PARALLEL ROADS: ECONOMIC JOURNEYS OF INDIA AND CHINA

Across the bulk of the twentieth century, only a handful of affluent and industrialised nations enjoyed the benefits of economic prosperity. At this time, income inequalities between countries remained stark with inequitable access to resources and opportunities for the populace of low-income countries. Despite the rapid pace of development in a limited set of countries, a large swath of the world was mired in poverty. It was a period when countries in North America and Western Europe prospered while those in Africa and South Asia grappled with difficulties. The roots of these conditions can be traced back to the era when some of these developed countries colonised different parts of the world and exploited their resources while hindering their growth. 

Among the nations that were on the lower rungs of development for most of the twentieth century were India and China. The two neighbouring countries are among the oldest and still ongoing civilisations of the world. At one time, these countries were centres of immense wealth and profound knowledge. However, by this time, their economies had been reduced to what the West referred to as bywords for weak, stagnant, and underdeveloped. Both countries started their developmental journeys around the same time. While India gained independence in 1947, the People’s Republic of China was established in 1949. Until the 1970s, both countries had similar GDPs and per capita incomes. Circling back to the present, these countries are now counted among the ranks of the dynamic modern economies of the world. Over the last few decades, the strategies pursued by these countries have propelled them to different levels. This article aims to track down and compare the developmental journeys of the two nations after the 1980s. 

Historical Context:

The current structure of the Indian economy is not just a product of the present; its historical roots run deep. When the British exited India in 1947, the nation was left grappling with numerous socio-economic challenges. The colonial rule that lasted almost two centuries had transformed the economy into a backward, amputated, and depleted one. Deindustrialisation, commercialisation of agriculture, and drainage of wealth into Britain are just a few illustrations of the economic ruin that the British had caused. In the 1960s, India went through what is popularly known as the Three Twos, which involved the death of two prime ministers, two wars, and two harvest fails. 

Several policies were implemented in different sectors of the economy to promote their growth after independence. In the agriculture sector, land reforms were implemented. Earlier, the ownership of lands was with intermediaries who collected rent from the actual tillers of the soil. Through the land reforms, intermediaries were abolished and a land ceiling was imposed to promote agricultural sector equity. The Green Revolution in the 1960s led to an increase in agricultural output, resulting in food grain self-sufficiency. In the industry sector, the Industry Policy Resolution of 1956 was implemented. A plethora of vital industries were reserved for the government, and a licensing system was introduced to regulate the activities of the private sector industries. To foster rural development, small-scale industries were promoted by reserving certain products for exclusive manufacturing under these industries. An inward-looking trade strategy, popularly known as import substitution, was also implemented to protect domestic industries from foreign competition. High import duties were also imposed. 

In China’s case, after establishing the People’s Republic of China in 1949, many essential sectors were brought under government control. The government sought to centralise economic planning to pursue rapid economic transformation. In 1958, the Great Leap Forward initiative was launched by Mao Zedong to bring about rapid industrialisation and agricultural development in the country.  It also witnessed the establishment of communes in rural areas to encourage collective farming. However, these measures resulted in widespread famines and economic disasters in the country. The promotion of backyard steel production led to further diversion of resources from the agriculture sector, worsening the food shortage. Moreover, the occurrence of natural calamities like droughts further intensified the irregularities in food grain production. Around 30 million people perished as a result of starvation and related causes during the catastrophic events that unfolded during the Great Leap Forward.

The Great Proletariat Cultural Revolution, which took place between 1966 to 1976, is another dark occurrence that destabilised the Chinese economy and resulted in widespread turmoil across the nation. It disrupted agricultural and industrial production due to the divergence of resources to carry out political activities. Moreover, many students and professionals, who were seen as a threat to the communist ideology, were sent to rural areas for re-education and manual labor, further reducing the availability of skilled workforce. Additionally, many people were massacred during this period. There was a negative impact on the country’s international trade and foreign investment. 

