Is India the New China? Economists Muse On College WhatsApp Group

Thanks to our middle-income trap, I do not believe that we have even half a chance of becoming the “next China”.

Is India the New China?
I was startled to see this question pop up on my highly erudite St Stephen’s Class of Economics 1982 WhatsApp group. Perhaps a dear classmate was being sarcastic or playing a prank, because nobody has bothered with such trivia in over a decade now. Yes, I concede this was the hot question around 2008, when America was collapsing, China was scalding under debt, and India was charming with three years of back-to-back 9 percent real GDP growth. But then, America recovered, China steadied, and we lost our way in a quagmire of inflation/corruption – so the India/China question died a quick death.

Still, I curiously clicked on the link, and was transported to UBS’s latest Shifting Asia report which has tried to resurrect this long-forgotten enquiry. I was immediately tempted to share Ghalib’s immortal lines with the report’s foreign author:

“I know the truth of what you call ‘heaven’;
Though, please your heart with this happy illusion.”

India’s “Reform Story” Stuck in a Time Warp

To be extra fair, I scanned the report for new clues/perspectives that the author may have unearthed. Alas, uncannily, the laundry list of India’s fabled “strengths” was exactly as in 2007/8:

• Youthful population, demographic bulge;
• Services sector led by information technology;
• A hugely-underperforming-therefore-high-upside-potential manufacturing;
• A woeful-therefore-much-to-improve infrastructure;
• Terrible-therefore-can’t-get-worse-health/education social indicators;
• Fantastic potential to unlock value via privatisation of state-owned banks and public sector companies, but heck, there’s no political consensus, so it’s near-impossible;
• A large middle class and domestic market;
• Etc etc etc

Besides a couple of recent milestones – like the rise of a digital economy, and the creation of an Insolvency/Bankruptcy Code – India’s “reform story” continues to sound like an ole’ record stuck in a time warp, circa 2008.

So, is this revival of the India/China equation just another flight of fancy?

Now now, I don’t want to sound like a crusty critic – after all, I had excitedly written a book on this very theme, Superpower? The Amazing Race Between China’s Hare and India’s Tortoise (Penguin Allen Lane, 2010). Perhaps I should go back to those notes to find some fact which could be revisited? A fact that may better inform the attempted resurrection of the India/China debate?

India has Fallen Behind China by Another Half-Decade

One of the remarkable points I had noted was how India was “merely lagging China by a decade”. To amplify, China had become a trillion-dollar economy in 1998, and India hit that mark in 2007. Even more remarkably, India had begun to grow faster than China on a key parameter – remember, in those go-go years of high inflation and high growth, our nominal GDP was tearing away at 13-15 percent, while a debt-laden China was staring at single digits. My hypothesis was simple (and rather “simplistic” in hindsight): India would reform aggressively to become productive, tame inflation, and streak ahead of China in real terms too. However, that never happened. We never repaired banks’ balance sheets groaning under bad assets, hardly did anything to improve productivity, and got trapped in rent-seeking state policies.

So now, if we re-calibrate our “inter-se time lag”, China crossed 3 trillion dollars in 2006, while we would have (without covid-19) done it this year – unfortunately, the “mere one-decade lag” has now become a “fifteen-year lead” for China. Clearly, they’ve raced ahead of us by another half-decade, while we have been standing still (on a relative scale).

Worse, China’s lead is accelerating, since we are lumbering behind on both nominal and real GDP growth now.

Is Statist India Caught in a Middle-Income Trap?

So when my squash-buddy from college, Arup Raha, who miraculously (just kidding!) also became a fine economist with stints at UBS, Citi and BNP Paribas (his current assignment), asked me to respond on the WhatsApp group, I let fly (it’s quite amazing how even after four decades, one likes to show off before college mates).

I wrote:

I am unfortunately convinced that India shall remain in the middle-income trap - so I do not believe that we have even half a chance of ever becoming the “next China”. And even more unfortunately, the reasons are more political/sociological, than economic. Politically, we have a debilitating, business-strangling creep of state power, which is neither China’s aggressive state capitalism, nor Europe’s enlightened democratic socialism. It’s a uniquely Indian “deep, endemic suspicion of competitive markets and urge to control”.

Sociologically, I’ve come to an even more sobering conclusion - guess who is even more statist than the state? It’s the ordinary Indian, who is simply not as aspirational (leave out those who are well-off, or “think in English”) - I reckon decades of poverty and state control have created a nationwide Stockholm Syndrome where the chronically poor Indian has begun to trust a dysfunctional state, which only gives the state more grist to be dysfunctional. All other institutions - from the judiciary to the media - have capitulated before this dysfunctional state. Add religious/majoritarian chauvinism, and the picture gets completely blotted.

So, we are where we are ... and shall, unfortunately, stay close to this perimeter in the coming decades ... slow, grinding growth, but pretty much within a middle-income trap.

I am sure many of you will disagree; and I pray and hope I am completely wrong here.

Not too many people in the group reacted to my outburst. A few pushed back mildly, saying perhaps we should not make the mistake of projecting from the past; that perhaps we’ve reached a new point of inflexion. They clearly sounded far more optimistic than I did.

Since Arup had instigated the whole thing, he owed it to the group to round it off, which he did with unexpectedly (kidding again!) mature intellect:

Thanks Raghav. Excellent stuff as always. It's really not fair comparing China and India. China's per capita income is close to 5 times India's and it is at a different stage of development.

It is much too pre-mature to discuss the middle-income trap w.r.t to India. If you consider World Bank's income classification, India is still a low middle-income country. It needs to approximately double its per capita income to even be considered a high middle-income country. The middle-income barrier or trap is at 6 times our current per capita income.

India has all the necessary ingredients for strong growth -- good demographics, an ambitious youth, high savings, strong institutions, and improved macroeconomic stability. Infrastructure building and skills development is crucial. Much will depend on governance.

Let me end with a little secret that I am not proud of at all. Five times out of six, Arup would clobber me on the squash court. I now hope his economic prediction smothers mine as ruthlessly!