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A Critical Comparison of China and India's Economies: Unveiling Key Insights and Differences

02 Mar 2023,3:57 PM



India and the People's Republic of China are large, geographically neighboring emerging-market economies. However, China's classification as an emerging economy faces rising scholarly and practitioner criticism, given its increasingly significant global economic and political power and integration. From an international perspective, both countries are viewed as two up-and-coming economic powers of global consequence (Brown, 2017). Multiple factors rationalize and justify such a perspective. Combined, the two populous economies currently account for more than one-third of the global population and roughly two-fifths of the world's working population (Morrison, 2019). Over the past decade, India and China have recorded some of the fastest and largest economic growth rates globally (Gechev, 2020). The nations have similarities in additional areas. They "share a long common border, have entrepreneurial trading heritage, enormous internal economic diversity, and significant agricultural sectors" (Das, 2006, p.78). They are ancient cultures with more than five millennia of recorded histories and, thus, occupy the status of ‘cradles of human civilization’ in the current archeological and anthropological research (Das, 2006). The current discussion's core concern is the nation's economic history and current economic status.

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India and China's economic prowess is a topic with an extended historical legacy, given that both nations' historical economic prosperity and prowess date back thousands of years to the remote past. However, various challenges, disruptions, and difficulties characterize both nations' more recent economic history, including a distressful colonization period in India and an extended duration of feudal incompetence resulting in China's economic turmoil (Das, 2006). Notably, “sometime between the mid-18th century and the latter half of the 20th century, the two countries became bywords for” economic stagnation (Das, 2006, p.78). The challenges India and China faced during the period caused their devolvement into some of the poorest countries globally. In addition, they were typically associated with numerous social challenges like disease, famine, pestilence, and economic and cultural backwardness (Brown, 2017). Consequently, by the 1980s, the perception was that China and India’s level of impoverishment were comparable to that of the worst low-income economies.

However, through persistent economic structural reforms, China and India have achieved significant progress and success in mounting a commendable economic recovery. For example, China's average income roughly increased tenfold. At the same time, India has roughly quadrupled, with the corresponding effect of both countries lifting millions of their people out of poverty, notwithstanding the associated increments in income inequality and environmental degradation (The World Bank, 2013; OECD, 2022). China proved to be a superior success in the endeavor, and the differences between the country's experiences and outcomes can be attributed to the fact that they each pursued distinct economic developmental paths (Das, 2006). Nevertheless, the current research studies agree that India's and China's global economic prowess and power are only likely to increase in magnitude and significance in the coming years.

China and India’s economic emergence has significant implications for the rest of the world. The widespread recognition of both countries’ significance informs the interests and the robust scholarly and public policy investigations comparing and contrasting the two economies to answer critical questions related to areas such as the impacts of their distinct economic models and the lessons that other emerging economies can learn from the two nations’ unique and shared economic experience (Das, 2006; Brown, 2017). The current paper furthers this endeavor by critically comparing the two economies’ histories, structures, and international trade.

Critical Analysis

Economic History

China’s Economic History

A comprehensive and critical examination of China's economic history reveals four distinct periods based on the nation's economy's performance and overall economic experience during each period. The periods are ancient China's economic history before 1912, ending with the Qing Dynasty; the period between 1912 and 1949, ending with the rise of the Communist Party of China (CCP) and the CCP's declaration of the republic; the pre-reform era from 1949 to 1979; and the modern era from 1979 to date (Brown, 2017; Das, 2006; Motohashi, 2015; Morrison, 2019). A brief summary of the main distinguishing aspects of each of the four distinct periods follows.

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China’s economy before 1912 was primarily characterized by the rise of Neolithic agriculture and its accompanying artisan and handicraft industries under a feudal system. However, the feudal system later collapsed, paving the way for the rise of a stronger state system and its central coordination of the national economy by 220 AD (Brown, 2017). Subsequent economic reforms that led to the economy’s semi-modernized state by the end of the Qing Dynasty in 1912 included diminishing state control of the economy that allowed for an0 increasingly stronger private enterprise, thereby precipitating enhanced foreign trade and the associated effects like the economy’s monetization by South American and Japanese silver and industrialization through the increased exposure to various technological revolutions.

