Tuesday, May 19, 2015

Perceptions Drive Policy: India-China Reality


      Perceptions drive policy.  This is also true of India’s China policy. What are Indian’s perceptions of China? Leaving aside the history of the border conflict, these perceptions are driven largely by knowledge of (or lack thereof) of the economic performance of the Chinese and Indian economies. I find that most Indians who take an interest in China, fall largely into two camps: One who think of China as a super achiever, the country equivalent of a superman. The people who fall into this group are generally either overawed or intimidated by China and have a defeatist attitude for India viz China.   The second camp is the opposite of the first one.  It is generally disparaging and dismissive of China’s achievements while exaggerating of India’s achievement and/or capabilities. By thinking that all we have do is have different govt., or change our objectives, or show the will, and we will grow fast and catch up in a jiffy. It sometimes verges on dangerous bravado.  In my view both these perceptions are equally problematic when it comes to defining India’s China policy. A foreign policy that furthers and promotes India’s interest must be based on a realistic appraisal of India’s position vis-à-vis China. This essay tries to present such an appraisal.

China: Superman or Iron Man?

     What are the arguments for the super-country view of China? China’s economy has averaged a growth rate of almost 10% per annum over a period of 30 years, the fastest and longest duration of sustained high growth rate seen in history.  In 2013 Chinese economy was 5 times the size of the Indian economy, in current US$ dollars, but equal in size of to the US economy in Purchasing Power parity terms.   Actually, China’s economy is about half the size of the US economy in current US$ terms but it is easy to fall into the practice of changing  metrics to suit ones argument.  This subtle exaggeration is also true of Western analysts who are pushing a G2 approach to US policy and the World order.

Good Luck & Good Governance?

      What are the kind of arguments on the other side?  China’s  per capita GDP in current US$ terms was about the same as India’s at the beginning of the 1990s. More precisely it was 0.84 of India’s US$ GDP in 1990 and 1.06 times India’s US$GDP in 1991. Even though China’s GDP was higher in 1990 (1.1x) and 1991 (1.4x), that was because of its larger population. This population differential is, however, projected by the UN, to end in 2025. The population differential and the consequent GDP differential have been around for several millennia, but should dis-appear in a decade.  Thereafter the game will be solely one of Per capita GDP. There is nothing inherently superior about the Chinese viz Indian’s that we can’t go back to the per capita GDP parity that prevailed in 1990-91, if we have the will and make the effort.  An important reason for the 9% average Per capita GDP growth of the Chinese economy since 1990 was the Geo-economic support that China got from the US, Europe and Japan, and which the Chinese Communist Party cleverly used to implement its (version of the) export led development model.  It did this by always telling foreigners what they wanted to hear (about free markets and private enterprise), while rigorously controlling & modulating the access of foreign analysts and experts to hard and soft data.

Reality of India viz China

   The reality is revealed by a careful appraisal of the real GDP of the two countries. The only way to compare the welfare of the people of different countries is in terms of their per capita GDP (income or consumption) in terms of Purchasing power parity(PPP). AS total GDP is population times per capita GDP(PcGdp) or PcGdp is derived from GDP by dividing it by population, GDP measured in purchasing power parity is also the logical way to compare the size of  GDP.  In 2013 India’s GdpPpp was 40% of China’s or inversely China’s GDP was 2.4 times that of India’s.  If China’s GDP was converted to USD in 2013 it would have got five times the US dollars that India would get from converting its 2013 GDP into USD.  However, if these dollars were used by the Chinese to convert into to Indian rupees, it would be able to buy in India real goods & services equal to 2.4 times the real Goods and Services it could have bought in China. Similarly if India used its entire 2013 GDP to convert into Chinese Renminbi in 2013 it could buy Goods and services in China equivalent to 40% of what it could have in India, double the 20% suggested by 2013 exchange rates.

Relative size

     That is one basic reality: China’s real economy is about 2.4 times that of India, or inversely India’s real economy is about 40% the size of China’s.  As China’s GDP at PPP was about the same as India’s in 1985, it took thirty years for China to open this gap.[1] During this period Chinas growth rate (9.9%) averaged 3.4% points more than the 6.5% average Indian GDP growth rate. As people some time confuse GDP with per capita GDP, the corresponding facts are as follows: China’s real per capita GDP, which was equal to India’s in 1992 (0.99) had become 2.2 times India’s per capita GDP (PPP) by 2013. The average growth rate of per capita GDP from 1990 to 2013 was 9% for China and 4.8% for India. It thus took, 25 years for a per capita growth difference of 4.2% per year to translate into a per capita income difference  of 2.2 times. 
       By way of benchmark, note that China’s GDP at PPP is now almost equal to that of USA, even though its Per Capita GDP at PPP (PcGdpPpp)  is only about 22% of US( because its population is 4.3 times).  India’s GDP is therefore also 40% of the US, while its per capita GDP is 10% of the US.

Growth Differential

The second basic reality is that the difference in the growth rates of China and India has been narrowing during this period 1990 to 2013. Thus estimating and plotting the GDP “growth differential” and introducing a linear trend through it shows that the “growth differential” has declined by about 0.16 per cent point per year.   The per capita GDP growth differential has narrowed at the slightly slower rate of 0.15 per cent point per year. Those concerned about the new Indian data with base 2011, should be reassured that this narrowing trend was clear in the old data available up to 2013-14.  If we extend this data to include the forecast growth for 2015, we see a sharp narrowing of the GDP growth differential suggesting that the China’s growth trend will go below India’s from 2016 (actual GDP growth is virtually equal in 2014).
    Along with the GDP Gap, have been the narrowing of the gap is several ratios, known to be correlated to per capita GDP growth.  These include the Export/GDP, Import/GDP and FDI/GDP ratios. The faster growth of exports of goods and services, their imports and FDI, may in fact be driving the narrowing of the per capita GDP growth gap.

Appraisal & Projection

    A realistic appraisal of the relative position of India viz China and how we got there also provides a basis for projecting into the future.  Thus it took about 22 years for China’s real per capita GDP to become 2.2 times that of India’s with an average per capita GDP growth differential of around 4.2% per year.  Given relative population growth rates, it took about 28 years for China’s real GDP to become 2.4 times India’s with an average GDP growth differential of about 3.4% per year. If India’s average GDP growth averages about 3.4% points more than China’s, India’s GDP will take between 25 to 30 years to catch up to, and become equal to that of, China.   Thus for instance if India is able to accelerate growth to an average of 8.5%, while China’s growth slows to about  5%, it would take about 28 years to close the gap. This is however an optimistic projection from India’s perspective.
    A more realistic scenario would be for both Indian and Chinese growth rates to decline gradually, with Indian GDP growth averaging about 2.3% points higher than China over several decades. Based on this scenario, a realistic objective for Indian Growth and development would be to target an elimination of the GDP PPP gap with China by 2050.  Though this is a generational challenge it is far from impossible one.
   Adding a growth projection for USA to this scenario, suggests that the GDP at PPP of both India and China would in 2050 be about 2.5 times that of the USA, even though their per capita GdpPpp would still be 2/3rd and 3/4th (respectively) of the USA’s.
A version of this note appeared in Economic Times Blogs under the title, “Perceptions Drive Policy” on May 19, 2015 at http://blogs.economictimes.indiatimes.com/PolicyAnalysis/relative-size-of-china-and-india/

[1] Unless otherwise indicated, all data used is from the World Development Indicators data base of the World Bank. As pre-1990 GDP PPP data has been removed from the WDI, we use IMF data for GDP PPP for 1980-89.

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