When Narendra Modi, the prime minister of India, speaks to a joint session of the U.S. Congress on June 8, he may find it hard to convince lawmakers of his country’s promise. He shouldn’t: As China, Russia and Brazil slow down, India is barreling ahead. It’s one of the brighter spots among all the emerging markets.
True, India’s economic growth in the last 25 years has been slower than China’s. India’s growth rose to almost 11 percent of U.S. gross domestic product in 2014 from about 4 percent in 1990, while China’s vaulted to 60 percent from 9 percent in the same period. But unlike China, India never became an export-driven manufacturing juggernaut and so its growth has been steadier. Last year it was 7.5 percent.
India also didn’t benefit as much as China when manufacturing shifted from the West to developing countries, and thus the decline in offshoring is hurting India less than China.
India certainly has its problems — notoriously slow bureaucracies, a lack of good infrastructure, and too much regulation and corruption to name a few — that need to be addressed before economic growth can explode. Modi has sought reforms for many of these issues, though with limited success so far.
Reliable data measuring India’s economy are fuzzy, to say the least. Most businesses are tiny and unregulated; many people are employed off the books. India also uses wholesale, not final, prices to deflate nominal GDP. Due to lower oil prices, the wholesale price index has been falling for 17 straight months while retail prices are still rising at a 5 percent annual rate. So the reported real GDP numbers are overstated.
Still, India has major advantages over China. China’s one-child policy, while now relaxed, will result in fewer entrants into the labor force for decades. That could choke growth: Younger people tend to be more geographically mobile and flexible in terms of occupation and ability to learn new skills.
By contrast, India has had few constraints on population growth. The dependency ratio — the number of children and seniors relative to the working-age population — will continue to fall in India as it rises in China. As of 2015, India had 1.25 billion people versus China’s 1.37 billion. It won’t be long before India’s population is bigger.
Say what you want about colonialism, but British control of India for centuries left a vigorous democracy and a parliamentary form of government, which is useful for running a large, diverse country.
The British also left India with a railway system that facilitates the movement of people and goods over a vast geography. By contrast, China is reluctant to grant resident status to farmers who move to urban areas in search of work.
And of course the British gave India the English language — useful in a world that conducts most business in English and as a unifying force in a country with hundreds of languages and dialects. India also inherited a free press and a legal system from the U.K. As a result, India’s rule of law is vastly better than the Communist party-dominated courts of China, complete with show trials and forgone convictions.
All of these advantages have led to large, sophisticated companies, such as the Tata complex, that compete globally. China, on the other hand, is burdened with government-controlled banks and other inefficient, state-owned enterprises that still produce half the country’s output and employ a quarter of the workforce.
For the first half-century of independence, Indian politics were dominated by the Congress Party with its socialist orientation and attempts to emulate the Soviet Union. In the 1950s, steel, mining, water, telecommunications and electricity generation were effectively nationalized.
The Industries Act of 1951, which required all businesses to get licenses from the government before they could launch, expand or change their products, stifled innovation. The “licence raj” reigned. The government imposed import tariffs in the name of encouraging domestic production, and domestic firms were prohibited from opening foreign offices. Foreign investment dried up under stringent restrictions.
As a result, manufacturing never blossomed and the economy grew at what Indian officials accepted as the “Hindu rate of growth” of 3 percent to 4 percent — subpar for a developing economy — while other Asian economies blossomed. Between 1950 and 1973, the Indian economy annually grew 3.7 percent, or 1.6 percent per capita. Japan’s economy grew 10 times faster and South Korea’s five times faster. China grew at a sustained 8 percent annual rate. All that began to change dramatically in 1991 with the shift toward capitalism.
Even so, India has historically had more of a free-market orientation than other large, developing countries, notably Russia and China. Its film industry, Bollywood, cranks out movies that range from excellent to awful, while in China, films are propaganda tools. State-controlled enterprises in India account for only 13 percent of GDP compared with 29 percent in China.
Fortunately for India, the pharmaceutical and technology sectors never suffered the burdensome regulations that bogged down the steel and airline industries. Also helpful is the Indian natural bent toward technology. Its booming information-technology sector relies more on new technologies such as satellite transmission, and is able to leapfrog Indian-regulated utilities and the crumbling infrastructure.
American and European firms outsource many back-office and even legal and medical services to India. Outsourcing revenue is now $95 billion a year and accounts for a fifth of Indian exports. India’s lower wages and English-speaking ability are the attractions.
Many Indians have strong entrepreneurial inclinations, and the economic growth they can spark is vital to reducing high poverty rates and corruption as economic power shifts from politicians to entrepreneurs. But many reforms are still needed. Bribe demands are routine, the bureaucracy is byzantine and the infrastructure is backward. All of this impedes entrepreneurial activity.
India also has a culture that penalizes risk-taking. Business is concentrated among long-existing and well-connected conglomerates with close ties to the government, much like the state-owned enterprises in China and the chaebols in South Korea.
When it comes to the cost of starting a business, India is off the charts — ranked 173rd out of 189 countries, according to the World Bank — compared with the U.S., Germany, the UK and even China. Only China tops India for the amount of time it takes to start a company. India also ranked 130th for the ease of doing business, behind the notoriously difficult Russia (51st) and Brazil (116th). Even China, at No. 84, ranks higher.
Opening the economy to entrepreneurs remains a long-run challenge for India, as does the education of hundreds of millions of students. About 90 percent of children enter school but more than half drop out before completing high school. Cheating on tests and bribing teachers for passing grades is rampant.
China is moving slowly to open its financial and currency markets to foreigners. The yuan, however, remains tightly controlled. It’s allowed to appreciate in good times but is held stable whenever the economy is weak. The rupee, by contrast, has been relatively free of government intervention. The Reserve Bank of India, the central bank, is largely independent of government influence, while the People’s Bank of China is completely government controlled.
In contrast to China’s 36 percent consumer spending component of GDP in 2014, India’s consumers are responsible for 59 percent of the economy, despite an equally high savings rate. This is a better balance in a world where exports and capital spending are no longer the easy route to economic growth for developing countries. India’s exports were a sizable 23 percent of GDP in 2014, and that percentage had risen despite the global recession and slow recovery. Chinese exports, on the other hand, were about the same percentage of GDP — much lower than the 35 percent level in 2006.
Change comes slowly to India, whose culture is heavily influenced by a Hindu philosophy that doesn’t emphasize urgency. Hinduism teaches that after death comes reincarnation in another form of life, so Hindu followers don’t need to get everything accomplished in this life since they can get more done in later lives.
But with improved education, faster deregulation and other reforms, India’s many advantages could translate into higher productivity and faster economic growth than in China. That should be Modi’s message when he visits America next week.