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The Elephant and the Dragon: can India’s rise match China’s?

AUTHOR: Tim Harcourt   DATE: 01.05.05   ISSUE 1, 2005

There’s certainly been a lot of new media interest in India and its potential as the world’s next economic superpower alongside the Middle Kingdom.

Why the comparison with China? Well, it’s partly because of the enormous population of each mega-nation. China has 1.3 billion people, whilst India has 1.05 billion. Lots of people means high potential but it also can mean significant poverty too. After all, India accounts for one-fifth of the world’s population and around one in three of the world's poor live in India.

Tim Harcourt Chief Economist, Australian Trade Commission and AGSM Visiting Fellow

But the comparison is also made because of the relative economic success of China compared to India over the past twenty years. Their relative economic progress is food for thought. In 1980, China and India were about level pegging when it came to GDP and per capita income. By 2000, however, China was about twice India’s size in terms of GDP and GDP per capita and eight times its size in terms of exports.

Why is this so? It’s partly due to the policy stances of the two nations. China, since Deng’s reforms in 1979, has transformed itself from a Maoist, closed economy to a more market-based, open economy, keen to engage in the world. By contrast, India stuck to a closed economy model with state planning dominating economic policy and import-replacement policies instead of the export led development approaches of their East Asian neighbours.

In fact, it was only during the balance of payments of crisis of 1991, that India changed economic policy direction and opened up its economy under the reforms of then Finance Minister (now the recently-installed Prime Minister) Dr Manmohan Singh.

As a result, India has a lot of catching up to do. However, over the next few years, it has the potential to be a real ‘hare and tortoise’ race. Will it succeed? According to a new report from the Lowy Institute, “India – the next economic giant” the sub-continent's prospects look good. Report author, Mark Thirlwell, believes that India’s catch-up will be based on growth in investment, labour force and productivity.

“There are vast opportunities for Australian exporters in India."

“India’s fiscal position is poor but its demographics will help as a younger working age population will be able to provide tax revenue for government services. The labour force is actually growing as a proportion of the population. In addition, India’s comparative advantage in the export of services and software makes it an exciting economic prospect,” he explained. Thirlwell expects that India’s rise will be based on a “services-orientated development path” in contrast to the “merchandise driven models followed in the past by the East Asian economies.”

So what does this mean for Australia? In the past, the Indian market has been a tough nut to crack for Australian business (with too much reliance on the "3 Cs" - cricket, curry and commonwealth). But according to Australia’s Senior Trade Commissioner in New Delhi, Mike Moignard, “There are vast opportunities for Australian exporters in India for food and beverage, intermediate manufacturing goods, tourism, education and entertainment,” he said. Trade reform and demographics are working hand in hand to raise demand for foreign goods and services – including Australia’s. “The rise of ‘western’ fast food outlets has helped the exports of processed foods from Australia and there’s increased interest in Australia as a safe haven for Indian students and tourists,” says Moignard. However, Australia can still do better. According to Austrade research, there are still only 1,506 Australian companies exporting to India, which is half that of China on 3,101, and well behind Singapore (6,328), USA (7,929) and New Zealand (13,726).

In summary, India’s rise means it will soon join China in increasing market share of world output and in turn, Australian exports. Progress has already been made over the 1990s with China and India’s share of Australian exports doubling between 1993 and 2003. On current rates of economic growth, and provided economic reform continues, India will join China as a key export market for Australian exporters to watch in years to come.