- 2018-10-08
How does India catch up with China?
India is very important now and will be even more important in the future. India is a democratic country with rapid economic development; and it will soon become the most populous country in the world. Westerners should eagerly hope that India will become a successful template for democratic and market-led development. The important question then is whether the Narendra Modi government, which came to power in May 2014, has played a decisive role in India's economic trajectory. The evidence shows: not yet. However, the reforms implemented by the government may have a significant impact in the next few years.
After India's foreign exchange crisis in 1991, its economic policies and performance have undergone a decisive change. From 1992 to 2017, India’s “reform and opening up” policies similar to those of China increased the average annual growth rate of India’s per capita GDP to nearly 5%. In the years from 1992 to 2007 (inclusive), the five-year moving average growth rate of per capita GDP reached 7.2%, and in the years to 2017, this growth rate fell disappointingly to 5.8%. However, if this growth rate were maintained, India’s per capita GDP would have doubled every 12 years. This will be a transformative development-not just for India, because the United Nations predicts that India's population will reach 1.6 billion (17% of the world's population) by 2040.
The important question is whether India's growth rate will continue to decline, stabilize or rebound. The key issue here is that the investment rate in India has dropped significantly, with the investment-to-GDP ratio falling from a peak of 40% in 2011 to 30% in 2017. If the investment rate remains at 30%, the annual GDP growth rate cannot rise above 8%, let alone achieve a higher growth rate-although the growth rate will not fall below today's growth rate. Looking back, the soaring investment rate in the early 2000s was inherently unsustainable. This situation left a problem: the "dual balance sheet" problem caused by bad debts in banks and many companies.
India’s recently published "Economic Survey" (Economic Survey) analysis concluded that reversing this slowdown in investment related to serious balance sheet problems is a difficult task. The report’s proposed agenda includes cleaning up the non-performing balance sheet (currently in progress). It is also important to take further steps to reduce business costs by "creating a clear, transparent and stable tax and regulatory environment." And whether the government, which abolished most of the currency in circulation overnight, can establish such a stable system, it must be questioned. The newly introduced Goods and Services Tax (GST) is a valuable reform in itself, and the difficulties in its initial implementation have caused further damage.
When Modi delivered a speech at the World Economic Forum's annual meeting in Davos in January, he demonstrated his determination to implement major structural reforms. His agenda is impressive and comprehensive.
The "Economic Survey" believes that the slowdown of the Indian economy in 2016 and early 2017 has been reversed: now the Indian economy is advancing at full speed.
However, based on what has happened so far, a reasonable estimate may be that India’s annual economic growth rate will stabilize between 7% and 8%. This estimate is largely based on the following premise: the global economic environment remains favorable. In short, this year, India should once again take away the title of "the world's fastest-growing large economy" from China.
What about long-term challenges? It is important to remove obstacles to investment growth and encourage savings growth. The Economic Survey also proudly pointed out that in the World Bank's Doing Business 2018 (Doing Business), India jumped 30 places and entered the world's top 100 for the first time. This is indeed the result of reform. However, India is still 22 places behind China. In terms of the effectiveness of contract execution, India also ranked only 164th. This reflects the inefficiency of the Indian legal system (in many ways the same as described in Dickens' novels). India can and should do better.
However, in general, the potential of such a still poor country (its real GDP per capita is about one-eighth that of the United States) in improving policies and institutions should make people believe that India will continue to grow rapidly. However, the "Economic Survey" boldly asked whether there may be a trend now: the gap with the world's wealthiest countries is as many as India today has not caught up. In particular, it pointed out obstacles that did not exist in the past, including: current resistance to globalization (which may slow down export growth); the tendency of industrial growth to peak earlier and earlier in the development process, that is, "premature de-industrialization" ; The challenge of upgrading human resources; and the adverse effects of climate change on agricultural productivity. The key challenge here is education. India still fails to provide adequate education for a large number of children-this will affect the quality of the labor force in the coming decades. The survey also provides sufficient reasons to prove that India should increase scientific research efforts and (especially the private sector) should increase R&D investment.
A notable structural feature of India (which has a meaning far beyond the realm of economics) is that the entire society prefers boys. To make matters worse, these prejudices have not disappeared with the economic boom. Although the treatment of women in India has improved in many ways, the ignorance of patriarchalism still exists. This phenomenon and the social attitudes that led to it must be changed. They are extremely destructive. Economic development is very important, and economic development alone is never enough.