Will India Catch-up

with China?
By
Mohan Guruswamy
Jeevan Prakash Mohanty
Ronald Joseph Abraham

CPAS
Centre for Policy Alternatives
94 Uday Park
New Delhi 110049
Website: www.cpasind.com
Email: cpasind@yahoo.co.in
Telephone: 51650995/7
Facsimile: 51650996
 2

Introduction
The emergence of China as a major world player has so far been the
dominant geo-political event of the new millennium. In the last decade
China has emerged as the largest exporter of manufactured goods to the
USA with a merchandise trade surplus of about US$180 billion causing it in
the recent years to emerge as the biggest holder of US currency (US$721
billion) as reserves. This powerful ascent of China as a major global player
has also resulted in the world’s spotlight being focused, from time to time,
upon India as the other big Asian story. This has inevitably led to a number
of comparisons between the two.

The trend was set by the article “Can India overtake China”, in the
prestigious US journal Foreign Policy in 20031. International Business
magazine, BusinessWeek, also devoted a major part of its August 22, 2005
issue on the emergence of India and China and their comparison. The article
in Foreign Policy was co-authored by Yasheng Huang and Tarun Khanna.
Both come with impressive credentials. Huang is an associate professor at
MIT’s Sloan School of Management, and Khanna is a professor at the
Harvard Business School. These scholars on their own admission discount
the macroeconomic facts of higher growth rates and foreign investment in
China that give her an advantage over India. Instead, they opine that India
may edge past China in the future due to institutional reasons such as more
competent indigenous entrepreneurship in India, a sound capital market, an
independent legal system, respect for private property and a grass-roots
approach to development. They point out that these reasons ensured that
India’s growth rate is only 20% lower than that of China’s which they call a
“remarkable achievement”2.

However, is such optimism that India will better China warranted? When
analyzing growth rates, social indicators, industrial production and more, it
becomes clear that not only has China left India far behind but these gaps are
set to widen in the future. As this paper will show, even to come abreast with
China by 2050 will be an uphill task for India.

China and India: Emerging Economies, Struggling with Poverty

Even with their impressive growth rates in the recent decades, and despite
their emergence among the world’s top ten in terms of GNP, both China and
India remain excruciatingly poor countries. India more so than China. Table
1
This Centre published an Indo-China comparison in 2003 (available at www.cpasind.com) immediately
after this article. The present report is an updated and significantly expanded version of this earlier study.
2
“Can India Overtake China?”. Yasheng Huang and Tarun Khanna. Foreign Policy. July-August, 2003.
 3

1 below attests to this reality. In 2003 in terms of GNP, China with US

$1146 billion ranks fifth while India with US $568 billion ranks ninth.
During the two years since, China has surpassed France and moved into
fourth place, while India has overtaken Mexico and South Korea and moved
into seventh position. This seems to have given the leaders of the two Asian
giants’ seats on the global high table. But when it comes to ranking in terms
of per capita income, which is a truer indicator of the condition of the
common people, China and India drop off from sight. India ranks 159th and
China is now in the 134th place. In recent years we use PPP figures as they
tend to show us in better light (Indian per capita income at PPP is $2880),
but things do not get much better for India when it comes to per capita
rankings, as China moves up to 119 and India to just 146.3

Table 1: Top 10 Countries of the

World, 2003 (GNP)
GNP Per capita
Country
(US $ billion) GNP (US $)
USA 11,012.6 37,870
Japan 4,360.8 34,180
Germany 2,085.5 25,270
France 1,521.6 24,730
China 1,416.8 1,100
Italy 1,243.2 21,570
Mexico 637.2 6,230
S. Korea 576.0 14,500
India 568.0 540
Brazil 479.0 2,720
Source: World Development Indicators 2005,
pp. 22-24. World Bank.

Even after tinkering about with PPP figures, it is a fact that both countries
still have stubborn problems with poverty. If we adopt the UNDP’s yardstick
of $2 a day to provide for basic human needs with a modest modicum of
quality in living standards, both China and India still fare poorly (see Tables
2 & 3 below). Again, India more so than China. While 47% of the Chinese
population lives with an income less than $2 a day, 80% of Indians are
below that line. However, even more worrying for the Indian leadership is
that the pace of economic growth in China will only better their already
improved poverty scenario. However, for India, national goalposts for

3
World Development Indicators, 2005, pp. 22-24. World Bank.
 4

poverty alleviation are pushed further back all the with no definitive
timeframe attached to this cause.

Table 2: International Poverty Line (2001)

Population Population
Country below $1 a below $2 a
day (%) day (%)
China 16.6% 46.7%
India 34.7% 79.9%
Source: World Development Indicators 2005, pp.
64-65. World Bank.

Table 3: National Poverty Line*

Country Survey year Rural (%) Urban (%) National (%)
China 1998 4.6 <2 4.6
India 1999-00 30.2 24.7 28.6%
< means less than
* Poverty Line as defined by both the countries individually
Source: World Development Indicators 2005, pp. 64-65. World Bank.

