After 40 years of economic reforms without political reforms, China’s growth has come to an abrupt end. India, on the other hand, having a young population, a rich history, and a fast-growing economy, is attracting global attention and investments. In the race for economic supremacy, will India surpass China?
Now the world’s most populous country, India is expected to surpass Japan to become the third-largest economy in 2027. But India also faces numerous challenges. In an era of global economic shifts, the comparison between India and China presents a study of contrasts and similarities. Let’s delve into the nuances of India’s competitive advantages over China.
40 years of similar Economic Models
First and foremost, what sets India apart from China is its political system. China is the largest communist state in the world while India is the largest democracy. Despite this fundamental difference, India and China shared economic similarities as both adopted a socialist economy for over 40 years.
After India obtained independence in August 1947, the country was eager to break free from its former colonizer, Great Britain, and therefore emulated a Soviet-style socialist economy. The Indian government implemented a slew of strict economic regulations and took control of industries such as banking, insurance, coal, electricity, and steel, as well as major infrastructure like ports, airports, and railways.
In 1990, the Indian government faced a major debt crisis and bankruptcy. In 1991, it implemented historic economic reforms known as “neoliberal” reforms. By gradually reducing government controls, opening up markets, attracting foreign investments, and promoting privatization, the Indian economy underwent a structural transformation. By the 2000s, India has become a global center for IT services. Cities such as Bangalore and Hyderabad became hubs for global technology and innovation. There are several factors that contributed to India’s rise.
India’s Youthful Edge
Over 40% of India’s population is below 25 years old. In China, people under 25 account for only 28% of the total population according to official data. The actual percentage may be lower. Currently, the median age of India’s population is only 28 years, whereas China’s official median age is 38. Those aged 65 and above account for only 7% of India’s population, while in China, it’s 14%.
A large young labor force not only contributes to increased productivity but also ensures strong domestic consumption. Furthermore, a younger population is more inclined to embrace new technology and ideas, which is more conducive to entrepreneurship and innovation. A dynamic, energetic workforce provides India with a strategic advantage over China’s quickly aging population.
Western-Influenced Culture
India’s historical connections and cultural ties with Western countries have fostered a Western-influenced culture. As the largest member nation of the British Commonwealth, India has been deeply affected by British systems in many areas, such as accounting, engineering, and legal services. The influence left by the British has laid a strong institutional foundation for India’s stable development and facilitated better integration with Western markets. And Indians’ good understanding of Western culture and consumer behaviors is proving advantageous in global trade and diplomacy.
Language Advantages
Since the early 1990s, when it abolished trade restrictions and the licensing system, India has become a synonym for outsourcing services. By now, almost all major American tech companies, such as Google, Amazon, Adobe, Intel, Apple, and IBM, outsource some of their operations to India. Multinational companies outsource their call centers and technical support functions to India as well. Indian tech giants like Infosys and Wipro, alongside a burgeoning startup ecosystem, underscore India’s technological ascendancy.
If we compare India’s call centers to China’s factory workshops, we see that India excelled in service jobs while China focused mostly on manufacturing jobs. But India has evolved from an outsourcing hub to a cradle of innovation and entrepreneurship. This transition is underpinned by a large pool of English-speaking engineers and professionals, giving India a clear edge over China’s language barrier in global competition.
Backward Financial System
India’s financial system still grapples with issues like inadequate access to credit, slow banking reforms, and regulatory challenges. This hampers entrepreneurial growth and foreign investment. And the country’s major banks remain state-owned even today. These banks grant loans to businesses and consumers at an extremely slow pace, making it challenging for enterprises with innovative ideas to obtain capital.
Inferior Infrastructure
In 2022, among the world’s top 100 container ports, India had only 2 on the list—Mundra Port and Jawaharlal Nehru Port. Of the world’s top 10 container ports, 7 are located in China and none in India. The absence of a major global port in India limits its maritime trade capabilities. This logistical disadvantage affects India’s manufacturing and trade efficiency, especially in comparison to China’s well-developed port infrastructure.
Despite its population surpassing China’s, India’s production capacity is only about a quarter of China’s. A key factor restricting India’s capacity is the lack of a sufficient, inexpensive, and stable power supply. Even in Bangalore, dubbed India’s Silicon Valley, power outages occur annually.
Transportation is another significant issue. According to a recent report from the South Korean newspaper “Chosun Ilbo,” 40% of India’s roads are still unpaved. India’s public transportation system, including metros, buses, and railways, remains quite inadequate. Most people rely on overcrowded minibusses and three-wheelers for travel in urban areas.
The Indian government understands that infrastructure limitations affect industrial productivity and deter foreign investors from seeking reliable infrastructure for operations. It has allocated approximately $120 billion for improving railway and road infrastructures in the current fiscal year—that’s a 37% increase from the previous year and more than double the 2019 budget. India plans to invest a total of $2 trillion in infrastructure improvements from 2019 to 2025.
Poverty
India’s GDP has surpassed $3.5 trillion, ranking number 5 in the world. However, with a population of 1.5 billion, India’s per capita GDP is only $2,515, which is in the bottom quarter of the world. Many Indians are engaged in low-paying jobs or are underemployed. To keep up with population growth, India needs to generate approximately 9 million new job opportunities annually. The good news is that wages in India have risen rapidly. According to ECA International’s annual salary trends report, India’s wages were expected to increase by 4.6% in 2023, the highest salary growth rate in the Asia Pacific.
The Indian government has made strides in reducing poverty. In 2004, 40% of India’s population lived in abject poverty, while by 2019, this number dropped to 10%, lifting over 300 million people out of destitution.
Government Inefficiency
In 2020, due to strong opposition from farmers, the Indian government overturned a significant decision to relax agricultural regulations. This reversal reverted policies to a pre-reform era, suppressing competition and favoring protectionism.
Another instance of impulsive government decision-making was in 2016 when it announced the discontinuation of certain currency notes to curb black money, corruption and counterfeit bills. This announcement impacted 86% of the currency in circulation, causing cash shortages as well as banking and financial sector stress. People queued up in long lines at banks to deposit or exchange old currency for new bills. This turmoil triggered a public crisis in government credibility.
Another disadvantage factor to consider is corruption. A staggering 89% of Indians regard corruption as one of India’s most significant problems. In the 2022 Corruption Perceptions Index released by Transparency International, India ranked 85th out of 180 countries and territories and 20 ranks below China which ranked 65th.
So, will India eventually surpass China? In terms of GDP, I think it will because China’s real GDP is only a fraction of the alleged amount and fast declining while India is steadily growing. The current geopolitical situation favors India; it has the potential to leverage China’s economic stagnation and access industries that are difficult for China to enter. The deciding factors revolve around whether the Indian government can instill confidence in businesses and investors by addressing infrastructural deficiencies and improving the efficiency of its banks as well as government agencies.
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