Central Idea

• The Indian economy has reached a milestone, surpassing $3.5 trillion in size, reminiscent of China’s position in 2007. While India shows similarities with China, such as comparable per capita income, the two countries diverge significantly in their growth drivers. This divergence has implications for India’s growth trajectory and its ability to achieve upper middle-income status.

Relevance of the topic

India lags behind China on multiple fronts such as investment ratios, export performance, labor force participation, and manufacturing employment. For instance, Female Labor Force Participation of China is 61% (2022) whereas in India it stands at 24% (2022).

The stark disparities provide valuable insights to analyze and propose strategies for India’s future development in areas like investment promotion, export competitiveness, and inclusive growth.

India’s positive growth

• Economic Size: The Indian economy has recently crossed $3.5 trillion in size, according to Moody’s. This indicates a significant expansion of the economy and reflects positive growth.
• Per Capita Income: India’s per capita income is projected to rise from $2,379 in 2022 to $2,601 in 2023, as estimated by the International Monetary Fund (IMF). This upward trend indicates an improvement in individual income levels and suggests positive growth in the economy.
• Exports: India’s exports of goods and services exceeded $770 billion in 2022-23. This demonstrates the country’s ability to compete in the global market and generate revenue through international trade.
• Investment Momentum: While India’s investment ratio has been lower than China’s, there are signs of activity picking up in certain sectors after a slowdown induced by the twin balance sheet problem. This indicates positive momentum in investment and the potential for future growth.
• Services Sector: India has witnessed a growth in the services sector, particularly in areas such as IT and business process outsourcing (BPO). The expansion of the services sector contributes to economic growth and job creation.
• Increase in Formal Manufacturing: India aims to boost formal manufacturing, which has higher productivity compared to other sectors. The focus on manufacturing can lead to increased employment opportunities and overall economic growth.
• Rise in Female Labor Force Participation: Although India’s female labor force participation rate remains lower than China’s, there have been efforts to increase women’s participation in the workforce. This can contribute to enhanced productivity, economic empowerment, and overall growth

Comparison: India’s economic position with China

The disparities between India and China

• Investment Ratio: China’s investment-to-GDP ratio averaged 40% between 2003 and 2011, while India’s investment ratio during the same period averaged around 33%. This indicates that China had a higher level of investment, which contributed to its rapid economic growth.
• Export Performance: In 2022-23, India’s exports of goods and services surpassed $770 billion, while China’s exports had already crossed $1.2 trillion in 2007. China’s deeper integration with the global economy and higher export volumes indicate a more robust export-driven growth model compared to India.
• Tariff Rates: China experienced a decline in tariff rates, with the simple mean falling from 10.69% in 2003 to 5.32% in 2020. In contrast, India’s tariff rate decreased from 25.63% in 2003 to 8.88% in 2017 but has risen thereafter. China’s lower tariff rates have facilitated its emergence as a global supply chain hub.
• Labor Force Participation: China had a considerably higher labor force participation rate, with almost 73% in 2007, while India’s rate stood at around 50% in 2022. The disparity, primarily driven by female labor force participation, impacts spending capacity and economic growth potential.
• Sectoral Employment: Both countries have similar sectoral distribution, but China experienced a faster decline in agricultural employment compared to India. India’s challenge lies in finding alternative employment opportunities for its declining agricultural workforce, with the construction and service sectors historically providing more jobs than formal manufacturing.

Implications of these disparities for future development of India

• Growth Trajectory: The disparities in investment ratios indicate that India may face challenges in achieving rapid economic growth and reaching its developmental goals without increasing investment levels.
• Export Competitiveness: The disparities in export performance suggest that India needs to enhance its global competitiveness to expand its export base and capitalize on international trade opportunities.
• Job Creation: The disparities in labor force participation rates, particularly the low female participation rate, have implications for employment generation and inclusive growth in India.
• Sectoral Shift: The slower decline in agricultural employment compared to other sectors raises concerns about the need for alternative employment opportunities for the declining agricultural workforce
• Investment Climate: The disparities in investment ratios underscore the importance of creating a favourable investment climate in India to attract domestic and foreign investments necessary for sustained economic growth.

Lessons learned from China

• Emphasis on Investment: China’s high investment-to-GDP ratio played a crucial role in its rapid economic growth. India can benefit from prioritizing investments in infrastructure, industries, and human capital development to drive economic expansion and productivity.
• Export-Led Growth: China’s success in becoming a global manufacturing and exporting powerhouse highlights the importance of export-led growth. India can focus on enhancing its export competitiveness, diversifying export markets, and promoting value-added exports to boost economic growth and job creation.
• Trade Liberalization: China’s gradual reduction of tariffs and its efforts to integrate into global supply chains helped it become a major player in international trade. India can learn from this and work towards reducing trade barriers, improving trade infrastructure, and actively participating in regional and global trade agreements to enhance its integration into the global economy.
• Manufacturing Development: China’s strategic focus on developing its manufacturing sector contributed significantly to its economic growth and job creation. India can prioritize the growth of formal manufacturing, foster a business-friendly environment, and provide targeted support to enhance manufacturing capabilities and competitiveness.
• Infrastructure Development: China’s investments in infrastructure, such as transportation networks, energy systems, and telecommunications, played a vital role in supporting its economic growth. India can invest in modernizing and expanding its infrastructure to create a solid foundation for economic development and attract further investments.
• Human Capital Development: China’s emphasis on education, skills training, and research and development (R&D) has contributed to its technological advancement and innovation capabilities. India can focus on improving the quality of education, enhancing vocational training programs, and promoting research and development to nurture a skilled workforce and foster innovation.
• Long-Term Planning: China’s long-term development plans, such as its Five-Year Plans, provided a roadmap for sustained economic growth and policy continuity. India can develop comprehensive and strategic plans that align with its development goals and ensure consistent implementation of economic policies.
• Infrastructure for Special Economic Zones (SEZs): China’s establishment of SEZs played a pivotal role in attracting foreign direct investment and promoting export-oriented manufacturing. India can learn from this model and develop specialized zones with the necessary infrastructure, incentives, and supportive policies to attract investments and promote targeted sectors.

Conclusion

• In the coming years, India’s growth may continue at a moderate pace, even if low- and semi-skilled job creation in manufacturing falls short. However, achieving the explosive growth witnessed by China between 2007 and 2021 would require increased investment activity, a resurgence in exports (particularly goods), a rise in female labor force participation, and greater employment opportunities in formal manufacturing. India must strive to replicate the success story of its neighbor if it aims to achieve rapid economic advancement.

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