Burnish or Varnish?
The “India Shining” campaign of the NDA government touting the 2003-4
growth rates of nearly 8% caused a self-laudatory mood among the Indian
elite, which has for long craved the West’s attention. We have finally caught
this attention because the West now sees a huge market in India – as the
recent purchases of commercial aircraft will testify. While 8% is good,
evidence suggests that the underlying basics of the Indian economy remain
unchanged. Nothing makes this more explicit than a comparison with the
economic and social indicators of China after the economic reforms. Far
from catching up with China, India seems to be falling well behind. We must
not forget that the year of shining came after a year of 6.7% in turn preceded
by three years of growth rates of 4.6%, 5.7% and 3.9%. This shows that the
average growth rate is still in a relatively low trajectory.

But even if we accept that India is indeed shining, how good is that shine? Is
it a burnish that reveals the quality of the metal beneath or is it a thin coat of
varnish that just puts a superficial gloss? To understand that, we must go
into how good the years after the so-called reforms have been. Very simply
put, the first decade after the launch of the so-called reforms has not been
very much better than the decade before it. GNP growth for the post reform
 5

period (1992-01) crept up by a mere 0.2% to 5.9%. With a performance like

that, it would be extremely difficult to make a case that the economic
reforms or liberalization, call it what you wish, have made much of an
impact on the nation as a whole.

Of course some have benefited. As former BJP minister Sushma Swaraj had
famously told the Lok Sabha in 2003 that there are no queues for telephone
and gas connections. But with India’s teledensity a mere 5.2 per 100, and
with just 16.7% of India’s households having LPG connections (and that too
mostly in urban areas) clearly suggesting that most households are without
cheap and subsidized energy, we seem quite some way off from a
satisfactory distribution of benefits. Ironically enough, the lack of queues
should be a matter of grave concern given that an overwhelming majority in
India still doesn’t have telephones or gas connections. Such news is not
enough to warrant an outpouring of self-congratulation, for it is indices for
infant mortality (65 per 1000), life expectancy (65 years), literacy (65%), as
well as energy sufficiency (577 billion Kwh) and energy consumption (a
mere 379 Kwh per capita) that make the reality. However well we might
have done, we have fallen well behind China in these spheres and it will take
some effort to catch up. See Tables 4 & 5.

Table 4: Demographic Indicators in 2003

Description China India
Population (million) 1288 1055
Birth Rate (per 1000) 15 25
Death Rate (per 1000) 8 8
Infant Mortality rate (per 1000) 30 65
Life Expectancy (years) 71 65
Source: Statistical Outline of India 2004-05, pp. 247,
TATA Economic Services.
 6

Table 5: Prosperity Indicators 2005

Availability per 1000 China India
Telephones (landlines) 167 40
Cellular phones 161 12
Personal Computer 28 7
Source: Statistical outline of India 2004-
05, pp. 248. TATA Economic Services.

Economic & Social Comparison

With impressive achievements in the economic sphere, not surprisingly
China has also fared better in terms of social sector achievements. Most
notable of these is the rapid transformation of China into a highly literate
country, and therefore better placed for the transition into a modern society.
But what should cause Indians concern is that China seems to be doing
better despite allocating the same percentage of its GNP towards education.
This suggests it is getting more out of its educational system than India is.
Even though China allocates just one percent more of its GNP for
healthcare, it nevertheless has far more impressive achievements in this
sector also. In the recent days the Indian Prime Minister has indicated that
his number one priority is to make government more efficient and
responsive to national needs and goals. Clearly he knows the reality better
than most holding elected offices and places of authority in government.
However, what is of further grave concern is that despite a higher per capita
income and superior social indices, China continues to be more competitive
in terms of labour costs. See Table 6.

Table 6: Social Sector Indicators

Description India China
Gross enrolment ratio in primary schools (%)* 99 114
Adult Literacy (%) 65 91
Labour cost per worker in manufacturing ($ per year) 1,192 729
Education expenditure (% of Govt. expenditure) 13 13**
Physicians (per 1,000 pop.) 0.4 1
Health expenditure (% of GDP) 5 6
Health expenditure per capita ($) 24 49
Contraceptive prevalence rate (%) 52 83
* This ratio can be over 100% because students constantly dropout and reenroll into schools.
** Pertains to 1990
Source: Statistical Outline of India, 2004-05, pp. 249,
TATA Economic Services & Tenth Five Year Plan, Government of India.
 7

The rate of change reflected in the Human Development Index, which is a

composite index prepared by the UNDP using longevity, education and
income as its key components, shows the vast superiority of China’s
achievements in these areas (see Table 7 below). While India’s HDI rose
from 0.254 in 1970 to 0.602 in 2003, China’s rose from 0.372 to 0.755 in the
corresponding period. This is a remarkable performance by China
considering that its per capita income in 1970 was considerably lower than
that of India.

Table 7: Human Development Index

1970 2003
Country HDI Value Rank HDI Value Rank
Australia 0.862 12 0.955 3
Sweden 0.881 2 0.949 6
Switzerland 0.872 8 0.947 7
USA 0.881 3 0.944 10
Japan 0.875 6 0.943 11
Netherlands 0.867 10 0.943 12
U.K 0.873 7 0.939 15
China 0.372 64 0.755 85
India 0.254 82 0.602 127
Source: Statistical outline of India 2004-05, pp. 276. TATA Economic
Services, & Human Development Report, 2005, pp. 219-221. UNDP

Power to the People

In terms of electricity, China’s lead over India is truly astounding. It
produces more than two and a half times as much electricity as India, while
the average Chinese consumes just about that much more. But India seems
better connected physically. Though India is one third of China in terms of
surface area it has a larger railway network and roads system. This and
greater distances in China apparently account for its disproportionately
larger air traffic. But it would seem that this gap is closing a bit given the
boom that India has been seeing in air transportation in the last two years.
See Table 8.
 8

Table 8: Infrastructure Indicators

Description India China
Electricity Production (billion Kwh) 577 1472
Electricity Consumption Per capita (Kwh) 379 893
Rail route (km) 62,759 58,656
Roads (‘000 km) 3,315 1,765
Air passengers carried (‘000) 18,225 83,672
Source: Statistical Outline of India, 2004-05, pp. 248.
TATA Economic Services & CIA World Fact Book & Care Ratings, 2002.

