Source: Global Times Published: 2019-5-13
As the 2019 Indian general election gets underway, there has been discussion about whether India has lagged further behind China over the past five years under the Modi government.
Regardless of whether it is provocative for some Western media to bring up the topic, it is true that in terms of economic development, the gap between China and India has widened, which is mainly determined by the growth momentum of the two economies. The size of the Chinese economy was $13.6 trillion in 2018, while that of India's was around $2.8 trillion. If India wants to narrow the gap with China in the size of its economy, its annual economic growth must be several times the Chinese growth rate. That's very unlikely for India, considering China's still relatively fast growth pace.
Moreover, while Indian GDP growth rates reached 6.7 percent and above over the past five years from 2014 to 2018, statistical reasons may have affected the data. Since the Modi government has changed the statistical methodology and the base year for calculating GDP, there has always been skepticism surrounding the new growth statistics. Even the former governor of India's central bank Raghuram Rajan once raised questions about the new statistical method. In fact, if using the original statistical method, the economic growth during the Modi period would be basically at the same level as that during the former Singh government, or could be slightly higher.
Also, it should be noted that since Modi came to power, the Indian economy has experienced some favorable factors, such as a drop in international oil prices. With imported oil accounting for 80 percent of its total oil demand, India needs to spend heavily on energy imports every year. Meanwhile, fluctuations in international oil prices could also affect domestic inflation. That is to say, during the years under the Modi government, the Indian economy has benefited a lot from global energy prices.
Additionally, there have been lags for reform measures, especially for important policies. In my opinion, the reform measures adopted by Modi will be positive for the Indian economy in the long run. However, since some of the measures were implemented suddenly, like demonetization and the consumption tax reform, they may cause some confusion or even have a certain negative impact on the economy in the short term, which is normal and justified.
From the perspective of the manufacturing sector alone, the gap between the two Asian economies has also been widening. China's industrialization process has evolved from the processing or original equipment manufacturing (OEM) stage to capital-intensive industries and is now aimed at further upgrading and developing technology-intensive industries. By comparison, India has been developing its manufacturing sector in a selective manner. It rejected labor-intensive and high-pollution industries and only accepted investment in industries with relatively high capital and technology requirements. It is because of this selective development that its manufacturing base does not seem very solid.
Generally speaking, the South Asian country still faces some old problems in developing its manufacturing power. For instance, the preferential policies for attracting foreign investment are not fully realized; reforms in labor law and land law are unfinished; infrastructure is underdeveloped; and the quality of the labor force is not very high. All these have caused obstacles for the development of manufacturing. Nevertheless, it is undeniable that India has indeed made significant progress in certain fields.
After introducing policies suppressing smartphones produced in other countries, a large number of smartphone manufacturers have transferred their production lines to the country. Also, India's pharmaceutical industry has been developing fast over the years. But its manufacturing sector as a whole hasn't seen much improvement in the past five years.
At present, the Indian economy relies mainly on the tertiary industry. However, due to the economic downturns in Western countries in recent years, its IT and software contracting sectors have suffered a lot, resulting in mass layoffs in 2017. Moreover, as India's young graduates have struggled to find jobs, the Indian economy under the Modi government actually was growing without employment. Modi used to promise 10 million new jobs each year, but in fact, the unemployment rate remains high.
The Indian elite class has long been aware of the problems with the economy. Although the government is implementing the reforms slowly due to the complicated political system and administrative procedures, it is indeed moving forward. And since pushing forward with the reforms is basically the consensus of the country's two political parties, no matter which party comes to power, as long as the reform measures are continued, India's economy will grow at a faster rate in the future.
The article was compiled based on an interview with Liu Zongyi, a senior fellow of Shanghai Institutes for International Studies, a visiting fellow of the Chongyang Institute for Financial Studies, Renmin University of China and a distinguished fellow of the China (Kunming) South Asia & Southeast Asia Institute.