell to 49.5 indicating the difficulty of the economy to revive and expand. This is despite several efforts like interest rate cuts, cash injections and fiscal stimulus. At this rate, achieving the target of 5 per cent growth might become bleak for China.
Infrastructure development is key
Even as a tourist to China, the massiveness of its infrastructure is quite evident. This has binded all corners of the country together. Be in transportation, buildings, logistics, warehouses, China is much ahead of India. Operating as the factory of the world is not an easy task and China systematically built its capabilities achieving economies of scale and offering goods at price point that can be matched by none. Between 2003 and 2011, China’s investment to GDP ratio averaged at 40 per cent. And from then till 2021, it further increased to 43 per cent. Apart from sufficing global demands, China had a very thriving domestic demand. Soon, several bubbles began to burst starting with real estate. This was followed by the curb on various private industry that were growing at a stature of threatening governance. Added to all this, covid and the recent China plus one policy, served a severe blow to the country. Several of the industrial areas look deserted today. Rising unemployment is also weakening the local demand. Apple for the first time has moved out of China to manufacture its iPhone from India. More companies are following suit.
India must build its capabilities to serve this growing demand. The highest ever investment by India is about 33 per cent to GDP which is 10 per cent less than China’s. Only in the recent budgets, has there been a massive thrust on infrastructure. This pace needs to be furthered and this will help adding about 0.75 per cent to GDP annually. Recently Niti Aayog has come out with a plan to identify sectors that can be developed to global potential. This activity, to be done over four months, will identify industries like cement, steel, consumer products, amongst others that are currently not covered under Production Linked Incentive(PLI) scheme. The government plans to provide requisite infrastructure, simplify regulations and policy frameworks, tweak trade agreements, taxation and provide other facilities to benchmark the sectors on a global level.
This is the step in the right direction as it will help to employ a major portion of the population that will slowly start to move away from agriculture. Presently, they migrate to construction and its allied sector as compared to manufacturing. According to economic survey, manufacturing is twice as productive as transport, 2.5 times more than trade and 3.75 times more than construction. Creating more opportunities in manufacturing will lead to increased incomes.
Reaping the demographic dividend
While the young and energetic population is touted as the strength of India, channelising and utilising their capabilities is of utmost importance. Else, there are high chances that the same advantage can turn over as a liability. In the recent budget, India announced its aspirations to transition over to a knowledge-based economy. To realise this, massive skilling and upskilling efforts need to be carried out at all stages of education. Then the skilled individuals’ aspirations must be met by suitable job opportunities. This is a massive move but taking steps towards it is necessary. China has a considerable labour force participation that stands at about 73 per cent. But this has started to decline. On the other hand, in India, the participation rate is at about 50 per cent. The major portion of difference is due to lesser participation of women in India. The female labour force participation in China stood at 66 per cent in 2007 and declined to 61 per cent in 2022. In India, it was considerably lower at 30 per cent in 2007, and has fallen even further to 24 per cent in 2022.
Policies are slowly stemming to address this gap. Today around 43 per cent of STEM graduates are women. Steps must be taken to encourage them to take part in the workforce as they form a substantial half of the population. Recently when TCS revoked its work from home policy and called back people to office, most of the women techies quit. This highlights the need to devise more inclusive policies that can accommodate women.
Entering a digital future
Most of India is yet to develop and this offers an advantage of incorporating digital facets at the initial stage itself. Traditional industries too are catching up. Thanks to the pandemic, digital payments caught on as a rage. Digital wallets account for 35 per cent of retail sales in India. UPI and Aadhaar are few major successes.
India’s success as a software services hub has not reflected much in hardware and product development. In the last two decades, India’s digital sector has grown an average of 35 per cent annually while China has recorded 50 per cent growth. Globally China is the second largest digital economy following US and digitalisation has played a major role in furthering its growth. China has about 1.43 million 5G base stations and more than 500 million 5G users as of early March 2022. It has one of the world’s largest and most advanced network facilities. Additionally, the country has also accelerated the integration of big data, cloud computing and artificial intelligence. By 2025, China will account for nearly 30 percent of the world’s total data volume with a vast variation of data types in the world. With its new semiconductor mission, India is slowly picking up pace. Inviting foreign players to invest in the economy and at the same time encouraging startups will help address through two ends of the spectrum.
Innovation will be a key differentiator
China had for long been touted as a copy cat country. The fake it, till you make it approach, helped the country build on top of the existing infrastructure and today, China is the supply chain to the world. Simultaneously, China invested consistently to upgrade its research and innovation network. It has over the years built close to 24 science and technology (S&T) clusters and of them three are among the world’s five biggest S&T clusters as announced by the World Intellectual Property Organization (WIPO). China’s innovation-driven index stood at 336.3 in 2022, up 15.5 percent year-on-year, and social research and development investment surpassed USD 410.37 billion for the first time, ranking second worldwide (National Bureau of Statistics of China). Also, recently the country overtook US in the field of advanced research and technology which comprises of several critical sectors like defence, space, robotics, energy, environment, biotechnology, artificial intelligence and advanced materials. The Australian Strategic Policy Institute (ASPI) points to India slowly emerging and making a mark in the fields of AI, quantum computing and communications. The semiconductor policy is providing a base to the advanced IC design and fabrication industry which would mature to its full potential in about 7-10 years from now. India’s advantage stems from the abundant young talent that are coming out of its institutions. Global companies set shop to attract them and utilise their talents, which in turn nurtures the domestic market.
In terms of patents, China alone filed almost half of all patents across world. In 2021, the country filed close to 1.5 million patents which constituted about 46 per cent of the total. Of the top ten countries, China’s alone beats the sum of the rest of the nine countries. This explains the extent of innovation and research in the society. China has achieved this through focussed, consistent and quality investment in the field. Of the patents filed, 695,946 were granted. India ranked 6th with 61,573 patents filed in 2021 and of this 30,721 were granted. India has just entered with its baby steps. In the Global Innovation Index 2023, India’s ranks have jumped up from 81 in 2015 to 40 now. This has been mainly due to the ICT services, venture capital received and increase in number of STEM graduates. The effects of investing in innovation and research is quite evident from China that is reaping rich dividends. Though the world tries to isolate its systems from China, a strong and equal alternative is still unfound.
In India, presently there are just around four S&T clusters. China’s experience highlights the need to spread these far and wide so that each part of the country can become vibrant and thriving centres of innovation. The government can offer technology visas to welcome the best of the brains and at the same time provide grants to universities that work on critical technology. Relooking at the taxation to attract venture capital into start ups that work on new age technology will help to address from two ends of the spectrum. The time-tested method of establishing public-private partnerships and centers of excellence will help foster commercialisation of research results that will inturn bolster the economy.
Adding to all this, trade and logistics, still have to be developed further. Despite policy and structural changes, there are several societal issues that need to be addressed. While China had the advantage of being a one party state to execute its growth, India is a large and multi-faceted country. Bringing consensus on various issues and taking all forward will be a mammoth task. India also faces a unique challenge like none other. In the current global scenario, environmental concerns top the chart. Till now, the path to growth has been through high emissions. This would no longer be possible. India has the unique opportunity of showcasing, balancing growth and emission and set a precedence for countries to follow. The past ten years are a sample of India’s capability. The time is right. If this momentum is kept up with, India can rise as a global power.