The Chinese lead in electricity production and consumption is not the full
story. That China has almost three times India’s generation capacity is
understandable. However, its far superior power distribution is really telling.
The transmission & distribution losses in China are just 6.8% while India
loses 23.4%, much of it to simple old-fashioned theft. It is little wonder that
the average electricity tariff in China is US $3.20 per 100 Kw lower than
that of India. Despite the high tariffs in India last year the cumulative loss
made by the power sector was Rs 22,013crores4. See Table 9.

Table 9: Energy Profile

Description India China
Electricity Generation Capacity (Mw) 89,000 2,58,000
Transmission & Distribution Losses
23.4 6.8
(% of total power)
Electricity Tariff (US $ / 100 Kw) 7.53 4.3
*Energy Use (Kg. of oil equivalent
513 960
per capita)
Source: Home Page, www.wakeupcall.org.
* From World Development Indicators 2005, World Bank

Industrial Production: Oil, Steel and Cement

In the recent days we have seen crude oil prices piercing the US $60 a barrel
level and experts are of the view that they are headed to reach US$ 100 a
barrel within the next twelve months. Apart from stagnation in refining
capacity that is causing refined petroleum product prices to climb, it is the
rising demand in India and China that is also a major contributor to the price
rise. In both countries the oil sectors are largely controlled by the state. But
the Chinese are demonstrating that they can move with far greater alacrity
when it comes to securing international sources of production. More than

4
‘Push for power reforms’, Tribune News Service, 26th February, 2005, www.tribuneindia.com
 9

once in the recent months the Chinese oil industry has bid out Indian
attempts to buy into international oilfields for an assured share of the output.
China’s CNPC outbidding India’s bid for PetroKazakhstan, a company that
accounts for 12% of Kazakhstan’s oil, is the most recent example. Quite
clearly in the years to come India and China will begin to compete more
rigorously for international oil and markets for their goods to have the
money to pay for it. Commercial rivalry between India and China seems
inescapable. So far China seems better placed. See Table 10.

Table 10: Energy Outlook of India & China (2004-05) (million metric tonnes)
Domestic Import Value
Country Consumption Import
Production (billion $)^
*India 133 34 99 42.87
** China 325 180 145 62.78
^ Calculated assuming that international prices of crude oil apply identically to both.
Source: Press Information Bureau, Ministry of Statistics and Programme
Implementation, Government of India & Basic Statistics on Indian Petroleum and
Natural Gas, 2003-04, Economic Editors Conference, 18th November 2004, Ministry of
Petroleum and Natural Gas, GoI, & Energy Intelligence Agency, Govt of USA.

Other indicators that illustrate the vast chasm that distances India from
China are the production of steel and cement. China now produces over five
times as much steel and six times as much cement as India. Despite its
higher steel production China has also been in recent years a large importer
of Indian steel. While coal still accounts for 60%5 of India’s electricity
production, its production in India has been languishing. Not least among the
causes for this is the fact that the Indian coal industry has largely come
under the control of the state and this has been inimical to more efficient
mining. China produces four times as much coal as India. India on the other
hand has begun to import coal, despite having huge reserves. See Table 11.

5
“Background Note”, India – International Energy Agency (IEA) joint conference on coal and electricity in
India, 22-23 september, 2003
 10

Table 11: Agricultural & Industrial

Production
Million tons/year India China
Steel Production 29 163
Cement Production 109 650
Food grain 210 418
Production
Crude oil 34 165
Production
Coal Production 300 1300
Source: www.wakeupcall.org

Higher Value Addition

Value addition rather than output is always a better indicator of the stage of
economic development and industrial growth. The major point of
comparison is that China’s value addition in industry is almost twice that of
India’s. This coupled with the fact that China’s industrial sector contributes
twice as much as India’s industrial sector to their respective GDP’s clearly
suggests that India has some way to go if it can catch up with China in
gaining overseas markets and creating employment for the millions joining
the work force each year. Two other points of comparison are the greater
role international trade plays in the Chinese economy and its higher gross
capital formation. This only suggests that the Chinese lead will continue till
such time India embarks on a more determined bid to step up industrial
production and capture bigger shares in international markets. See Table 12.

Table 12: Economic Highlights 2003 (%)

Percent of GDP India China
Agri. Value Added 25 15
Industry Value Added 26 51
Services Value Added 48 34
*Gross Capital Formation 24 42
Source: p. 202-203, World Development Indicators,
2003 & * p. 247,Statistical Outline of India 2004-05,
TATA Economic Services

The Value Addition in Manufacturing indicates the degree of industrial

activity in the country. Clearly China adds much more value in
manufacturing than India. In 2001, China had $ 407 billion value addition in
manufacturing, whereas India added just one sixth of that with only $67
 11

billion. The gross output of the manufacturing sector in GDP of China was
39%, which was more than double of India (16%) in the year 2003. The
output of the services sector as percent of GDP stood better for India with
51% in the year 2003, whereas China’s gross output in the services sector
remained 33% in the same year. Moreover India saw greater value addition
in this sector, mainly due to the burgeoning government administration
which is growing at 32% and the IT sector which only employs 0.8% of the
workforce and yet has exports worth $ 9.2 billion. See Table 13.

