Macroeconomic differences between India and China

Source: The post macroeconomic differences between India and China has been created, based on the article “Public spending must pivot to building human capital” published in “Live Mints” on 16th July 2024

UPSC Syllabus Topic: GS Paper3- Economy-growth, and development

Context: The article discusses China’s growth driven by exports and state investments, leading to issues like ghost cities and overcapacity in sectors like electric vehicles. In contrast, India has lower domestic savings and investment but better GDP returns. It highlights India’s need to boost infrastructure and human capital investment to sustain growth.

For detailed information on Trade Relationship Between India and China read this article here

What fueled China’s growth?

1. Exports and Capital Spending: China’s rapid growth was powered by a consistent 8% net export surplus, amassing significant foreign exchange reserves.
2. Domestic Investments: High domestic savings rates fueled investments in infrastructure and industry expansion.
3. State-Owned Enterprises: Profits from these enterprises provided fiscal benefits, reinvested in physical capital, leading to a high investment-to-GDP ratio.
4. Challenges with Efficiency: Despite high investment, there are criticisms of inefficiencies, such as the construction of “ghost cities” and overcapacity in the electric vehicle sector, indicating not all investments yielded high returns.

What are the main macroeconomic differences between India and China?

1. Trade Balance: India consistently faces a trade deficit, relying on foreign capital inflows of about 2-3% of GDP, contrasting China’s historical 8% export surplus.
2. Investment Sources: China’s investments are largely fueled by state-owned enterprises and high domestic savings. In contrast, India’s investment relies more on foreign capital and lower domestic savings.
3. Government Spending: A significant portion of India’s savings is consumed by government expenses like pensions and salaries, which differs from China’s reinvestment of state-owned enterprise profits into further physical capital development.
4. Private Sector Role: Unlike China, India’s industrial expansion is more dependent on the private sector, with limited state-owned enterprise influence.

What should India focus on for growth?

1. Increasing infrastructure spending within fiscal limits, unlike China’s model which benefits from state-owned enterprise profits.
2. Expanding the manufacturing sector through private investments, facilitated by policies that improve the ease of doing business.
3. Innovating in areas like agro-based industries, green technologies, and digital services.
4. Significantly enhancing investment in education to build human capital, crucial for future job demands and economic growth.

Question for practice:

Discuss the challenges and inefficiencies in China’s growth model, such as ghost cities and overcapacity in the electric vehicle sector, and how these contrast with India’s economic strategies.