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In some ways, the India of today is similar to the China of 2007. As per Moody’s, the Indian economy has recently crossed $3.5 trillion in size. The IMF expects it to exceed $3.7 trillion this year. A decade and a half ago, the Chinese economy was of comparable heft. China then had a per capita income of $2,694, while the IMF expects India’s per capita income to rise from $2,379 in 2022 to $2,601 in 2023.
Though there are other areas of similarity, more profound are the points of divergence. These have implications for India’s growth trajectory.
For one, the underlying drivers of growth in the two countries differ. China’s meteoric rise has been driven by investments and exports. Between 2003 and 2011, the country’s investment to GDP ratio (gross fixed capital formation) averaged 40 per cent. In comparison, even during this high growth phase, the investment ratio in India averaged only around 33 per cent. Worryingly, the gap between the two countries has widened since.
In the years from 2012 to 2021, as the Chinese economy pulled further away, its investment ratio climbed even higher, averaging almost 43 per cent. In India, it fell to around 29 per cent as the investment momentum tapered off. While there are some signs of activity picking up in a few sectors after this almost decade long slowdown induced by the twin balance sheet problem, how investments fare over the coming years will have a bearing on whether India attains upper middle income status as per the timelines being currently projected. (Most of the data has been sourced from the World Bank.)
Then there are exports. In 2022-23, India’s exports of goods and services surpassed $770 billion, while imports were around $890 billion. In 2007, when the Chinese economy was of comparable size, the country’s exports had crossed $1.2 trillion, driven by exports of goods not services, while imports stood at $950 billion, signalling its deeper integration with the global economy.
China’s emergence as the epicentre of global supply chains over the decades has been facilitated in part by the lowering of tariffs. The country’s tariff rate (simple mean) fell from 10.69 per cent in 2003 to 8.93 per cent in 2007, declining further to 5.32 per cent in 2020. In comparison, while India’s tariff rate fell from 25.63 per cent in 2003 to 8.88 per cent in 2017, it has risen thereafter.
Between 2007 and 2021, China’s exports averaged about 24 per cent of GDP. While India’s exports have averaged roughly 21 per cent over this period, they were almost stagnant at around 19 per cent between 2015 and 2020. Though exports, especially of services, have picked up over the past few years, the question now is, can this momentum be sustained? And will it continue to be driven by services or will goods exports also pick up? This will have implications for job creation and the broader economy.
China also had and continues to have a considerably higher labour force participation rate. In 2007, its labour force participation stood at almost 73 per cent (ages 15 and above, modelled ILO estimate). It has since declined to 67 per cent. In India, the participation rate is estimated at around 50 per cent in 2022. (It is higher as per the PLFS.)
As the male labour force participation rate in both countries is roughly the same, the difference is largely due to female participation. In China, the female labour force participation rate stood at 66 per cent in 2007. By 2022, it had declined to 61 per cent. In India, it was considerably lower at 30 per cent in 2007, and has since fallen even further to 24 per cent in 2022.
A bigger labour force has implications for spending capacity. And if sales of passenger cars, a marker of an increase in discretionary spending, are any indication, there are significant differences. In 2022-23, passenger car sales in India stood at 3.8 million.
In comparison, in 2007, 6.3 million cars were sold in China. A higher labour force participation rate and an expansion of the market will necessarily require female participation to increase in India.
In terms of the sectoral deployment of their labour forces, there are some broad similarities. In 2007, 41 per cent of the labour force in China was engaged in agriculture, 27 per cent in industry (including construction) and 32 per cent in services. For India, the comparable numbers in 2021 were 44 per cent, 25 per cent and 31 per cent. (The absolute numbers differ.)
In China, the labour force employed in agriculture fell by roughly 1.5 percentage points per year between 2003 and 2019 (prior to the pandemic). In India, it declined by around 1 percentage point. The question now is, if India’s labour force in agriculture continues to fall at its pre-pandemic pace over the coming decade — the trend has reversed in recent years — where will they be employed?
In the past, the bulk of jobs in India have been created, not in manufacturing, but in construction and services like trade and transport. However, as formal manufacturing is much more productive than these sectors — it is twice as productive as transport, 2.5 times more productive than trade, and 3.75 times more productive than construction as per estimates presented in the economic survey — the lack of employment generation in this sector has been and still remains India’s biggest growth challenge.
In the coming years, even if low-and semi-skilled job creation in manufacturing falls short, it is possible that the Indian economy will manage to chug along. But only so. It will be hard to match the kind of explosive growth that China has witnessed — between 2007 and 2021, the Chinese economy grew at 8 per cent on average per year, while the Indian economy grew at 6 per cent — unless investment activity picks up, unless exports, especially of goods pick up, and unless the female labour force participation and low-and semi-skilled employment in formal manufacturing pick up. As before, the path to getting richer quickly remains the same.
ishan.bakshi@expressindia.com
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