Table 13: Value Addition & Output

Value Added in Manufacturing Service Value
Manufacturing Value Added Added
($ billion.) (% of GDP) (% of GDP)
1990 2001 1990 2003 1990 2003
China 117 407.5 33 39 31 33
India 21 67.1 17 16 41 51
Source: World Development Indicators 2005, pp. 206-207. World Bank.

More Globalized
With significantly higher exports, the Chinese economy has registered a
positive trade balance of US $79.2 billion, whereas India has a negative
trade balance of US $32.4 billion. When the Chinese trade figure factors in
Hong Kong we see a still more dramatic picture emerging with a combined
current account surplus of US $87.2 billion, whereas India has a current
account deficit of US $4 billion. Though the reform years in India have seen
a significant growth of foreign reserves, it still remains at US $127 billion in
July 2005, while for China and Hong Kong together it was US $833 billion.
See Table 14.
 12

Table 14: External Sector Comparison

(US $ billion)
Hong
India China
Kong
Exports* 55 438 229
Imports* 71 413 233
Trade
-32.4 79.2 -9.7
Balance**
Current
-4 68.7 18.5
Account**
Foreign
127 711 122
Reserves**
Source: * Statistical Outline of India, 2004-05, pp.
248, TATA Economic Services (data valid for 2003)
& **The Economist, July 30, 2005 (Data Valid for
previous 12 months ending July 2005)

The lower tariff structure in China has boosted its imports and as a
consequence added much value to exports. It has also ensured higher
investment in the last decade. The simple mean tariff in case of all products
in China was 40.4% in 1992, which has come down to 9.8% in 2004. In
India’s case there has been a decrease but not as marked as China’s.
Similarly, simple mean tariff on manufactured products in India during 2004
was 27.9%, whereas China’s tariff was one-third of India’s at 9.7% in the
same year. See Table 15.

Table 15: Tariff Barriers in India & China

All Products Manufactured
(Simple Mean Products (Simple
Tariffs %) Mean Tariffs %)
1992 2004 1992 2004
India 79.0 28.3 79.9 27.9
China 40.4 9.8 40.6 9.7
Source: World Development Indicators, 2005, pp. 338-339.
World Bank.

Post Reforms Comparison

A comparison of the first ten years of the economic performances of India
and China after reforms (from 1992 for India and from 1979 for China) is
instructive. China entered the first decade of reforms as a fast developing
 13

and modernizing country with an average decadal growth rate of 5.52%. But
more important than this was its performance, by 1980, of reducing infant
mortality to 42 per 1000, elevating life expectancy to 67 years, and raising
adult literacy to 66%. India by contrast had a better growth rate of 5.7% in
the 1980s but came burdened with an infant mortality of 119 per 1000, life
expectancy of 59.2 years, and adult literacy of 48.41% (see Table 16 below).
Many reasons have been advanced for China’s stupendous performance.
Few are as valid as what Amartya Sen wrote: “China’s relative advantage
over India is a product of its pre reform (pre 1979) groundwork rather than
its post reform redirection.”

Table 16: Social Indicators at

Pre-Reform Stage
China in 1980 India in 1991
IMR (Per 1000) 42 119
Life Expectancy (Years) 67 59.2
Adult Literacy (%) 66 48.41
Sources: India Health Report, UNESCO, World Development
Indicators 2003 & India: Economic Development and Social
Opportunity, Chapter 4. Sen and Dreze.

Yet another comparison would be even more instructive. In 1978, at the

inception of its reforms, China’s per capita GDP (in constant 1995 US$) was
$ 148, whereas that of India in the same year was $ 236. Seven years after it
began its reforms, in 1986, China caught up with India in per capita GDP
terms ($278 vs. $273) and a decade after reforms in 1988 was comfortably
ahead of India with a per capita GDP of $342 compared with India’s $312
(see Figure 1). In the first post reform decade the Chinese economy grew at
10.1% while the Indian economy grew at 5.7% in the corresponding decade
(see Figure 2 and Table 17 below). Quite clearly that was India’s lost
decade.
 14

Figure 1: Comparison of Per Capita Income between China and India

1200
1000
800
PCY

China
600
India
400
200
0

00

03
79

82

85

88

91

94

97
20

20
Years

Source: Central Statistical Organization, Govt. of India, China Statistical Year Book, 1997, 1998

Table 17: GDP and population

Annual Growth
1978 2003
Rate (%)
China
Population 963 1288 1.16
GDP ($billion) 141 1417 9.67
India
Population 648 1064 1.98
GDP ($billion) 155 601 5.57
Population Growth rate calculated using the exponential
growth rate formula. GDP growth rate calculated using the
compound annual growth rate formula.
Sources: World Development Indicators, 2005, National
Accounts Statistics (India) and
China Statistical Yearbook
 15

Figure 2: Growth Rate Comparison of first 10 years of reform

GDP growth rate (%) 20

15
China
10
India
5

0
1 2 3 4 5 6 7 8 9 10
Years

Source: Economic Survey (Various Issues), Ministry of Finance, Govt. of India, China Statistical Year
Book, 1997, 1998

But what did we achieve in the first decade of our reforms? In 1992, the first
year of its reforms, India’s per capita GDP was $ 331. This grew to $ 477 in
2001. In the same period the Chinese per capita GDP surged from $ 360 to $
878 in 2001. In the 1990s China grew at the rate of 9.7% while India grew at
5.9%. Quite clearly far from beginning to catch up, we fell well behind.

