India and China: Exploring economic similarities, divergences and what does the future hold?

Introduction

India and China have several historical similarities. Both countries gained independence around the same time and had large populations based on social hierarchy with primarily agrarian economies. In 1990, their economies were similar in size. However, China had a head-start of about 15 years due to the early reforms in the late 1970s.

Since then, both India and China have experienced rapid economic growth, lifting millions out of poverty and impacting the global economic landscape. However, China's economic growth rate has consistently outpaced India's, resulting in a significant difference in the size of their economies by 2020.

Snapshot of China’s Economic Growth History

China's economic growth history can be traced through various phases. It started with economic reforms in the late 1970s, shifting from a centrally planned economy to a market-oriented system. China established Special Economic Zones (SEZs) and attracted foreign investment, leading to rapid industrialisation.

In the 1990s, China sustained rapid economic growth through market-oriented reforms, structural reforms, and increased integration into the global economy.

In the 2000s, China shifted its growth model to focus on domestic consumption, services, and innovation. It invested in research and development, technology, and innovation, aiming to become a global leader in advanced manufacturing and high-tech industries.

Snapshot of India’s Economic Growth History

India's economic growth history took a different path. After independence, India adopted a socialist-inspired economic model with state-led planning and protectionist policies. It faced challenges such as low growth rates, a large public sector, and bureaucratic restrictions.

In 1991, India implemented significant economic reforms and liberalisation measures, opening up the economy, reducing government intervention, and promoting private sector participation. These reforms led to increased competition, productivity gains, and attracted foreign investment.

India witnessed a services-led growth boom in the 2000s, particularly in the IT sector, which propelled its economic growth and positioned it as a major player in the global technology industry. India also focused on infrastructure development and urbanisation.

Differences in Growth Trajectories

Despite their similarities, there are notable differences in India and China's growth trajectories. India's growth strategy has focused on services-led growth, while China's strategy has been export-led manufacturing.

India is the world's largest democracy, with a multi-party political system and a decentralised governance structure. While its democratic institutions have provided stability, the decision-making processes have sometimes been slow due to diverse political opinions and bureaucracy. Whereas, China’s communist single-party system has allowed for more centralised decision-making, enabling swift implementation of policies but with limited political freedoms.

India's integration with the global economy has been gradual but expanding, while China has pursued extensive global integration. China is investing in advanced manufacturing, high-tech industries, and innovation, while India is still working on building its industrial capabilities.

Looking at the Future

By 2050, it is expected that China will have the largest economy in the world, followed by the US and India.

China's future growth will be driven by technological advancements, its expanding middle class, the Belt and Road Initiative, and increased global influence. However, China also faces challenges such as an aging population and the need to transition to a sustainable, low-carbon economy.

India's growth will be driven by its strong services sector, infrastructure development, urbanisation, and increasing domestic consumption. In order to sustain growth, India will need policy initiatives that focus on infrastructure development, ease of doing business, skill development and education, digital transformation, investment in R&D, agricultural reforms, etc.

Conclusion

While India and China have experienced remarkable economic growth, there are differences in their growth trajectories and future prospects. China's focus on manufacturing, technological advancements, and global integration has positioned it as a global leader, while India's strengths lie in its services sector and ongoing reforms. Both countries have unique challenges and opportunities that will shape their future economic landscapes.