Subsequently, the period between 1912 and 1949 was largely one of economic turmoil for China, precipitated primarily by international and domestic conflicts. The conflicts of significant consequences for China's economy at the time, including the nation's political disintegration into regional warlords following the Qing Dynasty’s fall and the second Sino-Japanese war between 1937 and 1945 (Motohashi, 2015). Nevertheless, there were periods of relative prosperity during which the government's economic planning included advancing several industrial sectors, particularly those related to the military, constructing transport and communications infrastructure, and stabilizing national budgeting and tax collection.

Once the CCP rose to power in 1949 and declared China a republic, it continued the economic plans and development established during the preceding era of instability (Brown, 2017). The country under Mao Zedong’s leadership, between 1949 and 1978, maintained the central planning or command approach to the national economy, whereby “a large share of the country’s economic output was directed and controlled by the state, which set the production goals, controlled prices, and allocated resources throughout most of the economy” (Morrisson, 2019, p.6). A primary effect of the centralized planning approach utilized in the pre-1979 era that is still visible today consists of the Chinese state-owned enterprises (SOEs), which resulted from the government’s significant investment in human and physical capital during the 1960s to support rapid industrialization. As a result, the SOEs controlled “nearly three-fourths of industrial production” by 1978 (Morrison, 2019, p.6). Finally, modern China’s economic structure is the primary result of the structural economic reforms the Chinese government adopted in 1979 to modernize and globally integrate its economy (Brown, 2017). The Chinese government organized the economic structural reforms into what can be described as three fundamental stages (Morrison, 2019). The stages were opening the country up to foreign investment, privatizing state-owned industries, and opening up to international trade (Morrison, 2019). Multiple research studies attribute the exponential economic growth China subsequently witnessed and currently experiences to this successful economic reform process.

India’s Economic History

Similarly, India's economic history can be divided into three distinct eras based on a comprehensive evaluation of the most significant events and reforms that have characterized its economic development experience. The three eras include the nation's ancient economy, the economy under colonial rule, and the post-colonial or post-independence economy (Brown, 2017). India had a vibrant economy centered on the agricultural and artisan industries of the Indus valley before 1707 AD (Brown, 2017). The current archeological and anthropological evidence suggests that the Indus Valley's civilization appears to have engaged in robust agricultural activity and leveraged early transportation innovations to engage in international trade with Mesopotamia via various water and shipping routes (Brown, 2017). Additional evidence also suggests that India experienced unprecedented economic prosperity during the 15th and 16th centuries and eventually became the largest economy of the ancient medieval world, with an estimated GDP of approximately 25% of the world's economy by the 17th century (Brown, 2017). Subsequently, under British rule from 1757 onwards, the colonial government harnessed the significant revenue generated from India’s robust international trade and trade networks primarily associated with raw materials, spices, and other commodities. The colonial era precipitated India’s transformation from an economy that principally exported raw materials to one that exported raw materials and imported manufactured goods through its numerous trade relationships across Asia, Africa, and Europe (Brown, 2017). Indigo, opium, and raw cotton constituted the country's colonial economy's primary exports. However, the ruthlessness of the colonial era saw India's productivity decline significantly from the colonial era's estimated 25% contribution to the global GDP down to around only 3% during the 1950s (Brown, 2017). India's post-colonial economic development was also slow, and it initially targeted the agricultural and industrial sectors through centralized state planning between 1950 and 1990 (Das, 2006). The country subsequently commenced a reform process of economic liberalization with targeted changes and measures, such as market deregulation and tariff and tax reductions, from 1991 to date (Gechev, 2020). The economic reforms ushered in an era of unprecedented growth that saw India's rise to the fifth-largest global economy today primarily because of increased foreign investment.