China’s GDP (1995 constant US$) has grown eight fold since 1979 and
stood at $1.4 trillion in 2003. Chinese GDP was lower than that of India in
absolute terms in 1978 but caught up with India in the very next year. The
size of the Chinese economy now is twice that of India’s. In 2003 India’s
GDP stood at a mere $ 601 billion with a population of 1.03 billion. We
seem to be catching up with China on the population front but China’s GDP
still remains a distant and difficult target. See Table 18.

Table 18: Growth rates (%)

China India
Pre-reform period (10 years) 5.5 5.7
Post-reform period (10 years) 10.1 5.9
Source: World Development Indicators, World Bank.

A Study in Contrasts
It’s true both countries have transformed themselves after they embarked on
the path of economic reforms. But the transformations were entirely
different. In 1980 the sectoral break-up of China’s economy was as follows:
agriculture 30%, industry 49% and services 21%. As Table 18 below shows,
over the next 20 years until 2003, the share of agriculture fell while industry
 16

and the services sectors grew. Especially remarkable was the growth of
industry from 1990 to 2003; it grew from 42% to 53%.

The Indian sectoral picture makes for a study in contrasts. While the share of
agriculture fell from over 40% to 23% from 1980 to 2003, it was not
industry that took over this share; instead, the services sector became the
dominant sector contributing over half of India’s income. This is in sharp
contrast with China where over half the present income accrues from
industry.

Software apart, the biggest contributing factor to the growth of India’s

services sector has been the growth of Public Administration, which has
been bounding at an average rate of 32.5% each year from 1993-94 onwards.
In 2004, Central Government salaries and pensions alone accounted for
nearly Rs.50,000 crores6. State and local government salaries add to this
tally. This kind of spending was not what Keynes had in mind when he
advocated public spending to stimulate the economy! See Tables 19 and 20
below.

Table 19: Sectoral Break up of GDP (%)

1980* 1990* 2003**
Agriculture
China 30.1 27.1 15
India 42.8 31 23
Industry
China 48.5 41.6 53
India 21.9 28 26
Services
China 21.4 31.3 32
India 35.3 41 52
Source: China Statistical Year Book, 2001 &India’s
National Accounts Statistics (various issues) & **
Statistical Outline of India 2004-05, pp. 247. TATA
Economic Services.

6
Budget document 2005-06, Ministry of Finance, Government of India.
 17

Table 20: Sectoral Growth Rates from

1980 to 2003
1980-90 1990-2003
China India China India
Agriculture 5.9 3.1 4 3.1
Industry 11.1 6.9 13.1 6.1
Services 13.5 6.9 8.9 7.9
Source: World Development Indicators 2005, p. 198-199.
World Bank & Statistical Outline of India 2004-05,
TATA Economic Services

The impact of these sectoral growth rates is reflected in the job creation
patterns for the two nations. In 2003, China’s workforce is 705 million
(1999). About half of this workforce or 373 million is employed in
agriculture, 29% or 221 million in services, and 22% or 167 million in
industry. By contrast India’s total workforce is 482 million in 2004. The
major employer is still the agricultural sector with 60.0% or 289 million,
industry is a relatively small 17.0% or 82 million, services seems to be rising
but employs only 23% or 111 million. Many in India think of the IT sector
as the cause for the growth in Services. This is not so. Nearly half the
employment of the services sector is in unorganized retail. Government
employs another 20 million. By contrast the IT sector only employs 0.82
million or a paltry 0.8% of the total workforce in the services sector. Also, in
the coming few years, we can’t rely on the IT sector to create jobs. Even by
2008, IT will only employ 0.4% of the total Indian workforce! Therefore,
while IT will contribute over $50 billion in exports by 2008, it will remain a
minor employer. Quite clearly in terms of employment we are still an
agrarian society. See Tables 21 and 22.

Table 21: Sector wise employment (%)

China India
Agriculture 49 60
Industry 22 17
Services 29 23
Sources: CIA World Fact book, Govt. of USA.
 18

Table 22: IT Workforce and Exports in India

2002 2008
Total Workforce (million) 449 520
Services Sector Workforce (million) 99.5 121.3
IT Sector Workforce (million) 0.82 2.0
Share of IT workforce in Services Sector 0.8% 1.6%
IT Exports from India ($ billion) $9.2 $50.0*
* Prediction for 2009 by NASSCOM (but seems unlikely)
Sources: Ministry of IT and Communications, Government of
India and NASSCOM

Look who is Investing in China?

The surge in Chinese industrial growth was made possible by overseas
Foreign Direct Investment (FDI), which amounted to $475 billion between
1990 and 2003. (Ministry of Foreign Trade and Economic Cooperation,
Beijing) See Table 23.