Development Strategies:

By the 1980s, India ran into several challenges, including a balance of payments deficit and a slowdown in economic growth. The PSUs, which were supposed to play a major role in industrial development, were under huge losses, the foreign exchange reserves had declined to unusually low levels, and the economy’s foreign debt had been rising. By 1991, the condition had deteriorated to the point that the economy was on the verge of bankruptcy, prompting its approach to the IMF and World Bank for aid. 

In 1991, the ‘New Economic Policy’ was announced to foster a more competitive and global economic environment by removing various restrictions. These reforms were centred around liberalisation, privatisation, and globalisation. Under liberalisation, the regulated system was sought to be replaced by a system where regulations were to be minimised. It included industrial, financial, foreign exchange, fiscal, trade, and investment reforms. Through privatisation, the role of the public sector was reduced, and the private sector was given a greater role in economic activities. Moreover, several PSUs were given special Maharatna, Navratna, and Miniratna statuses to improve efficiency. The economy was integrated into the global market by opening it up through globalisation. It was achieved through various measures such as the devaluation of the rupee, an increase in equity limit participation of foreign investors, allowing convertibility of the Indian rupee, and modifications in tariffs and technology agreements. These reforms resulted in an inflow of foreign investment, control of inflation, and a rise in growth rate and exports. However, there were several inefficiencies in the implementation of disinvestment and tax policies, resulting in a fall in government receipts. 

The dislocation of the Chinese economy caused in the preceding decades meant that those who came into power after the death of Mao had to focus their attention on economic recovery. When Deng Xiaoping came into power in the late 1970s, he initiated several economic reforms that completely changed the economic trajectory of the economy. Initially, the reforms were introduced in the agriculture, foreign trade, and investment sectors of the economy, and were later expanded to the industrial sector. Under agriculture reforms, communes were divided into small plots of land that were then allotted to individual households. The liberalisation policies resulted in the increased participation of private enterprises, the development of stock markets, the diversification of the banking system, and increased foreign trade and investment. In the later phases of the reforms, Special Economic Zones (SEZs) were established to encourage foreign trade and commerce. 

Another aspect of the reforms was the adoption of a dual pricing system, under which farmers and industrial units were required to sell fixed quantities of inputs at prices fixed by the government, while the remainder of the produce could be sold at market prices. The state-owned enterprises of China were made to face increased competition from township and village enterprises, which led to an increase in the efficiency of these enterprises. The results of these reforms were visible in the GDP growth of China in the following years. The GDP growth peaked in 1984, as it touched 15.2%. Moreover, the strong growth of its industrial sector led to its emergence as the world’s largest exporter in 2010. 

Economic Performance, Development, and Global Integration: 

The disparity between the current positions of India and China and their positions about four decades ago is remarkable. According to World Bank data, India grew at an average of 5.9% in the past 4 decades. However, despite this progress, India remains far behind China’s growth of 9.5% in the same period. Before the liberalisation phase of the two countries, China was slightly behind India in terms of GDP per capita. But liberalisation could not help us replicate what it had done for the Chinese economy. In the 1990s, China grew at 11.5% in comparison to our growth of 5.6%. Then, China grew at 16.5% in the 2000s followed by a growth of 8.8% in the following decade. Meanwhile, India grew 6.5% and 5.1% respectively in the same periods. In addition to China, Japan and South Korea, which had similar figures as the Indian economy in the latter half of the previous century, also grew at a rapid rate to surpass India in terms of GDP per capita. Since 1980, China has recorded double-digit growth on 15 occasions, while India has not accomplished this milestone even once. 

However, in the years following the COVID-19 pandemic, India’s growth rate has significantly exceeded that of China, being valued at 9.05% and 7.24% in 2021 and 2022 respectively. China, on the other hand, experienced a slump in the growth rate and grew at 8.45% and 2.99% in the same years. One reason for such a gap is the substantial amount of investment made by China in education and skill development for its population. It created a workforce capable of supporting the rapid industrialisation and export-led growth model. On the other hand, India struggled to keep up due to poor skill development and infrastructural base in the country.