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Current Economic Structure

The historical examination above demonstrates that China and India's economic histories share various similarities. Notably, both countries have a robust historical legacy of economic prowess interrupted by similar geopolitical challenges. Additionally, both countries embraced an economic structural reform and liberalization process nearly at the same time to address their inherent economic challenges, including the imperative of integrating into the global economy (Gechev, 2017). However, India and China embraced different economic development models to operationalize their respective economic reform processes. As a result, each focal country's distinct economic development paths and models had significant implications for their respective contemporary economic structures. Their distinct economic development models also influence how each country's current structure impacts the national economic performance.

More specifically, comparing the two economies based on the three-sector economic model enables the current analysis to compare and contrast their respective structural components. India and China have primary, secondary, and tertiary sectors (The World Bank, 2013; RBIA, 2021). However, comparing the structural composition of both countries' GDPs demonstrates that China's economic reform process has been more successful in facilitating economic advancement and development than India's (Gechev, 2020). As figure 1 below, which compares China’s GDP by sector between 1978 and 2017 reveals (Huimin, 2018), China’s GDP growth attributable to the primary and secondary industries has significantly declined by nearly 20% and 8%, respectively, over the period, accompanied by a corresponding expansion tertiary industries by nearly 30%. Conversely, as figure 2 demonstrates, based on the latest statistics from the Reserve Bank of India (RBIA, 2021), China's sectorial GDP composition has remained relatively stagnant in secondary (manufacturing/industry) size over the past ten years. India's current economic structure could be more optimal, particularly because of its overreliance on the secondary and primary sectors (Kaur et al., 2021; RBIA, 2021).

Fig.1: China’s Economic Structure 1978 (Left) versus 2017 (Right)


Fig.2: India’s Economic Structure

Additionally, its primary sector is yet to achieve an efficiency level of comparable standards to China's (Brown, 2017). For instance, the current comparative economic statistics demonstrate that despite its lower share of the GDP, China's agricultural sector, approximately $991 billion GDP makes it the largest contributor to the total global agricultural output ahead of India, which is in second place, with an agricultural activity of roughly $375 billion (Bekkers et al., 2021). The figures and statistics reflect China's superior industrialization outcomes and the better optimization of its economic sectors and industries.

The reform processes adopted by each country and their effects on structure significantly impact China's and India's distinct economic growth dynamics and outcomes. The multiple empirical studies comparing China and India's economic growth since the 1980s as a baseline consistently demonstrate that China's reforms and other aspects of economic planning generated superior productivity and growth effects compared to India's approach and experience (Zhou, 2014; Ghechev, 2021). For example, through an empirical examination of the two economies between 1980 and 2010, Gechev (2020, p. 14) finds that “on average, during the entire 39-year period, China recorded an annual GDP growth (9.51%) that is 3.34 percentage points, or 54% higher than India’s 6.17%.” Filtering the results through the purchasing power parity method significantly increases India's GDP growth performance but still demonstrates a "2.4 times" difference, which is substantial (Gechev, 2020, p.15). The results of the comparison, illustrated in figures 3, 4, and 5 below, illustrate China's superior economic performance compared to India and its overall status as the most significant emerging economy in terms of economic performance.

Fig.3: GDP Comparison


Fig.4: GDP Growth Comparison


Fig.5: GDP Per Capita



However, India’s economy demonstrates a core strength over China’s from the political economy perspective. China and India established and operated completely different political structures underpinning their modern economic systems. Despite the economic liberalization reform process with measures to reduce the state’s control of the economy that China progressively continues to implement since the 1990s, the central government and government relations' influence on the economic system remains significant (Motohashi, 2015). China's political economy is such that private enterprises cannot raise capital, conduct business, or otherwise thrive without significant political connections (Motohashi, 2015). While the approach provides a more stable environment for implementing economic development and foreign investment policies, it harms the economy's international competitiveness, as evidenced by the few numbers of Chinese multinational enterprises that are successful beyond China’s borders (Motohashi, 2015). Conversely, India’s economic system is superior from a free market perspective because it is an economy driven primarily by private enterprise (Motohashi, 2015). The global success of multiple Indian multinational enterprises like Reliance, Tata, and the Birla Group demonstrate India’s economic system’s structural superiority, its higher consistency, and an overall higher level of integration with the wider global free market economy.

