India vs. China: A 21st Century Economic Battle Royal
Back in August of last year, TNI described why India’s economic prospects are brighter than those of China (“Beware, China: India's Economy Could Have an Even Brighter Future,”). That judgment seems to have been confirmed by subsequent events. As we noted at the time, "When all is said and done, the difference between India and China can be summed up in one word: freedom."
India is now clearly outperforming the other emerging nations, particularly China, a nation hobbled by a command economy and one of the most corrupt political systems on the planet. “As Brazil, Russia and China hit hurdles, it’s the poorest member of Goldman Sachs Group Inc.’s emerging-market group that’s proving a darling of global investors,” Bloomberg News reported in February. “The International Monetary Fund is predicting India will next year grow faster than each of its BRIC counterparts for the first time since 1999.”
In January of this year, we noted that Western hopes of an economic “rebalancing” by China, from state-directed investment to a demand pull economy based upon private consumer activity, was without basis (“The False Hope of Chinese Economic Rebalancing”). India, on the other hand, has not needed to stoke private demand because it already has a vibrant private-sector economy, albeit one that still struggles with bureaucracy and official corruption on a large scale. Yet even with all of India’s structural problems, the fact that its people are free to compete economically and express themselves politically puts them light years ahead of their counterparts in authoritarian China.
Instead of rebalancing its economy to greater consumer consumption, China seems instead to be heading toward a “new normal” of slower growth. While China’s official statistics suggest that the country met exactly the requisite target of 7.5 percent GDP, other indicators indicate that the years of artificial growth predicated on massive government spending on infrastructure is coming to an end. With economic statistics tightly controlled for political reasons, investors and other foreign observers lack accurate insight into how China's economy will evolve as the panacea of state “investment” allocations decline.
China Beige Book, one of the few Western organizations that independently collects economic data in China, sets the scene in terms of understanding China’s deliberate pull-back in fixed-asset investments:
In the first quarter of 2015, our survey showed growth in firms' capital expenditure easing for a fourth straight quarter, to the lowest level we've seen in four years of polling. Every sector except real estate saw slower investment in quarter-on-quarter terms, and real estate was sheltered only by its dismal performance at the end of last year… The credit and investment weakness may help the Chinese economy to rebalance. But there is little sign consumption is taking the lead in driving growth.
One of the key factors driving economic growth is population, a factor that is most visible in the United States, which has seen population growth fall from 1.6 percent in the years following WWII to just over 0.5 percent today. Many experts note that the big change in the future will be the slow growth in population in many nations as fertility rates decline and the average age of the populations in these nations rises. While the working-age population of China is set to peak in a decade and then decline, India’s population is going to continue to expand.
Byron Wien of Blackstone describes how aging populations in Europe, China and Japan will contrast with trends in India, even as the global rate of population increase slows:
China’s peak employment is expected to occur in 2024. The working age population in the G19 countries plus Nigeria is expected to decline from 68 percent to 61 percent over the next 50 years. By 2064 India’s employment could expand by 54 percent, while China’s could shrink by 20 percent. The number of employees in the United States is expected to continue to rise, but at a slower rate than in the past. By employing more women and encouraging people to stay at their jobs beyond age 64, the expected .3 percent rate of working population growth could double, but that would still be well below the pace of the last 50 years.
When you combine the advantage of a dynamic free society with strong population growth, the economic case for India becomes compelling. The World Bank estimates that India will grow at 7.5 percent in 2015 vs. estimates several points lower, and that growth is poised to accelerate, as policy changes gather momentum to unlock needed infrastructure investments.