Why India will displace China as global growth engine | Pakistan Today

Why India will displace China as global growth engine

A Gary Shilling

Most of us still look at China, the world’s second-largest economy, as the undisputed leader among major developing countries. In the long run, however, I’m betting on India to emerge as the more significant global economy.
Those who are dazzled by China often forget that much of the rapid growth before 2008 was caused by the shift of global manufacturing from Europe and the U.S., not by domestic-oriented activity. China’s economy remains export-driven, with consumers accounting for only 38 percent of gross domestic product, far below the levels of many developing and developed countries.
Chinese leaders are working to shift toward a more domestically directed economy. They want households to spend more and save much less than the current rate of almost 30 percent. One of the reasons that savings play such a big role is the high value Confucian society puts on providing for one’s family. The Chinese also save to pay for education for their children and to cover health care and retirement costs because there is no equivalent of Medicare and Social Security.
In 2010, the Chinese government promised basic health care for all by 2020. That’s eight years from now, and basic care remains pretty basic. In some rural hospitals, a practical nurse is the most highly trained medical practitioner.

Higher Wages

China has also increased minimum wages 20 percent to 30 percent in the last year to enhance consumer incomes and purchasing power. Yet higher pay, notably for factory workers producing goods for foreign companies, is driving low-skilled manufacturing jobs to cheaper venues such as Vietnam, Bangladesh and Pakistan.
Furthermore, Western companies are increasingly resisting the requirement that they transfer technical expertise to Chinese partners as the price of setting up production facilities in China. There is a widespread belief that much of the success of Chinese manufacturers is due to such voluntary technology transfers or outright theft of intellectual property.
China recently reduced its target for real GDP annual growth to 7.5 percent from 8 percent. That target is probably too high as China’s one-child policy leads to a population decline, especially among new labor-force entrants. The number of 15- to 24-year-olds is already dropping and this group is projected to account for 150 million people in 2030, compared with 250 million in 1990. As a result, China’s labor force between the ages of 15 and 65 is expected to peak in 2014.
China’s ample labor has increased GDP growth by an estimated 1.8 percentage points annually since the 1970s, but the contraction will cut into growth by 0.7 percentage point by 2030. At the same time, better conditions in rural areas have reduced the availability of cheap labor in coastal cities.
By contrast, India has had no effective constraints on population growth. China still has the advantage — with 1.34 billion people last year, compared with India’s 1.24 billion — though not for too much longer. Furthermore, the age distribution of India’s population is better because of China’s one-child policy, which is now being reconsidered in view of its negative consequences for the country’s long-term labor force and economic growth. This means that the dependency ratio, the proportion of children and senior citizens to working-age people, is expected to continue falling in India in coming decades and to increase in China.

Younger Population

Younger people, of course, tend to be more geographically mobile, flexible in terms of occupation and creative. But these advantages only translate into greater productivity and economic growth if these workers have the right education and training as well as job opportunities.
Several centuries of British colonial rule left India with a vigorous democracy and a parliamentary form of government. As in the U.S., these kinds of institutions are very well adapted to running a large, religiously diverse country where the central government is constrained by increasingly powerful states and weak coalition governments. China, however, remains centrally controlled, with the Communist Mao Dynasty, as I’ve dubbed it, simply replacing the dynasties of old.
The British also left India with a railway system that enabled the relatively easy movement of people and goods in that vast country. By contrast, China doesn’t grant resident status to farmers who move to urban areas in search of work.
And, of course, the British gave India the English language — very useful in today’s world and a unifying force in a country with hundreds of languages and dialects. India also inherited a legal system that is very different from the Communist Party-dominated courts in China, which feature show trials and foregone convictions, as demonstrated by the recent trial and conviction of Gu Kailai, the wife of the disgraced party leader Bo Xilai.
India is also home to a number of large, sophisticated companies, such as Tata Group, that can compete globally. China, meanwhile, is burdened with government-controlled banks and other hugely inefficient state-owned enterprises that still produce a significant share of GDP and employ a quarter of the workforce.
Indians have a natural bent toward technology, as was pointed out to me by the U.S. ambassador to India when I visited him in his New Delhi office in 1986. The ability of India’s many engineers and scientists to communicate in English is also a big help. Furthermore, the booming information-technology sector relies more on new technologies such as satellite transmission than it does on India’s utilities and inadequate basic infrastructure.

