Will India Outrun Cocky China?
Art by David Plunkert
Will India become a serious rival to China? As Asia’s and the world’s fastest growing major nation, and the sixth largest economy ($2.6 trillion), India stands a decent chance. Still, China, the second biggest economy ($12.2 trillion), has a sizable head start and harbors built-in advantages over the subcontinent.
While the everyone is watching the Beijing-Washington trade war, a more muted though nonetheless serious rivalry is playing out between the two longtime Asian competitors, China and India.
Considering that the two started out in the years after World War II as poverty-stricken backwaters, they have come a long way. They both have nuclear weapons, educated populations, and thriving capitalist cultures, albeit hemmed in by government, especially in China’s case. And they share a long stretch of border.
The two fought a war in 1962 over the disputed Himalayan border, which China won, and have engaged in sporadic combat ever since, with the latest skirmish in 2017. The fact remains that China has a more substantial military, with an increasingly international reach. In the latest chapter of their fraught relations, the strife is largely economic.
Indeed, future large-scale armed clashes between the two titans are less likely. Despite their long animosity, the two have tight trade ties, with India supplying raw materials and China manufactured goods. Chinese companies have invested in India, and China boasts a trade surplus with its neighbor.
More significantly, China’s gross domestic product is more than four times that of India, by the count of the World Bank. And as a result, although they both still have significant amounts of poor people, China is far richer overall, with a per capita GDP of $19,500, to India’s $8,440, International Monetary Fund records show.
But it’s also true that India is growing faster: The Indian economy expanded an estimated 7.3% last year, part of an accelerating trend that should hit 7.75% in 2020, by Statista’s reckoning. Meanwhile, China’s GDP continued to slow its advance, rising 6.6%, with 6.2% expected next year. “India will make up growth over China in the coming decade,” said Cameron Brandt, director of research at Informa Financial Intelligence.
At the heart of the different growth trajectories, however, is that China actually chooses to grow at a slower pace. “This is a managed slowdown,” said Tony Rodriguez, chief taxable fixed income strategist at Nuveen Asset Management. That’s because the ruling Communist Party wants to rein in the onerous debt that provinces and businesses have amassed, and also it seeks to foster a more domestic-centric, less export-oriented economy.
The chief difference between the two Asian giants is that China is an autocracy and India is the globe’s largest democracy. If the Beijing regime wants to build a superhighway through neighborhoods, the residents have no choice other than to get out. They can’t seek court injunctions or demand environmental impact statements. Starting in the 1970s, China decided to foster private enterprise to rev up growth. In practice, that means state-owned companies get the bulk of the government’s favor, and no one dares object.
In India, elections are hotly contested, yet the politicians don’t have a good track record at making the place run more efficiently. Reforming the hidebound bureaucracy remains elusive. Establishing a business in India, for instance, can be a maddening, complex undertaking with intricate rules to follow.
At least India Prime Minister Narenda Modi’s government is diligently trying, for once, to streamline the system. Up for re-election in May, his Bharatiya Janata Party, or BJP, is in a tight race with the Congress Party, which had long been in power until BJP upended it in 2014. Modi promised millions of new jobs, and some Indians are disappointed that he hasn’t come through.
Contrast that with the plum situation of Xi Jinping. Xi became president in 2012, and last year the nation’s Communist lawmaking body voted to abolish presidential term limits. Thus, if he wants, Xi can be president for life. Unlike the raucous politics in India, where a plethora of political parties vie for government posts, the Communist Party has a lock on all Chinese power. The regime crushes all vestiges of dissent and bans free use of the internet—only officially approved traffic is allowed
Whether authoritarian rule will win out over democracy in the long run is a difficult question. The case against heavy-handed government control is that it stifles initiative, which could hinder China’s future. Maybe. Chinese progress, particularly in technology, has been amazing.
How much ground can India really gain on China? Here’s a look at why the path is steep:
Demography: edge to India. The old phrase is true. Demography is destiny. “India has the greater population growth and its population is younger,” noted Anupam Damani, manager of the TIAA-CREF Emerging Markets Debt Fund.
India’s population growth rate is 1.17%, while China’s is 0.41%, according to the CIA’s World Factbook. And per 1,000 population, the birth rate is 19 in India and 12.3 in China. For the prime working years, 25 through 54, China has more people. The numbers are reversed, however, for the younger-than-25 set.
For a long time, China’s bustling youth fed its economic growth. The sweet spot for contribution to economic expansion sits with those in their 40s. The rap on young workers is that they lack skills and self-discipline. The knock on older workers is that they are less energetic and less willing to learn new things. The way the two nation’s populations are heading, India will have many more workers in their 40s before too long.
