What Accounts for the Economic Gap Between China and India?

The world’s two most populous countries had similar starting points, but China has outpaced India across the board.

By , a deputy editor at Foreign Policy.
India Prime Minister Narendra Modi talks with China's President Xi Jinping
India Prime Minister Narendra Modi talks with China's President Xi Jinping
India Prime Minister Narendra Modi speaks with Chinese President Xi Jinping during a BRICS leaders' meeting in Goa, India, on Oct. 16, 2016. PRAKASH SINGH/AFP via Getty Images

India has been a rare bright spot in the global economy, enjoying an estimated 7 percent growth rate this year, even as much of the rest of the world is struggling with energy and financial crises. But the country is also thought of as a disappointment for failing to keep up with the dynamism of China, its fellow presumptive future world power. Indian Prime Minister Narendra Modi took office promising to change that reputation—but his record is mixed.

Why has India failed to keep pace with China in recent decades? Why did the country never become a manufacturing powerhouse? And what kind of economic policymaker has Modi proved to be?

LISTEN HERE: For the entire conversation, and episodes in the weeks ahead on this subject and others, follow Ones and Tooze wherever you get your podcasts.

India has been a rare bright spot in the global economy, enjoying an estimated 7 percent growth rate this year, even as much of the rest of the world is struggling with energy and financial crises. But the country is also thought of as a disappointment for failing to keep up with the dynamism of China, its fellow presumptive future world power. Indian Prime Minister Narendra Modi took office promising to change that reputation—but his record is mixed.

Why has India failed to keep pace with China in recent decades? Why did the country never become a manufacturing powerhouse? And what kind of economic policymaker has Modi proved to be?

Those are some of the questions that came up in my conversation this week with FP columnist Adam Tooze on the podcast we co-host, Ones and Tooze. What follows is a transcript of the interview, edited for clarity and length. For the entire conversation, subscribe to Ones and Tooze on your preferred podcast app.

Cameron Abadi: It has become something of a cliche to pair China and India when discussing the future of the world economy—the future world powers in the East. But there is also a sense that India’s economy has never quite taken off the way China’s did, especially between 1980 and 2010. What has held it back? Is it democracy in India as opposed to China’s political system?

Adam Tooze: I was literally sitting in my hotel room this afternoon thinking, why does anyone focus on any other question? It is very dramatic. Why did these two giant countries—each of them has about a sixth of the world’s population—diverge to the extent that they have? It’s important to say that no country, no economy, has ever grown the way the Chinese have. So to compare the Indians to China is rather unfair to the Indians. But you can only go so far with the apologetics because the results are spectacularly different. And this is not a matter of abstract numbers. This is a matter of people’s livelihoods. The extreme poverty which still haunts very substantial parts of the Indian population—there really is no counterpart in China anymore.

But the numbers are very impressive. So, in the 1960s, life expectancy in China, in India, was kind of level. And then in the period of the Cultural Revolution, when we think of China as going through absolutely massive and destructive upheaval, the life expectancy surges.

And by the early 1980s, when the World Bank first gets access to China, what they see in China is a poor country, still low GDP per capita, not much higher than India’s, but poised for growth because China, by the early 1980s, had universal elementary education enrollment and life expectancy numbers and health provision more like those of a lower-income advanced economy—so, comparable to, say, the provision in Italy by the early 1980s. It’s a really remarkable contrast. And when you talk to Indian specialists, they come back to this point again and again: It’s something to do with state capacity, something to do with infrastructural capacity.

And so, in a really weird way, in a way that’s really taken me aback several times with centrist policy people, not leftists, they converge on this question of how much difference did it make that India did not have a genuine social revolution at the moment of independence from Britain. And that the nationalist movement, for all of the popular mobilization that Gandhi and his cohorts made possible, always shied away from unleashing the full force of a popular revolution that would have genuinely upheaved the social structure and transformed it, that might have challenged the caste system in a direct way. None of that happened. So instead, India transitions out of colonial rule, which was so oppressive in many ways and unproductive in many ways into independence but without that radical transformation. And I think if you’re looking for deep answers to this question, you end up in places like that. And what that explains then is this lack of infrastructural capacity and ultimately then things like the lack of investment, which is just lower in India; the lack of spending on education, which is lower than in China; the lack of spending on health, which is lower than in China.

CA: To jump to the present: Indian Prime Minister Narendra Modi has been in office for a while, and he has promised a kind of ideological transformation of the country in general—but he also ran on an ambitious platform to remake the Indian economy. How is his record? What kind of policymaker has he been, and has he kept his promises?

AT: Modi is a figure of legend at this point. He’s an absolutely remarkable politician. He is undoubtedly the figurehead of a Hindu-nationalist politics that is intolerably majoritarian, which is explosive because of the very large Muslim population in the country. And liberal academics who are critical of Modi’s BJP [Bharatiya Janata Party] feel the pressures of the regime as a result. And the people talk about it as a regime. And if you spend much time in Delhi, it feels like that, right? So the poster of the prime minister is all over the place. There are stadiums named after the living prime minister. There is something of a personality cult around Modi. It’s quite striking.

I think there are three sides of his policy. There are the complex high-level reforms which the government has pushed through—for instance, opening the markets up to foreign investment in various ways, trying to pass free market reforms so as to enable more buying and selling of lands and deregulating labor. So, this is a kind of almost neo-neoliberal development agenda.