English Speakers

US and European companies outsource many back-office and even legal and medical services to India. Outsourcing now yields about $69 billion in annual revenue, accounting for a quarter of Indian exports. The lower wages in India and English-language skills of call-center employees offer big advantages to this industry.
Another asset for India, as well as China, is a rapidly growing middle class. PricewaterhouseCoopers LLP estimates that 470 million Indians, or 38 percent of the population, had annual incomes of between $1,000 and $4,000 in 2010, enough to permit some discretionary spending. The number of consumers with such ready cash is expected to jump to 570 million in a decade, with about $1 trillion in income.
The household-savings rate is high, almost 30 percent. Even so, 82 percent of Indian households had phones, usually mobile, last year. Of the 247 million Indian households, 77 percent owned televisions, and 42 percent had bicycles, motor scooters or motorcycles, though only 10 percent possessed a motor vehicle, according to the 2011 census of India. Furthermore, much of Indian household saving is invested in gold and the dowries of yet-to-be married daughters.
Another strong point is that the Reserve Bank of India is relatively independent of government influence, while the People’s Bank of China is completely controlled by the state. During the recent regime change in China, the PBOC governor, Zhou Xiaochuan, was dropped from the list of 205 members of the Communist Party’s Central Committee and is apparently being forced into retirement. Politicians, not central bankers, call the monetary shots in China.
India has a vigorous and opinionated free press, compared with China’s state-controlled propaganda machine. Internet use in India is expanding, although it is still tiny compared with the U.S. and even its BRIC cohorts: Brazil, Russia and China.
A Gary Shilling is president of A. Gary Shilling & Co. and author of “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation.” The opinions expressed are his own. This is the first in a five-part series.



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11 Comments

  1. Luis said:

    I am totally disagreeing with the article. India is almost a chaos between provinces' commerce. Democracy has hurt the country: every politician is trying to impose his own point of view and there is no accord between them.. Infrastructure is terrible bad. Religion avoids social mobility. Starvation and poverty as heaven’s mandate stop any real effort to improve economically. Religion call for contemplation and meditation instead of action and progress. On the other hand, China has a strong sense of individualism, business, commerce and its government is form with engineers and very knowledgeable people prepared to solve problems, not with lawyers like US.

    • Anon said:

      .
      "China has a strong sense of individualism …"
      .
      Are you reading off the PLA gadget ???
      .

  2. Harinder said:

    What you call as chaos is part and parcel of democratic set-up as big as India. I will prefer these chaos to fascist communism on any given day. Politicians of course will beat their own trumpet. Religion neither discourages social mobility, not it tells you not to work. similarily your reference to contemplation or meditation are also phoney.
    India has achieved significant economic progress in the last 2 decades and it is acknowledged by the world. Uptil now only a section of society has benefitted from it so more growth is needed over next 2 decades to cover remaining people. But whatever India has achieved it has achieved under worst circumstances.
    What ever China has achieved it is under best circumstances. No disagreement, no protests, no dissent, no probes, no opposition, no resistance by environmentalist lobbies, no independent judiciary, no independent media – you oppose face jail or even execution. The world knows about China, what 10 top cummunists want world to know. Read independent analysis about corruptiion, exploitation, disparities in China.
    Read the reasons in report, they are logical.

  3. Shaukat said:

    If all those dreaming of indian success keeping writing this type of articule for the next 200 years, it might come true.
    I have been to india and also to china, they area miles apart, the western world can send as many of there jobs to india in hope of there success.

    • Anon said:

      .
      You have been to india and also to china …
      .
      So, I guess, you met Indians in India but never met a Chinese in China …
      .

  4. Aka said:

    Its a wishful thinking… China is far ahead and honestly chienese are much more hard worker then Indians

  5. captainjohann said:

    As an Indian, I feel nice to read this but the reality at present is bad politics, out moded and slow moving justice system which opens for the rich etc and also mal nourished kids.But we Indians like the chaos of democracy.We can grow faster only if the bureaucracy is reigned and world bank employees stop ruling India

  6. Jan Man said:

    How many times have we hear of all these pure idiocy of India displacing China in economic growth. Until India realises and control its exponential population growth and rampant corruption, we can safely bet that India may not even survive as a nation in a decade or two from now.

  7. Rajeev said:

    India will not only replace China but also USA by 2050. It is based on real stats by the top think tank of US. The present chaos, politics and all bad things are the stepping stone towards the great success journey. When two nations started journey together after getting freedom, unfortunately one was left far far behind and can not digest the success of other………..

  8. Kevin said:

    From day one the naysayers have been saying that it is just a matter of a day, a year, couple of year , a decade or two decade for India to go bust and disintegrate.

    But guess what, while India moves from strength to strength with India move forward each day…we all know what happened to those naysayers be they be those be Westerners or one of our neighbour who gone kaput in 1971

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