comparing-indian-and-chinese-economy-what-changed-in-30-years

Context: According to the World Bank data, India’s per capita income is about a fifth of China’s as of 2019. 

Background:

  • Situation in 1990: The per capita income of China was $318, while that of India’s was slightly greater at $368. Per capita income is the average income of a citizen of a country. 
  • Market reforms in China: China’s economy took off in the 1990s, thanks to market liberalization transforming it into an industrial powerhouse from a largely agrarian society. Since then the per capita income of China has surpassed that of India. 
  • Situation today: According to the Chinese National Bureau of Statistics, China’s per capita income was $10,276 in 2019, having crossed the$10,000-mark for the first time. The per capita income of India, however, was around a fifth of that.

India-China gap growth:

  • Chinese exports took off in the early 1990s: The country emerged as the outsourcing hub for manufacturing for large parts of the western world, allowing companies to drastically cut costs. 
    • In 2018, Chinese exports stood at $2.64 trillion against India’s $0.54 trillion. 
    • A major part of the jump in Chinese exports was a result of its companies becoming a key part of the global supply chains of large western companies. 
    • Indian companies missed out on this and are still trying to catch up. 
  • Better physical infrastructure in China: The overall physical infrastructure available was also clearly better in China, prompting the western companies to go there.

Good performers in India:

  • Services sector: In the last three decades, India has done fairly well in services exports. In 2018, China’s services exports were at $233.6 billion, while those of India were around$205 billion. The gap has been reducing over the last decade.
  • Reason for this performance:
    • This has primarily been due to software exports, which have grown constantly over the last few decades. Software exports have grown because of visionary entrepreneurs.
    • Less government interference: It took time to the government to realize  what  was  happening in the sector, and hence could not hold it back through its interference. 
      • In a few states, the government even supported software entrepreneurs.

Poor performer in India: The manufacturing sector:

  • The manufacturing sector could not match the pace of the services sector except for a few sectors such as two-wheelers. 
  • Many companies remained stuck in the import-substitution era that prevailed before the 1990s. Hence, they could not compete on the global front or even with foreign firms within India. This is why India imports even basic products. 
  • Today, 97% of goods imported from China are manufactured products.

Import-substitution era

  • Post-Independence India adopted the policy of import substitution by imposing heavy tariffs on import duty. 
  • Import substitution is a strategy under trade policy that abolishes the import of foreign products and encourages for the production in the domestic market
  • The purpose of this policy is to change the economic structure of the country by replacing foreign goods with domestic goods. 


Source: https://www.livemint.com/news/india/the-tale-of-two-economies-what-changed-in-30-years-11592930762996.html