India Is Not the New China, at Least Not Yet
India has the second largest population in the world, about 18% of all people one the planet. The main reason many people compare India and China is that they are the two most populated countries in the world. Recently, the Indian economy has begun growing faster while China’s fierce growth has begun to wane. While often compared, the two countries have some significant differences.
Stock market liquidity has been an issue in India
When I was working on my PhD dissertation one of the steps I went through was to calculate what percent of the stocks in the China and India markets were large and liquid. The objective was to determine what stocks were investable from the perspective of an international institutional investor.
My conclusion was that 90% of the stocks in the Chinese market were large and liquid while only 10% of the stocks in India’s market were such. This can mainly be explained by the uniqueness of the Chinese market where almost all listed companies were government-owned companies that had their large government stakes sold into the market. India’s market is more like others in the region with most stocks in the market originating as family businesses, hence the families want to maintain as much control as possible.
Regulators across Asia are trying to push listed companies to have more free float, but since this usually means the family would have to sell a portion of their shares, it’s an uphill battle. The end result for India is that in this vast country, there are only about 300 stocks which an international institutional investor can freely invest in. This makes it a small stock market in a massive country.
India has the second largest population in the world
At 1.3bn people, India’s population is just slightly lower than China’s 1.4bn. With this large population and growing level of education, India could and should be the next growth driver for the global economy. From 2000 to 2016 India’s population growth was nearly three times that of China. And according to some forecasters, this will continue meaning that by 2050 India’s population will be 1.7bn vs. China’s population of 1.3bn, down slightly from 2016. No country can grow forever—but even if this forecast were half right, India will find its place in the future as the world’s most populous country.
The India versus China comparison
The reason many people compare India and China is simply that they’re the two most populated countries in the world and are both in Asia. Forecasting the future is always hard, so the easiest way to get an idea is to look back at history. So then if we would like to discuss the next market that becomes a significant player in the global economy, India naturally comes to mind. I do, however, also believe there are differences. One example is cultural heritage. Another is the focus of the economy.
The Indian economy has begun to grow faster than the Chinese economy
In 2015, the Indian economy grew at 7.6%, compared to China at 6.9%. However, keep in mind that India’s GDP was only 19% of the Chinese GDP in 2015. The difference in GDP growth rates needs to differ a lot and for a long time until the size of the Indian economy is close to that of China. Also, the inflation rate in India is about four times higher than that in China, which is important to deal with for India to grow in real terms. Though both countries have a similar size population, the difference between economies leads to a significant difference for the average Indian and the average Chinese citizen. GDP per capita in 2015 stood at US$1,598 in India but US$ 8,028 in China.
India focuses on services and China on manufacturing
The main contributor to Chinese GDP is the industrial sector. In India, it’s the service sector. The traditional development of an economy is to start from agriculture, move to industrial growth and then on to services. India has, more so than China, moved from being dependent on agriculture to services and less focused on the industrial sector. One thing to keep in mind is that as China feels competition from smaller countries with lower labor costs, India faces competition as a service hub from the Philippines.
Today, India has close to 20% of its GDP coming from the agricultural sector, while China has less than 10%. I think we’ll see the rapid growth for India when people in agriculture start moving to other sectors.
India is likely to soon become the most populous country in the world
The Indian population is likely to soon surpass China, as the population growth rate in India is twice as large. Much of this can be explained by China’s one-child policy, which has restricted the population growth.
India has a higher age-dependency ratio at 52% versus 37% in China. In general terms, a lower ratio is better, as it shows how many children and retirees are dependent on the productive part of the working-age population (15-64 years old). However, as economies develop, life expectancy usually increases and elderly dependents increase. This is also the case in China where the life expectancy in 2014 stood at 75 years compared to India at 68 years.
An aging population, together with a lower share of births, could cause an issue for China in the future, as there will be fewer people in the labor force taking care of the elderly population. India’s main population challenge may be its large size and low per capita income.
Socialist equality versus caste system
At least in theory, one would assume that socialist China should be significantly more equal in terms of economic and gender equality than in India with its caste system. The GINI index measures income or wealth distribution in a country and is used as a measure for income inequality, where 0 means perfect equality and 100 is maximum inequality.
In a working paper from 2011, UNICEF estimated that the average GINI index in Asia in 2008 was around 40 compared to high-income countries at 31. Considering the GINI index in China stood at 42 in 2012 and at 35 in India in 2011, the theory about socialism creating equality may not hold true or maybe the increase in GDP of any country will naturally cause the GINI index to rise.
However, if we look at gender equality and define it as female labor participation, China would win this battle. In China, 44% of the total labor force is female compared to only 24% in India. The total labor participation rate, i.e. the share of the working-age population that is working, is also much higher in China at 71% compared to 53% in India. This could have to do with the shift to urbanization in China and the massive improvements in crop yields and overall agricultural efficiency.
These facts illustrate both the challenges and opportunities for India. By increasing labor participation, and especially female labor participation, more productive people in India would be a catalyst for economic growth.
One challenge for India is the relatively low literacy rate among adults—only 72% compared to China at 96%. The literacy rate provides an idea about the educational level in a society, and clearly India has quite a lot of room to catch up with China here. The difference between male and female literacy also differs a lot more in India, where male literacy is 81% and female literacy is 63%. This compares to China, where it’s 98% and 95%, respectively.
While often compared, India and China still differ measurably
As I’ve shown above, India and China still differ substantially. Part of the differences are owed to the stages of development, as the Indian economy was only 19% the size of the Chinese economy, according to 2015 GDP. Indian GDP growth would need to grow at a relatively faster rate than China for a long time to make up the difference.
Opportunities for India lie in increasing movement of labor away from the agricultural sector, increasing overall labor force participation and increasing female labor force participation. These opportunities are also challenges, which could be harder to deal with since the Indian banking system is now under heavy pressure.
What do YOU think? Will India become the next economic superpower?
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