Interesting piece on economies of India and China


India has been one of the fastest-growing large economies in the world for over two decades. However, the country’s performance in terms of GDP growth and macroeconomic stability has been dwarfed by that of China.

This disparity can be best illustrated by the two countries’ respective economic trajectories: Although they had similar economic status in the 1990s, China’s economy has grown much faster since then and is now almost five times bigger than India’s.

Given this situation, closer Sino-Indian cooperation may be the right solution for some of India’s economic problems. To this end, instead of viewing India and China as being on an equal footing as the representatives of emerging markets, we should recognize both China’s head-start and India’s unrealized potential for growth. This would be more conducive for assessing the promising future of Sino-Indian economic cooperation.

As countries that both have populations of over 1 billion people, China and India share three important advantages: a large and low-cost labor force; a large domestic market; and a great supply of high-quality human capital known for professional services and science and engineering talent.

Utilizing these three assets, China followed a three-step model. First, it focused on labor-intensive and export-oriented industries like clothes, toys and furniture at the low end by tapping into its huge workforce.

Then, with initial capital and expertise accumulated, it exploited growing domestic demand on the one hand by initiating policies that encouraged more transfer of technologies from developed countries, and on the other hand by taking advantage of its own economies of scale to develop national champions.

China then turned its attention to research and development, utilizing its large reservoir of talent. In this way, China expects to reap high value from cutting-edge industries like integrated circuits, pharmaceuticals and aviation.

Interestingly, though it has the same three advantages, India’s approach followed a reverse sequence: For decades, India has been famous for its highly competitive technology and capital-intensive industries like pharmaceuticals and IT services. While India’s intermediate-tier industries, such as cellphones and automobile parts, have made major progress in recent years, they still lag behind in terms of international competitiveness and the industrial ecosystem.

Ironically, and deviating from the conventional growth pattern, India’s labor-intensive manufacturing sector is disproportionately underdeveloped, leaving its huge workforce largely in less productive informal sectors.

Such a distorted industrial development pattern has taken a heavy toll on the Indian economy, which has been unable to meet the massive domestic demand for manufactured products, forcing Indian consumers to rely on imported goods.

India 2018 GDP $2.8 trillion. China 2018 GDP $13.2 trillion. Looks like somebody took a wrong turn.

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