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A tale of two countries

The IMF’s forecast that India’s growth will overtake China’s this calendar year and the next is cause for neither surprise nor euphoria. China is deliberately cooling off, after more than two decades of high growth. Meanwhile, India’s purported shift away from consumption-driven growth towards investment is expected to generate the conditions for sustained high growth. But the ‘elephant’ has a long way to go before it can catch up with the ‘dragon’. China’s compounded annual growth rate was over 10 per cent between 1990 and 2013, while the best that India achieved was about 9 per cent, between 2003 and 2009. China’s double-digit growth helped it emerge as the world’s manufacturing hub and enabled it to bring about major reduction in poverty levels, besides ensuring a far higher level of literacy and better health and living standards than India’s. India needs to grow at 7 to 8 per cent for at least a decade to create jobs for the 12 million people entering the market each year and generate resources to improve physical and social infrastructure. A quarter of India’s households have no electricity, whereas China has full coverage. India’s literacy level at 74 per cent is way below China’s 95 per cent: India’s so-called ‘demographic dividend’ is thus in question. India’s infant mortality rate of 43 per thousand live births is thrice that of China’s. And, China’s per capita income, at about $3,500, is more than three times India’s levels. India will not be able to sustain its investment thrust and reach China’s levels unless its present savings rate, at about 30 per cent of GDP, against China’s 51 per cent, improves. India must boost household savings by improving employment and financial inclusion, and keep inflation in check. A policy environment that encourages ‘Make in India’ can help.

Yet, in trying to become a manufacturing hub, it is important for India to learn from China’s experience. China’s investment-to-consumption transition (or from exports to domestic demand) has been prompted by a prolonged slump in the advanced economies. But the shift is proving slow and painful because of a manufacturing model that has relied on keeping wage costs unduly low. A domestic demand impulse would entail a shift towards high-value, high-wage manufacture, as in Japan. China’s investment in human capital and scientific research is what works here. The second cause for the government not pushing growth aggressively is a real estate bubble that needs to be deflated slowly. And finally, China can no more afford to ignore the environmental effects of unbridled industrialisation. Its air and water pollution levels are alarming. India shares many of China’s vulnerabilities, but not its strengths. It should lift domestic demand, go for a ‘growth-plus’ approach – and, above all, not be swayed by those who reduce development to a game of numbers.