Table 23: FDI Statistics for China & India

China India
Foreign Direct Gross Foreign Foreign Direct Gross Foreign
Investment, net Direct Investment, net Direct
Year inflows, current US Investment inflows, current US Investment
$ million (% of GDP) $ million (% of GDP)
1990 3487 1.2 162 0.00
1991 4366 1.4 74 0.00
1992 11,156 3.6 277 0.11
1993 27,515 7.4 550 0.20
1994 33,787 6.6 973 0.33
1995 35,848 5.4 2143 0.64
1996 40,179 5.2 2425 0.69
1997 44,237 5.5 3576 0.90
1998 43,750 5.3 2635 0.65
1999 38,753 5.5 2168 0.50
2000 38,399 4.3 2315 0.58
2001 46,900 4.1 3400 0.71
2002 52,700 4.2 3400 0.68
2003 53,500 3.8 4300 0.72
Sources: World Development Indicators 2002 for 1990-2000 & for 2000 onwards from World
Investment Report, pp. 62, 2004.
 19

Apart from the millions of new jobs created, the role of FDI in making
China a major manufacturing center of the world is seen in the contribution
of FDI enterprises to total exports, which rose from under 2% to 45.5% in
1999. In India at that time it was just 8%. Such disparity in investment in
exports shows up in the shares of world trade in the GDP’s of the two
countries. While trade accounts for as much as half (49%) of China’s GDP,
it accounts for less than a third (29%) of India’s GDP. Also while China
enjoys a 3.8% share of total world trade, India’s share in world trade is less
than one per cent.

In recent days there has been much speculation as to whether the FDI gap
between China and India is indeed as large as it is made out to be. One
problem is that the Chinese FDI data is overstated.7 Since the early 1990s,
researchers with the IMF, World Bank and other international institutions
have developed an evolving view that about a quarter or more of China’s
officially recorded FDI is in fact not FDI. Instead it is mainland Chinese
monies that have flowed out to access better financial, regulatory and legal
services and “round-trip” by returning to China as apparent FDI to access
the fiscal incentives and improved investor protection offered in China to
foreign investors.8 If this argument by IMF & World Bank holds, then the
total FDI inflows into China in 2003 spirals down to around $35 billion
instead of the $53.8 billion that the Chinese official figures show. Chinese
(and IMF) FDI figures include what are classified in India as Foreign
Institutional Investments (FII) in equity markets, loans etc.; whereas in
India, FDI implies only direct investment in industries9. Even if these
adjustments are accepted, FDI in China is still many times more than in
India. In comparison to Chinese FDI inflows, India’s FDI in 2003 stands at
0.72% of GDP whereas it is 3.8% for China.

The emergence of China as the global base for manufacturing is also

reflected on the surge in China’s R&D expenditure. The latest (2003) OECD
science, technology and industry scoreboard10 has ranked China as the fourth
largest R&D spender in the world. China’s total R&D spending in 2003

7
Unless indicated otherwise, estimates of the overstatement of FDI inflows into China are from Geng
Xiao “Round-Tripping Foreign Direct Investment in the People’s Republic of China: Scale, Causes and
Implications” Asian Development Bank Institute Discussion Paper No. 7, June 2004.
8
The rise in China’s FDI: Myths and Realities, Erskine, Alex, Australia-China Free Trade Agreement
Conference, Sydney 12 – 13 August 2004, www.apec.org.
9
For detailed discussion on this see India’s Performance and Economic Reforms: a Perspective for the
Future. Dr. Subramaniam Swamy. Konark, 2000.
10
R&D in non-OECD economies, OECD, MSTI Database, May, 2003.
 20

stood at $85 billion (PPP). Though India ranked among the top ten spenders
worldwide it spent just a third ($30.62 billion) of what China invested in
R&D in 2003. Such huge Chinese investments in furthering knowledge
suggest that India will only fall back further in terms of industrial growth
rates and competitiveness.

A Window of Opportunity for India?

But there is something else we must also understand here. China’s
population in terms of age composition is currently passing through a phase
of great demographic advantage. The cohort in the productive phase (15-60
years) of the life cycle is at its peak, whereas the dependency ratio in India
is, relatively speaking, somewhat adverse (See figure 3). While 64% of
China’s population currently falls in the productive cohort, the
corresponding figure for India is 59%. However 20 years hence, when
China’s productive population will stagnate at 64%, India’s productive
cohort will rise to 64% and attain parity with China. Moreover, the trend will
further alter by 2050 with India (61%) overtaking China (55%) in terms of a
favorable dependency ratio.

This transformation is however not just limited to percentage terms but is

more importantly palpable in absolute terms as India would have become the
most populous country in the world with 1.5 billion people. Thus while at
present China’s productive population stands at a whopping 812 million, and
India is seemingly way behind at 599 million, by 2050 India’s productive
population will be a huge 962 million and China would be way behind at
824 million (see Table 24 & Figure 3 below). But whether India will be able
to convert this into economic advantage is still to be seen? That entails that
India tool up to create a more productive and able workforce, stimulate
investments and create a much bigger market for goods and services.