International Trade

Of the multiple factors that explain China's superior economic performance compared to India and other developing economies, international trade is arguably the most significant. Of course, the statement above does not preclude the significance of other crucial factors, such as human capital and infrastructure investment (Brown, 2017). However, it warrants a closer comparative evaluation of the two nations' international trade patterns, particularly regarding foreign direct investment (FDI).

More precisely, China's expansion of international trade since 1978 significantly outperforms and outpaces China's, according to the latest data. For example, historical data demonstrates that by as early as 2004, China's global manufacturing export share exceeded 8% while India's was roughly 1% (Tong, 2008). Similarly, China and India's share of international manufacturing imports was approximately 6% and 0.8% (Tong, 2008). The same trend replicates across various dimensions of international trade, including the two nations' differential FDIs (Bhat, 2012; Bussiere & Mehl, 2008). The current research consistently demonstrates that India significantly lags behind China in FDI, including that, as early as 2006, China attracted roughly ten times more FDI than India because of more favorable and liberalized international trade policies (Bhat, 2012). Moreover, Bhechev et al. (2021)’s comprehensive comparative analysis of the two nations’ FDI performance reveals substantial differences in the economies’ FDI inflows, such that “during the 1982-2018 period, China accumulated net FDI inflows of $3.6 trillion, or nearly 7 times more than India’s $492 billion.” China's higher FDI inflows demonstrate its greater integration with the global economy through international trade. Figure 6 below illustrates China’s historical FDI pattern.

The differences in international trade observed above between China and India explain the corresponding differences in economic performance. For example, although the latest figures indicate that India recorded a higher trade share of GDP of 40% compared to China's 37% in 2021, China had higher exports as a GDP of 20% compared to India's 13% (Bekkers et al., 2021). Therefore, Chinese exports' greater contribution to GDP than India precipitates greater GDP and stronger GDP growth. Additionally, the two economies' differences in the FDI's contributions to the GDP also explain a significant proportion of the GDP and GDP growth variances observed between China and India.

Fig.6: China FDI Outflows and Inflows ($ billions 2005-2018)

Source: (Morrison, 2019, p. 16)


Future Outlook

Generally, the comparative analysis above reveals numerous historical and structural economic similarities between the neighboring giant Asian economies of China and India. However, the distinct economic development models that the two countries adopted between the 1980s and 1990s have produced distinct experiences and outcomes. Although the analysis demonstrates that China has been more successful in its economic reform and performance improvement endeavors, the results also demonstrate that India's economic performance has been equally impressive. Therefore, China and India are expected to continue their current growth, development, and performance trajectories if they maintain their current economic development models, ceteris paribus.

Several of the latest studies examining the future implications of China and India's economic development models corroborate the above assertion on the economies' future outlook. The research suggests that the countries' maintenance of their current economic growth and performance trends will eventually become the largest and most powerful economies in the next several decades (OECD, 2022; Benzell et al., 2022). For example, the econometrics analyses by Benzell and colleagues (2022) for the National Bureau of Economic Research projects that China and India's share of the global GDP will increase to 27% and 16% by the year 2100, respectively, thereby displacing the U.S. as the current global leader with a GDP of 16%, which the authors project will witness a decline to 12%. Generally, barring unforeseen constraints, China and India are poised to be the world's future economic giants.

Policy Recommendations

However, to maintain their remarkable economic growth and performance, India and China need to implement further structural reforms to optimize various areas of their respective economies with room for improvement. The potential target areas include balancing external and domestic demand and optimizing their manufacturing and service sectors. As revealed herein, these improvements need an evidence-based and systemic approach both nations possess based on their unique economic development experiences. Specifically, this analysis concludes by recommending that India and China should leverage the learning opportunities available to learn from each other's economic development models and experiences and utilize the knowledge as the basis for implementing feasible and appropriate improvements. For example, India can improve its development strategies by learning from China's approach to the agrarian reforms it implemented to achieve the observed improvements in agricultural productivity. On the other hand, China's economic development model can benefit from lessons regarding India's successful market-based financial sector and the broader economy. The lessons gained from each other's experiences can be instrumental in developing policies that further optimize each nation's economic development model.


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