Government actions: mixed verdict. Lacking the authoritarian control that China’s rulers exercise, Modi has had to scramble to enact reforms, and has encountered great resistance. In 2016, he declared most of the nation’s cash worthless, a bid to cut down on corruption, which cash exchanges facilitate, and tax evasion. That had only partial success, as a lot of Indians sat on their cash until the crackdown was over.
Modi also tried to limit rampant imports of physical gold, which were harming the country’s trade balance. Gold is popular in India, where it is both a prized ornament and a store of value. This limitation effort was a bust, as “they hoarded the gold in their homes or temples,” said Everett Millman, precious metals specialist at Gainesville Coins, which does business in India.
Western businesses have been eager for years to get in on the burgeoning scenes of both fast-growing nations. In 2018, foreign direct investment in India totaled $26 billion, which was 50% higher than that of China.
Modi has made a point of reaching out to foreigners to invest in India. The Modi government has worked to improve the red-tape problems, and has bettered its standing on the World Bank’s list on ease to doing business—of 189 nations surveyed, it rose from 130th place in 2016 to 77th last year. But China ranked 44th.
Perhaps that’s owing to the Beijing’s insistence of pairing outside investors with Chinese partners. Do that and approvals can go through swiftly. The downside is that foreigners must hand over their intellectual property to the local partners, an arrangement that galls the Trump Administration.
The biggest weakness for China is that it is loaded with debt, at its corporate and provincial government levels. Debt per capita is three times as high for the Chinese, as for the Indians. The worry is that this burden at some stage will drag China down, such as from a crisis in its large shadow banking system, which the government has less control over.
Much of the debt went to build infrastructure, which may have gotten out of hand—there are many “ghost cities” scattered across the Chinese landscape, where no one lives. Yet in terms of roads, bridges, tunnels, and buildings, China’s condition is first-rate. By comparison, India’s is primitive.
Capital markets: edge to China. Beijing’s control over its economy and financial markets is extensive, while New Delhi’s is much less. As an arm of the regime, the People’s Bank of China artificially pegs the nation’s currency to the dollar, and maintains a range that the yuan is valued in.
The Reserve Bank of India is independent from the government. The RBI’s actions have vexed Modi, who wants to keep the economy revved up prior to the May elections. Yet maybe the central bankers finally paid heed to his complaints. After raising rates in 2018, to combat inflation running at just below 5%, the central bank reversed course last week and lowered them. It also eased lending restrictions, which is aimed at spurring business loans.
China also has better developed capital markets. Its bond market, which at $12 trillion is several times the size of India’s, is developing the capability to bring in more foreign investments. ”India is two to three years behind China” vis-a-vis foreigners’ easier access to its bonds, said J.D. Butikofer, head of emerging market debt at Voya Investment Management.
On the equities front, China’s stock market value is almost three times India’s—making up 7.5% of the global market cap, with India at 2.8%, a study last year from Bespoke Investment Group indicates. Helping China is that its domestically traded stock, known as A-shares, is now included in MSCI’s EM indexes. “That triggers massive passive inflows” from non-Chinese index funds that need to replicate the MSCI benchmarks by buying A-shares, Voya’s Butikofer noted.
Geopolitical heft: edge to China. China clearly has military superiority and the ambitions to match. Xi’s defense budget is $228 billion, four times that of India’s. The Chinese military has almost twice as many tanks, artillery pieces, and aircraft as do the Indian armed forces. What’s more, the Chinese are enlarging their influence. They now have bases throughout the Indian Ocean, including a naval facility in the Mideast in Djibouti.
Whether or not another armed clash erupts, it’s clear that China’s muscular $1 trillion plan to build infrastructure in emerging nations around the world, called One Belt, One Road, is making India uncomfortable.
From New Delhi’s viewpoint, the most threatening is the China-Pakistan Economic Corridor, a $62 billion network of railways and highways designed to link the Chinese with another of India’s historical enemies. “China has clearly thrown its economic weight behind Pakistan,” writes Raffaello Pantucci, director of international security studies at the Britain’s Royal United Services Institute.
On the other hand, China’s willy-nilly penchant to build stuff might backfire if a lot of the projects end up having no economic utility. This is true both abroad and at home. Xi’s government is on a construction spree in China’s less-populated west, meant as economic stimulus to cushion the economic slowdown. “The Chinese have a lot of bridges to nowhere,” said Bruce Monrad, chairman of Northeast Investors Trust, “and a lot of dead loans on their balance sheet.”
For the moment, though, China’s bridge to the future appears sturdier than the other Asian giant’s.