This favorable demographic trend is as much a window of opportunity as it

is a danger. If we grasp the opportunity we can elevate our nation to a much
higher level of prosperity. On the other hand if we fail to do so, we will
move into a period of unfavourable demographic distribution when we will
be saddled with a rapidly graying population that will act as a natural brake
against fast economic growth. China has so far successfully seized this
opportunity, but will India follow?
 21

Figure 3: Population in Productive cohort

65 64 64 64
% of Population
61
60 59
2000
2020
55
55 2050

50
china india
(15-60)

Source: World Development Indicators, 2003, UNDP

Table 24: Population in productive cohort

(million)
2000 2020 2050
China 812 921 824
India 599 824 962
Sources: World Development indicators, 2003, UNDP

As discussed earlier, the educational expenditure of both China and India

remains the same in the recent years. The major drawback in the Indian case
is that it does not translate into an endowment of human capital. The higher
incidence of youth illiteracy in India amply illustrates that. The youth male
illiteracy in India is 19 percentage points higher than China in the year 2001.
Likewise, the female youth illiteracy remains at 35%, a contrast to China
with 1% of its female youths remaining illiterate in the year 2001. See Table
25.

Table 25: Youth Illiteracy Rate in India & China

Age 15-24 (Male %) Age 15-24 (Female %)
Country 1990 2002 1990 2002
India 27 20 46 35
China 3 1 7 1
Source: World Development Indicators, 2005, pp. 96-97. World Bank

Defence Expenditure
The official defence expenditures of China and India in the year 2003 were
2.3% of the GDP. Both countries fudge these a bit and understandably China
more so than India. Just recently US defence secretary Donald Rumsfeld
 22

indicated his establishment’s apprehension of China’s military expansion.

He went on to say that China’s defence expenditure exceeds what is
stipulated in their official defence budget.11 But even if we accept the
declared expenditures China’s defence outlays are much higher. It was US $
26.6 bilion in 2000, whereas India’s expenditure on defence in the same year
was US $ 11.9 billion. The projections of defence expenditure in both the
countries on the existing basis illustrate the higher capacity of China to
spend on defence. Thus the projection for 2020 in China is US $ 96.60
billion, whereas India’s is US $ 37.40 billion. The projection for 2050 shows
defence expenditure of China touching US $ 775 billion, while India’s is US
$ 215 billion or less than one third of China. See Tables 26 and 27.

Table 26: Defence Expenditure 2003

Description India China
% of GDP 2.3 2.3
Real Exp. ($billion)* 11.9 26.6
Military Persons (million) 2.41 3.75
*Figure Pertains to 2000
Source: p. 298-299, World Development Indicators,
2005

Table 27: Defence Expenditure

Projections ($ billion)
Country 2000 2020 2050
India 11.95 37.40 215.17
China 26.65 96.60 774.47
Source: Projections are based on current
trends and World Development
Indicators

Administrative Decentralization & Expenditure

On the face of it China seems to be deploying just about the same proportion
of its GNP towards education and health. Yet it seems to be achieving better
results. Quite clearly there are lessons to be learnt. While under the
Communist system supreme power may be centralized with a small un-
elected leadership, it is equally true that the management of the economy
and services like education and healthcare are greatly decentralized. By
contrast India with a supposedly different political system has become
highly centralized and nothing reflects this better than the pattern of
expenditure on salaries for government employees (see Figures 4 and 5
11
“Rumsfeld asks China to open up to World”, Reuters, page – 27, The Times of India, 20th Oct., 2005
 23

below). The percentage share of central government salaries and expenses of

the total under this head in China has been continuously declining and has
come down from a high of 73.9% in 1953 to 28.9% in 1998. The
corresponding trend in India is quite discouraging as it hovers at around 40%
(see Table 28 below). Quite evidently in China government is moving
downwards to the tiers that have greater interaction with the people, whereas
in India decentralization is as distant a goal now as it was in the early years
of the Republic.
Figure 4: Decentralization in China

100
in total expenditure(%)

80
share of central govt

60
expenditure

40
20
0
53

57

61

65

69

73

77

81

85

89

93

97
19

19

19

19

19

19

19

19

19

19

19

19
Years

Source: China Statistical Year Book, Government of China.

Figure 5: Centralization in India

government expenditure
in total administrative

60
50
Share of central

expenditure (%)

40
30
20
10
0
19 -61
19 -64
19 -67
19 -70
19 -73
19 -76
19 -79
19 -82
19 -85
19 -88
19 -91
19 -94
19 -97

0
-0
60
63
66
69
72
75
78
81
84
87
90
93
96
99
19

Years

Source: National Accounts Statistics, Central Statistical Organization, Government of India.

 24

Table 28: Central Government

exp. as % of total exp.
China India
1962 61.6 42.23
1970 58.9 41.1
1980 54.3 37.25
1990 32.6 39.42
2000 34.7 40.41
Source: National Accounts Statistics,
Govt. of India & China Statistical
Yearbook, Govt. of China.

Yet another notable feature of the Chinese economic reforms and

decentralization has been the degree of autonomy conferred on the state
owned enterprises (SOE’s). Most SOEs in China (except for the large ones
like China Telecom) have been either privatized or handed over to local
government authorities for management using local capital. In sharp contrast
to this, Indian PSU’s have become adjuncts of administrative ministries with
all entrepreneurial spirit crushed by mindless bureaucracy and uncertain
politics.

