By Liu Dian, Chen Xinran Source: China Matters Published: 2017-8-23
Since Narendra Modi came to power and launched his program of intensive domestic reform, India`s economy has made massive strides forward. The country`s economic performance in recent years is really striking. The Indian government has gone so far as claiming that its economy has "outpaced China".
However, some of the economic statistics published this year are noteworthy.
GDP growth for the first half was 6.1% this year, far lower than the expected 7.1%, while the Purchasing Managers` Index slumped to 46 in July from 52.7 in June.
The index of core service industry activity has dropped from 53.1% to 45.9%, which was below the target and the lowest index rating since September of 2013.
India`s CPI growth rate slowed down to 1.54% in June, which was far lower than the inflation target of 4% set by the central bank. On August 2nd, the Central Bank of India was compelled to reduce the interest rate and lower the repo rate from 6.25% to 6% — the lowest in 7 years — in an attempt to give a boost to the economy.
These latest statistics have shown a trend of weakening in the India economy. Reuters said that India lost fastest growing economy tag. The reasons for all of this can be discerned from the role the Indian economy plays in the global industry chain.
India`s role in the global division of labor
With the advance of globalization in recent years, industrial transfer from western developed countries has provided opportunities for developing countries to industrialize and boost economic growth.
Affected by this industrial hollowing-out, the inflation of the fictitious economy in developed countries has worsened steadily. Real economic growth in the developed countries has been generally weak since the outbreak of the global financial crisis in 2008.
In contrast, the overall economic growth in developing countries remains high. Among these, China and India are growing fastest, with GDP growth rates that are around double the world average.
As representatives of the emerging developing countries, China and India both offer many regional advantages to industrial transfer, hence have become the main beneficiaries. But in contrast to China, which is well-known for the complete range of its manufacturing sector, India is limited by its national conditions and can only cope with lower and middle reaches of the service industry. As a result, Call Center Services and IT and software development have become the main outsourced industries in India and constitute its regional strength.
In addition to several world-renowned IT companies like Infosys, a number of leading figures in the field such as Satya Nadella, the CEO of Microsoft, and Sundar Pichai, the CEO of Google, also come from India. A strategy of giving priority to the lower-end service sector has made India "the world`s back office".
The "upside-down" economic model impedes industrial upgrading
As an economy develops and its national per capita income rises, the structure of industrial development should proceed as follows: the share of national income and the labor force provided by primary industry (principally agriculture) should gradually decrease; the share of national income and the labor force provided by secondary industry (manufacturing) should rise; as the economy attains further development the share of national income and the labor force provided by tertiary industry (services) should rise along with it.
In fact, India`s economy has followed a quite different path. The majority of India`s industrial activity comes from western industrial transfer and outsourced service industries. According to statistics from the World Bank, the share of the service industry in India`s GDP rose from 38% in 1980 to 53.8% in 2016.
Meanwhile, the share of traditional industry rose from 22% in 1980 to 28.8% in 2016 – a sharp contrast to the surging service sector which makes India`s economy something of an "upside-down" model.
This economic model has created turbulence in India`s ongoing economic development. Skipping the industrialization phase has caused a detachment between primary and secondary industry, and tertiary. Without sufficient material wealth to support a higher level of consumption, the tertiary industry cannot drive the national economic growth adequately.
China started its own economic growth from scratch, upgrading and optimizing its industrial structure step by step. In contrast, India has chosen the high-salary job approach, grafting a modern western service industry directly onto the base of a backward agricultural country. This has caused long-term lopsided development in its economic structure, with its domestic pillar industries relying heavily on external impetus, while its domestic market potential cannot be readily stimulated. All this creates an intensive instability in the Indian economy.
World economic growth in recent years has generally been slow. The western countries who occupy the upper echelons of the service sector are facing a hard time themselves, hence outsourcing work has been severely constrained, to the detriment of "the worker", India. Bangalore, a city which whose development has been based on outsourced international IT services, is forecast to have 100,000 people facing unemployment this year, with IT companies transferring their bases overseas.
Moreover, the high value-added tertiary industry is very much dependent on human capital and talents, which in turn, depends heavily on education and basic research. As a result, only a fraction of India`s workforce can upgrade their qualifications in the process of modernization and participate in global industry chain as "skilled workers".
Based on available data, the total Indian workforce in IT and related fields, numbers only 10 million, which is a small number to provide support to the country`s overall population of 1.3 billion. Most of India`s workers remain trapped in pre-industrial activity, and it is difficult for them to promote general industrialization and the modernization of society.
"Dragon VS. Elephant" — in the "new mediocre" age
India and China are the two fastest growing economies in the world. They have attracted international attention in this age of the "new mediocre".
Even though the high speed development of software and related services has brought India international acclaim, their economic contribution has been overstated. IT contributes at most 5% to India`s GDP, which is far less than the contribution of manufacturing exports in China.
Due to its upside-down economic structure, inadequate infrastructure, low trade-friendliness, and the absence of a strong industrial base as support, foreign investment in India has been falling, making India steadily less competitive than China.
The industrial base that China created over a period of more than 30 years before reform and opening-up has enabled it to seize development opportunities more effectively. China started accepting western industrial transfer in the 1980s, and made manufacturing exports the key element from the beginning, using these to propel domestic economic growth and promote the optimization and upgrading of the industrial structural.
More recently, the Chinese government has started to implement a mix of measures, including innovative macro-control, releasing market vitality by streamlining government and delegating authority, and stimulating innovation and entrepreneurship throughout society. All these measures have achieved outstanding results.
China`s economy has already become the main driving force of world economic growth. In 2016, China`s contribution to world economic growth reached 33.2%, while its economic aggregate represented around 15% of the world GDP. In contrast, India represented only 2.8%, leaving a significant gap to be plugged if it is to return to its highest historical ratio of 3.4%, reached in 1964.
Since the launch of the Belt and Road Initiative, the principles of mutual discussion, building jointly, and sharing benefits equally have won worldwide approval. In contrast, India has made the unwise decision to shift its focus to external conflict, to the detriment of its domestic economic development.
The competition between "the Dragon" and "the Elephant" provides a clear image of which is more successful as time goes on. What India needs to do is to recognize its own role and recognize its development gap with other countries. India needs to realize the industrialization as the backbone of the national economy and waste no time catching up in building a comprehensive industrial system. An upside-down economic structure cannot support India`s long-term development.
Liu Dian is assistant research fellow of Chongyang Institute for Financial Studies at Renmin University of China, Chen Xinran is intern researcher of Chongyang Institute for Financial Studies at Renmin University of China.