A medium-term view of the Chinese and Indian economic situation

The global economy is still struggling to cope with the economic shock of the Covid-19 pandemic. This task has become even more difficult due to the fact that its largest growth engine, the Chinese economy, is actually embracing what appears to be a policy-induced slowdown.

China’s GDP growth of 4.9% in the quarter ending September 2021 surprised analysts on the downside. Among the biggest reasons for the lower-than-expected growth were headwinds to factory output due to power shortages, which among other things, are a result of provinces trying to meet their emission norms by cutting coal production.

Then, there is the looming threat of a disruption in the real-estate and technology sectors as the Chinese government is actively discouraging profiteering (by trying to short the housing market driven by capital gains motives), even businesses (there have been steps to ban online gaming and tuition and scuttle IPOs of tech-companies) in these areas.

The nature and magnitude of these State-sponsored disruptions in the Chinese economy is comparable to, perhaps even bigger than the disruption caused by the National Democratic Alliance government’s policies such as demonetisation and the roll-out of Goods and Services Tax (GST) on the informal sector in the Indian economy.

While State-sponsored disruption is common to both India and China, their content and desired objectives differ drastically. The Chinese State is actively hurting big-business to usher in what it calls an era of “common-prosperity” even if it leads to a lower growth. The Indian State, on the other hand, is trying to facilitate an expansion of formal sector’s (big business) footprint in its economy, which it believes will unleash the forces of creative destruction and pave way for higher growth rates.

Here are four charts which try to put these developments in larger context.

India headed towards a period of sustained growth advantage over China

China was the world’s fastest growing major economy for many decades now. India’s GDP growth rate matched China’s in 2014 and then surged ahead in 2015 and 2016. However, the slowdown in the Indian economy from 2017-18 onwards once again brought India’s GDP growth rate below China’s. The difference became the highest ever in 2020, when the Indian economy experienced its biggest ever contraction and China managed to escape contraction altogether. If the latest World Economic Outlook (WEO) projections by the IMF are to be believed, the Indian economy is headed for a period of sustained growth advantage over the Chinese economy.

But the latest WEO projections entail a downward revision in growth for both China and India in the medium term

While India is projected to occupy the coveted position of the world’s fastest growing major economy until 2026, the latest IMF projections are not exactly good news for either China or India. This is because both Asian giants are expected to grow at a slower pace than what was expected in the April 2021 edition of the WEO. Projected GDP growth rate for both China and India has been brought down between the April and October editions of the WEO. IMF has also slashed its potential growth rate for the Indian economy from 6.25% to 6% in its latest Article IV consolation with the government.

China and India might have similar levels of income inequality

An often cited argument, while discussing the difference between Chinese and Indian economic performance, is that the lack of democratic pressures in the former have allowed the State to do what it needs to do to ensure growth. This is certainly true for China’s successes in ensuring land reforms in its early phase and lack of concerns around issues such as land acquisition for industry and infrastructure projects in the more recent past. However, this should not be inferred to argue that the Communist party dictatorship is unaffected or oblivious to the biggest by-product of China’s growth story — staggering inequality.

As Xi Jinping looks to consolidate his power within the Chinese Communist Party and extend his tenure in breach of the established two-term policy, he is seeking to bring inequality onto the centre-stage of politics.

“At present, income inequality is a prominent issue around the globe. The rich and the poor in some countries are polarised with the collapse of the middle class. This has led to social disintegration, political polarisation, and rampant populism — indeed, the lessons [for us] are profound! Our country must resolutely guard against polarisation, drive common prosperity, and maintain social harmony and stability”, he wrote in an article To Firmly Drive Common Prosperity in the Chinese Communist Party’s flagship journal, Qiushi on October 15.

Ironical as it may seem, inequality levels in China, a dictatorship, are not very different from India, a vibrant democracy. At least this is the picture which the latest available World Bank statistics (they are a decade old for India) convey.

But Chinese per capita incomes are much higher than India’s

An average Chinese has a much higher standard of living than his Indian counterpart. According to the October edition of IMF’s WEO, China’s per capita GDP in 2017 purchasing power parity dollar (PPP) terms was 16216.08 compared to just 6172.05 for India. PPP is a better way to measure per capita GDP because it factors in the difference in price levels across countries. The gap between Indian and Chinese per capita GDP levels has been widening continuously since the 1980s. India’s advantage over China in terms of GDP growth rate over the next few years is not expected to reduce this gap significantly.

The Chinese State’s push towards fighting inequality, even if it has to use income redistribution via higher taxes on the rich, comes at a time when its growth has been slowing down in any case. While the policy shift is clearly tied to Xi’s political ambitions, the associated hypothetical – whether business as usual would have given a boost to China’s growth rates – is equally difficult to answer. To be sure, this still does not take away the fact that the global economy might face significant turbulence because of the State-sponsored economic realignment in China.

India’s situation, at the moment, is perhaps trickier than China’s. It must seek a sustained period of high growth to boost per capita income levels. Entrenched inequalities, much lower level of per capita incomes and almost continuous democratic competition (there are elections every year) means that the State always has to balance populist pressures and measures which will help sustainable growth in the long-term. Electricity subsidies for farmers and a policy to shift cultivation in line with environmental sustainability concerns is a good example of such tensions. In principle, an aggressive income redistribution policy would have been a good idea in India as well. The problem is that the Indian economy is too dependent on the rich to achieve even a 6% GDP growth rate at the moment.