Lessons for India

It is quite clear from the inter-sectoral picture we have now that China is a
fast industrializing country whereas India seems to be entering the post-
industrial services phase without having industrialized. We need to reverse
this trend by stimulating industrialization, especially since it creates more
jobs and has greater multiplier effects on the economy. This calls for far
greater investments in infrastructure especially since civil projects such as
roads, railways, dams, canals and building construction require not only
large amounts of material such as steel and cement, but they will also
employ large numbers of least skilled workers. The uncontrolled growth of
this segment of our population poses our greatest economic challenge and
their gainful employment is its only solution. Quite clearly government must
spend less on itself and more for the people.

How long will it take India to Catch-up?

The challenge ahead of us is not catching up with China’s growth rate,
which inevitably must slow down. Can we do what China did to us in 1986?
Can we come abreast with it in terms of GDP? To do that in 2020 we need to
grow at 11.6% and to do that long after most of us are gone in 2050, India
 25

must grow at 8.9% every year (see Table 29). Catching up with growth rates
is not good enough. If that were the game we are already doing much better
than the USA, Europe and Japan! However, a study by Goldman Sachs
projects that India’s growth rate over the next half-century will not reach
such high levels. India’s growth rate is set to peak at 6.1% in 2005-10 and
yet again at 2030-35 (see Table 30). However, the study also predicts that
India’s growth rate will come abreast with that of China by 2010 and
overtake it by 2015.

Table 29: What will it take for India to Catch-

up with China?
India Year Growth
Rate (%)
To catch up China by 2050 8.9
To catch up China by 2020 11.6
Average growth rate since 2000 6.2
Average growth rate in 1990s 5.6
Average growth rate in 1980s 5.6
Source: Projected on basis of current data and trends.

Despite this, according to Goldman Sachs, India will not catch up with
China even by 2050 (see Table 31). This is so because China has a much
larger base in GDP than India; therefore, even smaller relative increases in
income for China would mean a higher absolute increase than India. More
dismal is the fact that in 2050 China will be two times richer than India in
per capita terms, very similar to the present situation. Therefore catching up
with growth rates is just one swallow and that doesn’t mean that our season
in the sun is at hand. It remains to be seen whether India will manage to defy
the Goldman Sachs projections and grow at 8.9% to catch-up with China by
2050.
 26

Table 30: Real GDP Growth Rates: 5-year

Average (percentage figures)
Year India China
2000-2005 5.3 8.0
2005-2010 6.1 7.2
2010-2015 5.9 5.9
2015-2020 5.7 5.0
2020-2025 5.7 4.6
2025-2030 5.9 4.1
2030-2035 6.1 3.9
2035-2040 6.0 3.9
2040-2045 5.6 3.5
2045-2050 5.2 2.9
Source: Goldman Sachs BRIOs Model Projections

Table 31: Projected GDP and GDP per capita

GDP (US $ billion) GDP per capita (US $)
Year India China India China
2000 469 1078 438 854
2005 604 1724 559 1324
2010 929 2998 804 2233
2015 1411 4754 1149 3428
2020 2104 7070 1622 4965
2025 3174 10213 2331 7051
2030 4935 14312 3473 9809
2035 7854 19605 5327 13434
2040 12367 26439 8124 18209
2045 18847 34799 12046 24192
2050 27803 44453 17366 31357
Source: Goldman Sachs BRIOs Model Projections

India and China are clearly set to emerge as two great economic powers.
They are also neighbors who will increasingly compete for resources,
markets and influence. It is unlikely that India and China will again become
mortal enemies. The likelihood of war and conflict is minimal. Yet the
economic circumstances will ensure that both countries will be competitors
and rivals. But to ensure that this does not turn into yet another Cold War,
India must ensure that the economic gap with China closes. That will also
 27

largely close the strategic gap. Clearly India’s leadership has its job cut out.
But are they up to it?

About the Authors

Mohan Guruswamy, Chairman, Centre for Policy Alternatives, New Delhi
was formerly Advisor to the Finance Minister. He also has many years of
experience in academia and the private sector; and is a graduate of the John
F. Kennedy School of Government, Harvard University.

Jeevan Prakash Mohanty is a Research Associate at the Centre for Policy

Alternatives and is a doctoral candidate at the Jawaharlal Nehru University,
New Delhi.

Ronald Joseph Abraham studied Economics at St. Stephen’s College, New

Delhi and is a Research Assistant with the Centre for Policy Alternatives.
 28

Reports Authored by Centre for Policy Alternatives

• Will India Catch-up With China?

• Left Behind: A Case Study of Assam
• Towards a New Petroleum Products Pricing Policy
• Economic Growth and Development of West Bengal: Reality vs.
Perception
• FDI in Retail: More Bad than Good?
• Jammu & Kashmir: is there Really a Fresh Vision and Blueprint?
• A Socioeconomic Comparison of India’s Three Top States
• Centrally Planned Inequality: the Tale of Two States – Punjab and
Bihar
• The Children of the Ganga and the Politics of Allocation
• Last in the South: Economic Growth and Development in Andhra
Pradesh
• The Looming Crisis in Indian Agriculture
• The Economic Strangulation of Bihar

To access these reports, please visit our website: www.cpasind.com, or

email us at cpasind@yahoo.co.in.

Projects Currently Underway

• Redefining the Poverty Line of India

• The Tibet Conundrum
• Review of the Indian Education Sector
• Review of the Indian Transport Sector

Centre for Policy Alternatives Society is a privately funded think tank

focused on the study and review of public policy in India. CPAS is
registered under the “Society Registration Act (XXI) of 1860”.