China’s Economy Will Be More Competitive Than India’s For Many Years

May 19, 2016, 5:00 AM UTC
A young girl tries out the new US fastfo
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Despite the attention many Fortune 500 CEOs have paid to India since the election of Prime Minister Narendra Modi in 2014, China’s growth will continue to rival its Asian neighbor even as investors worry that its economy is slowing down. U.S. headlines have called China’s economy the “Doomed Dragon,” predicting it is headed for disaster. This sentiment is too negative. China’s fundamental strengths mean that even if growth slows in the short-term, it will likely keep growing at an annual rate of between 6% and 7% in a few years; rates the U.S. would only dream of. Asia’s other rising giant, India, will also grow quickly, but is unlikely to perform quite as well as its popular Prime Minister Modi hopes. India’s decentralized political system means that no matter how well-meaning, the Modi government cannot achieve change nearly as quickly as the Chinese.

Nonetheless, the economic weight of the world has already shifted in China and India’s direction. It will continue to do so as their economic reforms move forward. By 2030, China and India, respectively, are expected to be the first and third largest economies in the world, with the largest middle classes that U.S. companies will wish to sell to. They will lead the world in demand for natural resources and energy, and be its largest carbon emitters.

The limits of “socialism with Chinese characteristics,” the economic system established by Deng Xiaoping in the 1980s, are now becoming clear. Over-investment, inefficient state-owned enterprises, mounting government debt and growing inequality are unsustainable. However, several factors weigh in China’s favor. The economy is large with plenty of natural resources, labor and capital. Its high savings rate means that China doesn’t have to rely on fickle external capital. In spite of its rapidly aging population, China will still have surplus labor for at least the next few decades. Moreover, the government is raising artificially low retirement ages and relaxed its one-child policy. With more than 1.3 billion consumers, China’s large internal market makes it less sensitive to external economic shocks than small economies.

Yet there are real headwinds. China’s long-term growth will depend on whether President Xi continues to push forward with key market-friendly reforms, instead of prioritizing short-term stimulus.

The Communist Party knows it must build a larger consumer class, but this will take time. Most Chinese still save more than shop because they have no real social safety net. The government is moving to fix this. It is building more schools , spending well over 10% a year more on healthcare and shoring up the pension system so that families will be less burdened by caring for elderly parents. Allowing Chinese to have more children will also help boost demand: two-child families spend far more money. These reforms are already paying off. Household consumption is growing at one and a half times the rate of China’s GDP growth.

If China’s reformers are able to move the economy closer to a true market system, a big internal market, growing consumption, and high savings will help the country grow. While the pace will slow, possibly even to 4% or lower in the short term, it is reasonable to assume that in a few years China will be back to 6% to 7% annual growth.

India has further to go. Despite the 19,000 people chanting Prime Minster Modi’s name in Madison Square Garden just after his 2014 election, he was never going to be able to deliver on these very high expectations for growth. Unlike in China, where the central government can push through tough compromises, a noisy collection of interest groups stall many key economic reforms. Modi’s BJP Party does not have a majority in the upper house of Parliament, and many key issues, such as energy, infrastructure, and even many labor policies, are reserved for the states and cannot be changed easily from Delhi.

Modi and his team have been trying valiantly with some success: he has opened more sectors to foreign investment and companies can now obtain many licenses and permits online, making the process faster and less susceptible to corruption. India’s government has agreed to invest $52 billion in to upgrade the country’s creaking infrastructure since 2014. This is a great start, but by some estimates India needs $1 trillion for new roads, rails, airports and ports.

Modi also had some lucky breaks in his first year that helped him deliver stellar growth: in 2015, India’s economy grew more than 7%, faster than China for the first time in decades. Due mostly to lower international oil prices, India’s inflation rate fell by more than half in 2015. The stock market boomed as investors poured a record $42 billion into Indian stocks and bonds, expecting that reforms would finally start.

However, sustained progress will be slower than India optimists predict. Key legislation that would make it easier for companies to buy land, to hire and fire workers, and an important law to simplify India’s byzantine tax system have been held up in Parliament in Delhi for nearly two years.

Despite Modi’s speeches around the globe to promote growth through his “Make in India” campaign, India is still far behind countries like China in the push for manufacturing might. Even with a slowing economy, China created more than 13 million jobs in 2014, while India struggled to achieve even a million. These are jobs India needs to absorb its rapidly expanding workforce in the coming decades. India also has the herculean task of educating its young people. A first step towards this requires fixing its broken education system, which will require training between 1 and 2 million new teachers.

If Modi’s zealous reforms continue, India can unlock some of its latent potential and grow faster than China. It is more likely that the current trajectory of 5% to 7%growth continues. Although it won’t surpass China, this is an impressive achievement: by 2030, India will likely be the world’s distant third-largest economy, with the largest or second-largest middle class, and Asia’s key economic engine outside China.

Anja Manuel is the author of This Brave New World: India, China, and the United States.

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