What the Indian economy needs to complete with China

Source: The post is based on the article “What the Indian economy needs to complete with China” published in The Indian Express on 3^rd July 2023.

Syllabus: GS 3 – Indian Economy – Growth & Development

Relevance: A comparison of India’s and China’s growth rates.

News: The India of today in some ways is similar to China of 2007. China, in terms of per capita income had $2,694 in 2007, while the IMF has also projected India’s per capita income to rise from $2,379 in 2022 to $2,601 in 2023.

However, there are significant divergences between the two countries.

What are the areas of divergence?

Investments: China maintained an investment to GDP ratio around 40 percent between 2003 to 2011. In comparison, even during this high growth phase, the investment ratio in India averaged only around 33 percent.

During the period from 2012 to 2021, the Chinese economy continued to increase, with its investment ratio increasing to almost 43 percent, while India’s investment ratio fell around 29 percent.

Exports: In 2022-23, India’s exports of goods and services surpassed $770 billion, while imports were around $890 billion. In 2007, when the Chinese economy was of comparable size, its exports had crossed $1.2 trillion while imports stood at $950 billion.

Between 2007 and 2021, China’s exports averaged around 24 percent of its GDP, while India’s exports averaged roughly 21 percent during the same period.

Tariff reduction: The reduction of tariffs has made China as the hub of the global supply chains. Its tariff rate declined from 10.69 percent in 2003 to 8.93 percent in 2007, and further dropped to 5.32 percent in 2020.

In contrast, India’s tariff rate declined from 25.63 percent in 2003 to 8.88 percent in 2017 but has risen thereafter.

Labour force participation: China has consistently maintained a higher labor force participation rate compared to India. In 2007, China’s labor force participation rate was nearly 73 percent, but it has declined to 67 percent since then.

Whereas, In India, the estimated participation rate was around 50 percent in 2022, although it is higher according to the Periodic Labour Force Survey (PLFS).

The difference in labor force participation rates between the two countries is mainly due to female participation. 

In China, the female labor force participation rate was 66 percent in 2007, which declined to 61 percent by 2022. Whereas, in India, the rate was at 30 percent in 2007 and has further decreased to 24 percent in 2022.

However, in terms of the sectoral deployment of their labour forces, there are some similarities.

For instance, China in 2007, had 41% of the labour force engaged in agriculture, 27% in industry and 32% in services. Whereas in India, in 2021, it was 44%, 25% and 31% respectively

What are the challenges present with India’s growth?

In India, most of the job creation has occurred in construction, trade, and transport sectors, rather than in manufacturing.

However, estimates from the economic survey suggest that manufacturing has higher productivity than trade and construction. Hence, the lack of employment generation in the manufacturing sector remains India’s biggest growth challenge.

What can be the way ahead?

It may be challenging for India to witness a rapid growth like that of China, which averaged 8 percent annual growth between 2007 and 2021.

However, in order to achieve such growth, India needs to boost investment activity, enhance exports (especially in goods), increase female labor force participation, and promote low and semi-skilled employment in formal manufacturing.