The exciting story surrounding developing markets has been predominantly driven by the rise of two economic powerhouses, India and China.Both of these economies are the two fastest growing major economies in the world today which is expected to continue for at least the next decade, as forecasted by the IMF . Whilst both countries share some similarities, one of the major divergences has been their GDP growth rates. Historically, China has enjoyed strong economic growth, with India playing second fiddle. However, the outlook for growth going forward paints a different picture as the two countries begin different trajectories in their long term economic cycles. In this research note, we highlight the various factors that are likely to contribute to growth of each country going forward.
Together, India and China command 40% of the global population. Whilst India’s population of 1.25bn is slightly behind China’s 1.36bn, it is expected to surpass China as the world’s most populous country by 2025 and reach 1.69billion people by 2050. Furthermore, India enjoys one of the youngest populations in the world with a median age of 27, compared with China’s 37. It is expected that India will add 300mn new workers to the labour force by 2030. With such a large and vibrant new generation, consumption demand requires substantial investment from both businesses and the government.
India’s economic liberalization began in 1991, in three phases
Whilst the impact of the latest round of reforms is unobservable as yet, the success of the initial reforms may be gauged from the table below which highlights the increase in GDP Growth and foreign direct investment (FDI).
China on the other hand initiated major market driven reforms in 1978, 13 years before India, and was able to quickly implement these being a communist state. China’s reforms were also far more comprehensive resulting in unprecedented growth for over 30 years. A major reason for growth divergence between China and India has been comparative advantages in manufacturing exports and attracting FDI, which have been the two key drivers of the China’s success story. The link between FDI and GDP growth is illustrated below.
Figure 2: GDP and FDI
China is a net exporter, with growth coming particularly from export of manufactured goods. In contrast, India’s major export has transitioned over time from agriculture to services. India still remains a net importer, largely due to the fact that it chose to import rather than industrialise, effectively opting out of the boom of mass market manufacturing. This left China in an almost monopolistic position to reap the benefits of demand from developed economies. In fact, Chinese growth has been driven by US households, not by Chinese households.
China is now the second largest economy in the world, at $10 trillion, compared to India at $2 trillion, ranking 5th. Interestingly, the two countries were of the same size in 1980, but over the last 35 years have grown at different trajectories. Although China is expected to continue growing at a brisk pace, especially relative to advanced economies, it is likely to slow down, given weakening export demand, fixed asset investment and domestic consumption.
[box] According to the IMF, India is expected to grow significantly faster than other developed and emerging economies and overtake China as the fastest growing major economy from 2015 onwards.[/box]
We feel over the next few decades India’s growth will accelerate relative to China’s, driven by;
India and China have differed in terms of the speed, timing and pattern of their growth. Over the past four decades China has been more successful in generating economic growth, given a focus on manufacturing and exports. Whilst undoubtedly both countries will be very prominent in the future in terms of contribution to global growth and global trade, they are at different points in their long term economic cycle. In an age of technology, India’s comparative advantage in human based capital along with favourable demographics leading to increased spending from both private and public sectors and rising household wealth, means that India is likely to have strong structural tailwinds in its favour.