Why is India's economic growth rate lower than China's?
Why is India's economic growth rate lower than China's?
Compare and contrast of the two most populous nations on the planet
China began its economic reforms 12 years before India and thus had somewhat of a head start. Nevertheless, even if you normalize for that, China has still grown faster than India.
By instituting the one-child policy, China benefited earlier from a “demographic dividend” – effects of which should start to level off and then reverse in the next five to ten years. India’s demographic dividend is still to come.
From the start, China focused policy on attracting investment that would leverage its main advantage – a vast and inexpensive labor pool. Government policy was very focused on upgrading (i) human development index (HDI) factors such as education, literacy and health, and (ii) infrastructure – both of these were crucial in attracting foreign investors to tap into this labor pool.
By contrast, India has not done as good a job at improving its mass labor pool, and you can see that in its low HDI rankings. Similarly, its infrastructure notoriously lags behind, and that is another key component in basic economic development. China has simply done a better job improving HDI and infrastructure.
Many years after the initial reforms, many industry sectors in India are still held back by bureaucracy and over-regulation. Sectors that were not burdened by over-regulation, such as business process and IT outsourcing, have thrived and will continue to do so. Still, that provides only 3 million jobs out of a country of 1.2 billion people. India has not been as successful in spurring job creation and drawing people from the non-productive rural areas into the cities.
China’s development, particularly in the last decade, has been investment-centric. Contrast that with India, which has been consumption-driven. It is easier to control investment-driven growth (e.g. forcing the state-owned banks to lend) – and thus grow very rapidly over a short to medium-term horizon - than it is to control consumption, which is driven by individual decisions of millions of consumers (and is largely correlated with growth in disposable income).
China benefited from its cultural and business ties to its Diaspora – in particular, Hong Kong and Taiwan, which had blazed the trail as two of the original Asian Tigers and provided investment capital, expertise, and trade channels. It was a win-win game as China got the capital and jobs it needed to move up the economic ladder while the Hong Kong and Taiwanese businessmen could massively scale their operations (and profits). China’s export-centric development has benefited tremendously from globalization and trade in the post-Cold War era.
China’s one-party system enables faster decision-making than India’s democratic process. When you are playing catch-up to the advanced nations of the world, what needs to get done is often pretty obvious and so the nation that can make decisions more quickly will simply get more done. It remains to be seen what will happen to this advantage when you are no longer playing catch-up, and need innovation to move the economy forward. Democracies are better in fostering innovation, but at the lower rungs of development, it’s more of a catch-up game, and China has done a good job climbing up the first few rungs.
How things proceed from here is of course a whole other discussion.
This was originally published on Quora in January 2011.