Why Chinese takes the lead in the short run?
(1) Earlier reform. The Chinese economy has transformed itself from being a closed centrally planned communist economy a decade earlier than India (1978 vs. 1991). Economy liberalisation means opening up its economy to private & foreign investment, international trade etc. As a result after both opening up, China takes the lead by receiving more than 10 times the foreign direct investment India receives ($700 billion vs. $ 68 billion)
(2) Infrastructure. This is the key area the Indian economy needs to bail itself out if were to compete with the mighty Chinese economy that registered double digit growth. By 2005, India spent just 5.9% of its GDP onto upgrading infrastructures while China 14.6%. Due to the recent Olympics, the Chinese government spending on this area accelerates further. World class ports, airports, expressways, rail networks, telecommunications etc can increase productive capacity of the economy by speeding up business transactions & reducing business costs. This is said to be the main attraction for foreign investors
(3) Flexibility of labor market. Unlike China, India has very rigid labor market such as difficulty to lay of workers even in time of difficulties. This is worsened with amendment made to IDA (Industrial Disputes Act) 1947 that states any firms employing more than 100 workers must get permission from government before retrenchment schemes, which very often not granted. As such unemployment is high as firms are wary of the fact that they will not be able to offload them, do not hire in the first place. This translates to lower growth of job opportunities
(4) Social righteousness. Unlike China which believes in justice & righteousness, the world largest democracy still practices caste system where people are put into grades. Very often those lower class people are being denied chances of getting education & proper employment opportunities. This may mean that unemployment in India will remain high & the income inequality between the rich & poor will widen. It is argued that by taking these people into the workforce, India can easily narrow down the gap of economic growth with China
(5) Mass educated workforce. China has larger population than India (1.3 billion vs. 1 billion). From this, nearly 91% of Chinese over 15 can read and write while only 61% of Indians over the age of 15 can read and write. More educated workforce in China translates to greater productivity per worker from supply side argument. This will inevitably give a higher boost to their national output
However, India is set to take over China in next few decades due to:
(1) Exploding population in India. Chinese population is growing but at a slower rate & most of its people are entering retirement age. Beyond some point, economists argue that the Chinese population may dip below 1 billion. In a country where boys are preferred, coupled with the One-Child-Policy & modern technology, families will go to great length to ensure that one child is male. Statistics proven that 90% of the aborted fetuses are female. Hence, decline in number of human capital will adversely affect the Chinese economy at later stage
(2) Slowdown in foreign investments & some has even pulled out. Chinese labour costs are escalating & therefore manufacturers & foreign investors have begun to look elsewhere for more profitable opportunities. The average Chinese worker earns approximately US $500 more a year than an Indian counterpart for doing the same work. As a result, India has become more and more attractive to large international companies, at least in terms of workers' wages. Other examples like Nike, for example, has expanded four production lines in Vietnam and invested US $16 million in new facilities there, diverting from Taifeng Corp, a Guangdong-based firm that made shoes for Nike in the past
(3) Inefficient banking sector. China’s NPL (non performing loans) & bad debts are doubled of that India due to biased lending policies. Banks often made loans to government projects with little regard for the working of market force. Also very often these loans are made to finance the bankrupt state-owned enterprises which produce goods & services that account only a meager 25% of China’s GDP. These liabilities average to more than half of China's current GDP, an alarming trend that could set the economy on the brink of collapse.
(4) Other issues. India has emerged to become the ‘back office of the world’ & that is imminently growing dominance in services sector. Though it has lower number of educated workforce compared to China, but rest assured they are regard as more highly skilled & their expertise is sought worldwide in the medical & IT field. Indian firms also has better corporate governance standards which explains why though Chinese economy is growing rapidly, it is India’s ROA (return on assets) which are higher, lower NPL & stock market performance which is better. Lastly Indian speaks much better English than Chinese, & this gives them the edge in absorbing & innovating technologies
My opinion: China will take over US dominant position in economy in nearest future. But in several decades, if nothing is done to address the demographic issue in China, it will be the Tiger that roars!!
Also it is interesting to note that, yes it is China now that takes the lead but don't forget that it is because of the earlier reform & openning up of the Chinese economy. But if we have a second thought, Indian economy which is trailing from behind of about 2-3% means they are behind but they are chasing up fast!!