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In some ways, India today is similar to China in 2007. According to Moody’s, the Indian economy recently exceeded $3.5 trillion in size. The International Monetary Fund expects it to exceed $3.7 trillion this year. A decade and a half ago, the Chinese economy was a similar heavyweight. Then per capita income in China reached $2,694, while the International Monetary Fund expects per capita income in India to rise from $2,379 in 2022 to $2,601 in 2023.
Although there are other areas of similarities, the points of difference are more profound. These have implications for the growth trajectory of India.
First, the underlying drivers of growth differ in the two countries. China’s rapid rise has been driven by investment and exports. Between 2003 and 2011, the country’s investment-to-GDP (gross fixed capital formation) ratio was 40 percent. In comparison, even during this phase of high growth, the average share investment in India was only around 33 percent. Worryingly, the gap between the two countries has widened since then.
In the years 2012 to 2021, with the expansion of the Chinese economy far and wide, the proportion of investment has risen even higher, averaging around 43 percent. In India, it has fallen to around 29 percent as investment momentum wanes. While there are some signs of activity picking up in a few sectors after this nearly decade-long slump due to the balance sheet problem, how investment fare over the coming years will affect whether India reaches income class Higher average according to schedules are currently being projected. (Most of the data was obtained from the World Bank).
Then there are the exports. In 2022-23, India’s exports of goods and services exceeded $770 billion, while imports amounted to about $890 billion. In 2007, when the Chinese economy was of similar size, the country’s exports exceeded $1.2 trillion, driven by exports of goods rather than services, while imports reached $950 billion, indicating its deeper integration with the global economy.
China’s emergence as the center of global supply chains has been facilitated for decades by cutting tariffs. The country’s tariff rate (simple average) fell from 10.69 percent in 2003 to 8.93 percent in 2007, and then fell again to 5.32 percent in 2020. In comparison, India’s tariff rate fell from 25.63 percent in percent in 2003 to 8.88 percent in 2017, rising thereafter.
Between 2007 and 2021, China’s exports averaged about 24 percent of GDP. While India’s exports averaged nearly 21 percent over the period, it almost stagnated at around 19 percent between 2015 and 2020. Although exports, especially services, have been rising over the past few years, the The question now is, could this happen? That the momentum continues? Will it remain service-driven, or will exports of goods also rise? This will have implications for job creation and the broader economy.
China also had and continues to have a higher labor force participation rate. In 2007, its labor force participation rate was about 73 percent (age group 15 years and over, typical ILO estimate). Since then it has fallen to 67 percent. In India, the participation rate is estimated to be around 50 percent in 2022 (it is higher according to the Labor Force Survey).
Since the male labor force participation rate in both countries is about the same, the difference is largely due to female participation. In China, the female labor force participation rate was 66 percent in 2007. By 2022, it has dropped to 61 percent. In India, it was much lower at 30 percent in 2007, and has since fallen further to 24 percent in 2022.
A larger labor force has implications for spending power. And if passenger car sales, a sign of increased discretionary spending, are any indication, there are huge differences. In 2022-23, passenger car sales in India reached 3.8 million.
By comparison, in 2007, 6.3 million vehicles were sold in China. Rising labor force participation and expanding market will necessarily require increased female participation in India.
In terms of the sectoral spread of their workforce, there are some broad similarities. In 2007, 41 percent of China’s labor force was employed in agriculture, 27 percent in industry (including construction) and 32 percent in services. For India, the similar numbers in 2021 were 44 percent, 25 percent and 31 percent. (Absolute numbers vary.)
In China, the labor force employed in agriculture fell about 1.5 percentage points annually between 2003 and 2019 (before the pandemic). In India, it decreased by about 1 percentage point. The question now is, if India’s agricultural labor force continues to decline at a pre-pandemic pace over the next decade – the trend has reversed in recent years – where will they be employed?
In the past, the bulk of jobs were created in India, not in manufacturing, but in construction and services such as trade and transportation. However, because formal manufacturing is much more productive than these sectors—it is twice as productive as transportation, 2.5 times more productive than trade, and 3.75 times more productive than construction according to estimates provided in the Economic Survey—the job shortage in this sector has been and continues to be the greatest. A growth challenge in India.
In the coming years, even if employment opportunities are low and semi-skilled manufacturing is insufficient, the Indian economy can still make headway. But that’s it. It will be difficult to keep up with the kind of explosive growth in China – between 2007 and 2021, the Chinese economy grew by an average of 8 per cent annually, while the Indian economy grew by 6 per cent – unless investment activity picks up, unless it rebounds. exports, especially commodities, and unless female labor force participation and low-skill and semi-skilled employment in formal manufacturing rebound. As before, the path to get rich quick remains the same.
ishan.bakshi@expressindia.com
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