Had I asked this question ten years ago, the answer would have been clear cut: Impossible. But things are changing. The Chinese economy is five to six times bigger than that of India, but India’s growth rate is clearly higher than that of China, especially since 2022, and there is no expectation this trend will change any time soon. This means that, unless a major shock hits the Indian economy, it will continue to converge in size with that of China for at least 30 years until India completes its urbanization process. Whether this will make the Indian economy bigger than that of China is hard to tell since it will depend on how fast China will decelerate but also how long India will continue to benefit from its current long-hanging fruits to create growth, from urbanization, a growing population and a very favourable external environment as the most obvious hedge for the West against the rise of China.
The speed of China’s structural deceleration is probably the least difficult to predict among all the above uncertainties. China’s growth rate has been coming down since 2010 from over 10% to barely 5%. Since China reached US$10,000 ($13,613.45) per capita in 2019, the deceleration has been faster although masked by a very large volatility in growth stemming from the Covid pandemic. China’s growth at 5% for an economy with an income per capita above US$10,000 is a very good record and, therefore, very hard to beat. Only South Korea grew over 5% on average (5.5% in particular) for the ten years after it reached US$10,000 per capita. In other words, China’s structural deceleration is a normal feature of any economy, which also means that a renewed acceleration of growth would be like defying gravity. Every factor behind potential growth is slowing down in China, from the contribution of labour and labour productivity to the contribution of investment (still oversized at 40% of GDP) and the return of investment coming down for the past 10 years and now at levels similar to any developed economy. Under the current circumstances, i.e., without major structural reforms, China’s growth rate will land at 2.4% by 2035 but will continue to slow, at a much faster rate thereafter as China’s urbanization rate, currently at 60% of total population, will reach that of developed economies at around 75%. As Chinese cities start to suffer from depopulation, China’s growth will come down much faster, hovering around 1% per year, similar to Japan today.
India is a very different story as its recent past proves. With an average growth rate of around 7% for the last 10 years, India is expected to keep it given the very rapid past of urbanization from a much lower level than China today (35% versus 60%), positive population growth as well as a very favourable external environment. In fact, India is expected to become a large magnet of foreign direct investment into manufacturing, as investors search for alternatives to China in an era of great power competition between the US and China. India’s central role in the Indo-Pacific, given its population and GDP size, will keep the US interested in supporting India. This is true for the European Union for a different reason, namely its increasing economic rivalry with China as the two largest exporting engines in the world. All in all, the convergence of the Indian economy with that of China is bound to continue until India reaches China’s economic size by 2050 when it will also double China’s population.
As every projection into the next 30 years, many things can go differently. One big question mark is China’s ability to innovate its way out. China has been increasing its expenditure in research and development to levels similar to developed economies although still much lower than South Korea or the US. Some positive consequences of innovation are increasingly apparent with China’s fast move up the ladder in many industrial sectors as well as some key breakthroughs in key scientific fields. However, this innovation drive does not seem to be generating any productivity gain based on existing data on China’s total factor productivity. This disappointing impact of innovation on China’s productivity, and thereby growth, needs to be traced back to the lack of substantial reforms during the last two decades but also the increasingly difficult environment for the most part of the Chinese economy: the private sector. If we add the much harsher external environment due to the US’s increasing technological containment on China, it seems very difficult to move away from our baseline scenario.
The question, then, is whether the Indian economy can disappoint again. This would not be the first time. Let’s not forget that the Indian economy was as big as that of China in 1950 but excessive planning and government-led industrial policies without a successful agricultural reform led to an underwhelming growth rate for many years, which a severe economic crisis in 1991.
Drawing from China’s experience, India will need to dig deeper on its own “Reform and Opening-Up” agenda. While the Modi administration seems to have gotten the message, especially in its second term, questions remain as to whether a third term for Prime Minister Modi, which seems increasingly likely, will lead to more reform and opening, or less. India is in a sweet spot to attract foreign investment from the West, but also Japan and South Korea. However, Modi’s “India First” policies are pervasive, with a clear tone of self-reliance especially as far as the industrial sector is concerned. Other question marks come from Modi’s social agenda, in particular on the degree of religious inclusion.
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All in all, India seems set to become as large an economy as China by the middle of this century and, most importantly, the ball is on its field as to whether it can achieve it. Having the ball, though, does not equate to winning the match, as China’s path of relentless deceleration demonstrates. No country is big enough to be complacent as to the importance of stepping up structural reform and keeping the economy open to foreign competition, not even India.
Alicia García-Herrero is the chief economist Asia Pacific at Natixis Corporate & Investment Banking