And then there is the reality of BJP, Modi-ist crony capitalism, essentially with a series of networks that link the prime minister to key Indian business interests. And it’s a way of doing politics, a way of doing business. Turkish President Recep Tayyip Erdogan functions in a similar way. Russian President Vladimir Putin functions in a similar way. You could say, after all, that American political parties do, too.

But the most impressive thing that you see going on in India over the last 20 years, but really accelerated under Modi, is the creation of a nation in real time. Because India is so massive and so hugely diverse, and it’s a federal state, and the federal units of India are the size of Mexico, you know, they’re gigantic, huge populations. And these are bolted together in this fragile federal structure. But in the last 10 to 15 years, what Delhi has begun to do is to roll out a truly comprehensive set of national programs which tie ordinary Indians, hundreds of millions of peasants, into a national ID system, the national financial system, the national cellphone system. Then you compile those three things together. They’ve got this highly advanced electronic ID system, linked to people’s cellphones, which is 1.2 billion cellphone licenses in India—practically everyone has access to one. And all of a sudden, you’ve got the mechanism for delivering welfare payments to literally everybody in India at the flick of a switch. And I’ve met the bureaucrats who do this, and it’s an incredibly impressive electronically based welfare system. And then you’ve also got a campaign for clean water, a campaign for indoor toilets and national electrification. And that’s what really gives Modi and the BJP the heft.

CA: It also raises the question of whether those who are not Hindu are getting left behind in some way. I don’t know if that’s legible in the data either.

AT: It’s not just legible in the data. It’s eerie for a European to take a taxi, you know, take a tuk-tuk ride around Delhi, and your truck driver will literally point out where Muslims live. And he’ll point to what to my eyes looks like an overcrowded ghetto, buildings piled six, seven, eight stories high. Everyone in this town knows where the lines of segregation are drawn, and the Muslims live in those sectors because it’s increasingly difficult for them to get rental accommodation in the city. Landlords will not let to people with Muslim family names.

CA: So, to look at the composition of the economy a bit more specifically, where does manufacturing fit in into the scheme of things for India’s economy? Did India miss the boat when it comes to manufacturing, or did it end up just jumping straight to services?

AT: This is a crucial question when you do the India-China comparison. So, the bulk of labor, when we start the comparison in the ’60s, ’70s and ’80s, is in agriculture. And China has a head start there in terms of use of fertilizer and investment, everything else. But then the really big difference that opens up between the two economies is that China, from the ’80s onwards, begins to develop as a key hub for global manufacturing, with investment by Western companies, by Japanese, South Korean, Taiwanese companies. They all go into China and make it the big factory of the world. And because China does it, it occupies the space that India could have been. And India misses the opportunity, as globalization really begins in earnest in its modern form in the 1990s, to be in that space. India, at that point, is coming out of its financial crisis of 1991, it is liberalizing rapidly, but the sector which workers went into, overwhelmingly migrant male workers, was construction. So, as the city population of India has boomed, all of the extra population really in the last decades has ended up agglomerated in the cities. And as in China, that has required a huge construction process. It doesn’t quite get the headlines the way Chinese urbanization does. But this has been a massive source of employment for rural-to-urban migrants in India.

The real contrast that hurts, and people don’t really enjoy it when you bring it up, is Bangladesh. As China has developed, it’s no longer a low-cost manufacturing hub. And so the question really is, who moved into the slots beneath? Vietnam is one country which has very effectively moved into that space. And Bangladesh has. Bangladesh now is a world leader in textiles and in garment production in particular. The question is really nagging as to why that didn’t happen in India. And the answers seem to do with regulation, that it was just easier to build bigger businesses, to employ labor, particularly female labor, in Bangladesh. Bangladesh is overwhelmingly Muslim. Muslim women work much more outside the home, in India as well, than Hindu women do. But in Bangladesh, the mobilization of female labor has been much easier.

CA: I wanted to finish by asking about the remarkable number of CEOs of major international companies that are run by Indians and Indian immigrants. What exactly accounts for that success at corporate leadership? And is it telling in some way that these CEOs tend not to be the founders of the companies that they’re leading and that these companies are often not in India themselves?

AT: Yeah, so by one list I found online, it was Google, Microsoft, Adobe, Twitter, IBM, Chanel, Bata, and the list goes on. It’s an incredible list. It has certain obvious common denominators—tech features very prominently there. All told, apparently 60 of the CEOs of the Fortune 500 companies are of Indian origin. So, first of all, you think, wow, that’s a lot. And then you think, well, how many Indians are there? And one-sixth of humanity is Indian. So, you know, that’s broadly one-sixth of the CEOs of the Fortune 500 companies. So, I mean, wake up, smell the coffee. This is the world, right? Another 60 ought to be Chinese, and then the rest will be the rest. I mean, so there are just a lot of Indians, and their education system at the elite level is absolutely competitive with anywhere in the world. Perhaps not the universities in India itself, but they have a pipeline of people who then make it into the absolutely top tier of the Western universities, which are the entry tickets to those kinds of jobs. And so, yes, I don’t think we should be surprised.

Cameron Abadi is a deputy editor at Foreign Policy. Twitter: @CameronAbadi

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