No Leapfrogging in Sight

Why in News?

• As per Moody’s, the Indian economy has recently crossed $3.5 trillion in size. The IMF expects it to exceed $3.7 trillion this year.
• Currently, Indian economy's size is about that of China in 2007. But without a spur to manufacturing, it will be extremely difficult for India to follow China's growth trajectory.

 

A Comparison of Chinese and Indian Economy

• A decade and a half ago, China had a per capita income of $2,694, while the IMF expects India’s per capita income to rise from $2,379 in 2022 to $2,601 in 2023.
• According to World Bank, India’s gross domestic product was 64% of China’s in 1980.
• By 2001 when China joined the World Trade Organization, India’s economy was only 28% as large as China’s.
• And, despite several years of rapid growth in the 21st century, by 2021 India’s economy had fallen even further behind and equalled only 17% of the Chinese economy. 

 

Points of Divergence between Indian and Chinese Economy: Different Drivers of Growth

• Investments and Exports
  • China’s meteoric rise has been driven by investments and exports.
  • Between 2003 and 2011, the country’s investment to GDP ratio (gross fixed capital formation) averaged 40 per cent.
  • In comparison, even during this high growth phase, the investment ratio in India averaged only around 33 per cent. Worryingly, the gap between the two countries has widened since.
  • In the years from 2012 to 2021, as the Chinese economy pulled further away, its investment ratio climbed even higher, averaging almost 43 per cent. In India, it fell to around 29 per cent as the investment momentum tapered off.
  • In 2022-23, India’s exports of goods and services surpassed $770 billion, while imports were around $890 billion.
  • In 2007, when the Chinese economy was of comparable size, the country’s exports had crossed $1.2 trillion, driven by exports of goods not services, while imports stood at $950 billion, signalling its deeper integration with the global economy.
  • Between 2007 and 2021, China’s exports averaged about 24 per cent of GDP. While India’s exports have averaged roughly 21 per cent over this period, they were almost stagnant at around 19 per cent between 2015 and 2020.
• Tariff Rates
  • China’s emergence as the epicentre of global supply chains over the decades has been facilitated in part by the lowering of tariffs.
  • The country’s tariff rate (simple mean) fell from 10.69 per cent in 2003 to 8.93 per cent in 2007, declining further to 5.32 per cent in 2020.
  • In comparison, while India’s tariff rate fell from 25.63 per cent in 2003 to 8.88 per cent in 2017, it has risen thereafter.
• High Participation of Female Labour Force
  • China also had and continues to have a considerably higher labour force participation rate.
  • In 2007, its labour force participation stood at almost 73 per cent (ages 15 and above).It has since declined to 67 per cent.
  • In India, the participation rate is estimated at around 50 per cent in 2022.
  • As the male labour force participation rate in both countries is roughly the same, the difference is largely due to female participation.
  • In China, the female labour force participation rate stood at 66 per cent in 2007. By 2022, it had declined to 61 per cent.
  • In India, it was considerably lower at 30 per cent in 2007, and has since fallen even further to 24 per cent in 2022.

 

Challenges for Indian Economy

• Employment Generation for Agriculture Dependent Labour Force
  • In China, the labour force employed in agriculture fell by roughly 1.5 percentage points per year between 2003 and 2019 (prior to the pandemic).
  • In India, it declined by around 1 percentage point.
  • Considering India’s labour force in agriculture continues to fall at its pre-pandemic pace over the coming decade the challenge before Indian economy is where they will be employed.
• Semi-Skilled Employment in Manufacturing Sector
  • In the past, the bulk of jobs in India have been created, not in manufacturing, but in construction and services like trade and transport.
  • However, as formal manufacturing is much more productive than these sectors — it is twice as productive as transport, 2.5 times more productive than trade, and 3.75 times more productive than construction
  • The lack of employment generation in this sector has been and still remains India’s biggest growth challenge.
• Export of Goods
  • Though exports, especially of services, have picked up over the past few years whether this momentum be sustained is a question.
  • Goods exports also need to pick the pace of services exports. This will have implications for job creation and the broader economy.

 

What Indian Economy Needs to Compete with China?

• Increase Participation of Female Labour Force
  • A higher labour force participation rate and an expansion of the market will necessarily require female participation to increase in India.
  • A bigger labour force has implications for spending capacity. For example, passenger car sales in India stood at 3.8 million in 2022-23. In comparison, in 2007, 6.3 million cars were sold in China.
• Mass Production
  • To make India an economic power, we need to do mass production. It will help achieve cost leadership and beat China’s pricing.
  • Around 80% of air conditioners, 70% of mobile sets, 60% of shoes, 74% of solar cells and 60% of premium luxury branded products in the world are now being manufactured in China.
  • We need to build clusters for that—and a one district one product strategy where MSMEs can share technology, expertise, and labour, and bring efficiency for mass production.
• Skilling of Workforce
  • To have an edge on China or compete with China, India needs to impart skill development on a very large scale.
  • People transitioning from agriculture to industries need better skills. It will help them to find better opportunities.
• Diplomatic Strength
  • This is one area where it is not understood why India should have an asymmetry in power.
  • India needs to develop business skills in its diplomats.
  • We need to skill and re-skill them to focus and achieve both strategic and business goals from the relations with the countries they are stationed in.

 

Conclusion

• Despite China’s runaway economic growth, there are possibilities for India to achieve extremely rapid growth over the next 20 years or soto compete directly with China.
• India needs to fix some basic problems; labour force participation, tariffs, skilling workforce, etc.

 

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Q1) What's the reason behind the huge trade deficit between India and China?

India is heavily dependent on Chinese goods, as it imports a significant amount of raw materials and finished products from China. This includes items such as machinery, electronics, and chemicals. There are several non-tariff barriers to trade between India and China, including complex regulatory requirements, intellectual property rights violations, and lack of transparency in business dealings. These barriers can make it difficult for Indian businesses to access the Chinese market and compete with Chinese firms.

 

Q2) What is RCEP? 

The Regional Comprehensive Economic Partnership (RCEP) is a proposed agreement between the member states of the Association of Southeast Asian Nations (Asean) and its free trade agreement (FTA) partners. The pact aims to cover trade in goods and services, intellectual property, etc.

 

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Source: The Indian Express