China began to engage in economic reform and entry into world markets roughly a decade before India. We see from Figure 1 that before China’s entry into world markets, India was, in fact, growing more rapidly. After it liberalised its economy, however, China started to draw away and, significantly for the argument of this chapter, continued to grow more robustly.

Figure 5.1 China and India: average decadal growth

Source: Gordon, Sandy 2006, Widening Horizons: Australia’s new relationship with India, ASPI, Canberra.

We see from Figure 1 that after economic reform in 1991, Indian economic growth gathered pace from the so-called ‘Hindu’ growth rate of 2–5 per cent to an underlying rate of about 7 per cent in the 2000s. Moreover, this pace of growth quickened as the decade drew on and provided India with four successive years of about 9 per cent growth (growth is, however, expected to slip back to 7.3 per cent in the 2009 fiscal year).

We also see from the Economic Intelligence Unit projection (Figure 2) that in market exchange rate measurements and purchasing power parity (PPP), China will continue to draw away from India. According to this projection, India’s economy will be roughly half that of China’s at PPP rates and about only one-third at market rates in 2030. World Bank projections (Table 1) paint an even more negative picture for India by the earlier date of 2020, with India’s share of the world economy at market rates being less than one-third that of China’s. These World Bank data are, however, dependent on a significant projected slowdown in China’s growth and a somewhat lesser slowdown in India’s.

Figure 5.2 Projected growth rates of India, China and the United States in market exchange rates and purchasing power parity

As in Winters, L. Alan and Yusuf, Shahid (eds) 2007, ‘Dancing with Giants’: China, India and the global economy, World Bank and Institute for Policy Studies (Singapore), Washington, DC, p. 6.

Table 5.1 GDP as a percentage of world GDP in six large economies, 2020 (per cent)

^a The World Bank projects an annual growth rate of 2.3 per cent for the 25 countries of the European Union plus the European Free Trade Association, from which we derive the figure for Germany.

Note: Average growth rates are calculated as the average of annual real growth rates (US$ constant 2000) for the period. Similarly, average contributions are calculated as the average of annual contributions. The calculation for the period 2005–20 is based on GDP in 2004 and the projected growth rates.

Source: World Bank 2005b, World Development Indicators

Figure 5.3 China and India defence spending, 1997–2007 (US$ billion)

Source: Davies, Andrew 2008, Asian Military Trends and Their Implications for Australia, Australian Strategic Policy Institute, Canberra, p. 6.

Moreover, we see from Figure 3 that this economic situation, reflecting more rapid economic growth in China, is reflected in respective defence spending data. These data are drawn from the Australian Defence Intelligence Organisation (as in Davies 2008) and seem somewhat conservative in the case of China, with the latest Jane’s estimate putting China’s expenditure at about $58 billion (The Canadian Press, viewed 26 September 2008, <http:/www. canadianpress.google.com/article/ALeqM5h7mb64TOSdOPW7wvgMNhgC5Bthg>).

Obviously, such economic and defence spending projections depend on assumptions that ‘all things will remain equal’. There are several important unknowns in the category ‘all things’.

First, there is the issue of political stability in both countries. Commentators have argued persistently that India is both penalised and advantaged by the fact that it has remained a vibrant democracy. It is penalised in the sense that its consensual decision-making processes mean that it has not been able to act forthrightly to develop its economy in the way that China has, enabling the latter to maintain spectacular growth rates in the past three decades. Then again, India might in future be advantaged by the fact that it has already crossed the Rubicon of democratisation, while China has not. That process, should it occur, could also be highly destabilising for China, with concomitant economic effects—or so the argument runs. ^[1]

This view of the future of China is, however, increasingly subject to challenge. For example, recent research by the respected Pew Research Center (viewed 28 August 2008, <http://pewglobal.org/reports/display.php?Report ID=261>) shows that 86 per cent of Chinese people ‘are satisfied with the country’s overall direction’. The Pew Center research was conducted after the riots in Tibet but before the May earthquake. The same question asked in 2002 elicited a favourable response on the part of only 48 per cent of respondents. It is also noteworthy that respondents reported far less satisfaction with their own lives than with the general direction of the country. Moreover, the recent global downturn appears to have resulted in a significant decline in factory employment in China. Obviously, the data need to be treated with caution. They do, however, give us pause to consider whether China is, indeed, inevitably bound to liberalise its polity in the foreseeable future.

Aside from the Pew Center’s research, there are other views being brought forward to challenge the belief that China must inevitably confront a damaging call for more democracy. According to Ma (2007), ‘The links between economic liberalization and political reform…have turned out to be much more complicated and tenuous in the case of China.’

At the same time as doubts are gathering about the inevitability of democracy in China, there is every indication that India’s politics will continue to be shaped by unstable coalitions and will be subject to considerable volatility, especially given current energy shortages and inflationary pressures. India’s national election, scheduled for May 2009, is likely to result in yet another weak coalition, one that this time might not last the full five-year term.

Are there other factors that could cause economic catch-up on the part of India? Certainly, there are in the longer term, and the most prominent of them is demographics. In Figure 4, we can compare the population ‘trees’ for India and China.

Figure 5.4 Population ‘trees’ for India and China, for 2000 and projected for 2050

Source: Gordon, Sandy 2006, Widening Horizons: Australia’s new relationship with India, ASPI, Canberra, p. 24.

What is immediately apparent is that India—which will be the most-populous country in the world by about 2030—has a far higher proportion of young people in its population than China. This should in theory erode China’s comparative advantage in labour-intensive manufactures by about 2030; but will India pick up the challenge and become the new labour-intensive powerhouse of the world economy?

In the initial stages of India’s economic liberalisation, this did not appear at all likely. Indeed, some commentators were even claiming that India had a leapfrog economy that would bypass the labour-intensive phase altogether (Das 2006). Until quite recently, India’s labour-intensive push into world markets was restrained not so much by tariff policy as by foreign direct investment (FDI) restrictions, labour laws, lack of infrastructure and state-imposed restrictions on the large-scale manufacturing sector, which had the effect of reserving labour-intensive manufacturing for the small-scale sector (see Arvind 2008).

On the other hand, the enormous capitalisation of the Chinese economy also promises to enable it to substitute capital for labour on an immense scale as its labour force ages, ensuring that it retains a formidable competitive edge and a substantial share of the world economy. The models here would be first Japan and, more recently, Korea and Taiwan.

Of course, the analytical picture is far more complicated than the one we have been able to present above. At the very least, however, we have been able to provide sufficient information to show that it is a big call to assume that India will catch up with China. Indeed, it is quite possible that the World Bank projections provided above will prove fairly accurate.

So what might this mean for Sino–Indian relations?