Both countries have made significant strides in poverty alleviation since the 1980s. According to World Bank data, China successfully brought 439 million people out of poverty between 1990 and 2011. In 2001 and 2011, two ten-year policies were implemented to combat poverty. Rapid industrialisation, infrastructure development, and integration of poverty alleviation into the national development policy also created many jobs and reduced poverty levels. In India’s case, the New Economic Policy 1991 produced mixed results in poverty alleviation across different states. Moreover, the focus on service sector development implied fewer job opportunities for unskilled labor. However, the country has done an incredible job of lifting over 415 million people out of poverty in the past 15 years. 

The reforms of 1978 significantly benefitted China, driving its FDI from almost zero in the 1980s to over $40 billion annually by the late 1990s. China emerged as a favourable location for foreign investors due to the availability of cheap skilled labor and enticing market opportunities. Even in the post-pandemic period, China has continued to maintain high levels of FDI. In India, many restrictions were removed to encourage foreign investment. In several industries, there was a rise in the allowed limit of foreign equity participation to encourage FDI. However, the average annual FDI in India was far behind that of China. In the post-pandemic period, India has become an increasingly attractive destination for foreign investment, with rising FDI inflows in technology and services. 

Since its reforms, China has also heavily invested in infrastructure development to support rapid industrialisation. Infrastructure investments (in % of GDP) grew from about 4% in 1985 to over 8% in 2002 and then jumped to nearly 24% in 2016. This growth significantly contributed to its phenomenal economic growth and poverty alleviation. In recent years, China has also focused on the development of digital infrastructure such as 5G networks and AI technology. India’s infrastructure development initially lagged behind that of China from the 1980s to the 2000s, without a significant change in the level of investment (in % of GDP). However, since the 2010s, India has seen a significant increase in infrastructure development, with a multifold increase in the budget allocation towards it. The rapid development of highways, reaching a peak average of 37 km per day in 2020-21, along with the electrification of railway routes and the modernisation of rail travel through the Vande Bharat trains, are some of the key developments that took place. Moreover, there have been significant upgrades in the digital infrastructure. 

China’s international trade in the pre-reform period was typically characterised by a high level of regulations. The opening up of its economy helped China to develop a strong foundation to become the major global trading power it is today. Today, China is the largest exporter and the second largest importer in the world. Its entry into the World Trade Organisation in 2001 further eased its trade deals. However, following the trade war, China’s exports to and imports from the USA have been negatively affected. It also resulted in a disruption of the global supply chain. Moreover, although the COVID-19 pandemic resulted in a fall in the country’s exports in the first quarter of 2020, the export figures rebounded explosively as there was a surge in the demand for medicinal drugs and consumer goods. It also resulted in the growth of its e-commerce platforms like Alibaba internationally. 

The system of regulations over trade and industry before the economic reforms in India led to what is known as the “Hindu rate of growth”, i.e. a period of low economic growth between the 1950s and 1980s, between the 1950s to the 1980s. After 1991, several changes were made in the policy, such as reducing import duties and removing quotas, export duties, and import licensing. These changes had a positive impact on India’s trade deals. The country has also witnessed major economic shifts in the past decade, majorly due to occurrences such as the COVID-19 pandemic and the Russia-Ukraine war. Exports are on the rise, with an average annual growth of about 5% in the past 10 years. This is also accompanied by a rise in the level of imports. As a share of its GDP, India's trade has grown from about 18% in 1991 to over 49% in 2022. Here, trade refers to the sum of imports and exports. According to the current account, India also enjoys a surplus of $143 billion in the trade of services (RBI, 2023). 

Conclusion:

India and China started on their developmental paths around the same time but with contrasting growth trajectories since the 1980s. China not only initiated reforms earlier than India, but it also executed them on a vast scale. Focus on infrastructure development helped China to build a strong foundation for the subsequent phenomenal growth that was observed. India, on the other hand, has faced several challenges in infrastructure development which have led to its slower growth. The style of governance also has a role to play in this. China’s one-party rule has resulted in swift decision-making, political stability, and implementation of long-term policies. In contrast, India’s democratic system makes the procedure much slower and less efficient. Both India and China have come a long way in their developmental journeys. India, with its immense potential, still has considerable ground to cover to attain a development status like that of China. Both India and China have their challenges facing them, and each has its way of tackling them. They will likely find new and unique ways to grow and develop, just as they have in the past.