CHINA AND INDIA : A Tale of Two Economies

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 CHINA AND INDIA : A Tale of Two Economies

The Chinese and the Indus valley civilizations are two of the four oldest civilizations in the world. Before and after European colonisation, China and India went through several messy political imbroglios that crippled the internal unity of the countries, cooperation, coordination and understanding among people and the rulers.

Despite many problems, these two countries have become economic powerhouses of the world after 1990 as emerging economies.

Xiaodong Zhu, professor at the University of Toronto and an expert on the Chinese economy, in his 2012 article ‘Understanding China’s Growth: past, Present, and Future’ writes that China used to be one of the poorest countries in the world till 1978. Back then, its GDP was only one-fourteenth of that of the United States. Later, it started exceeding by 8 percent every year after communist leader Deng Xiaoping rose to power and started the process of economic reform. The rapid and consolidated progress in average living standards in the nation, which accounts for more than 20 percent of the world’s population, has led china to become the second largest global economy.

When industrialisation engulfed western countries in the 19th and early 20th century, China missed the industrialisation drive due to political turmoil and civil wars. The country’s GDP was almost zero from 1800 to 1950.

China’s rapid growth over the last three and half decades has been driven by productivity growth rather than by capital investment (Xiaodong Zhu, 2012).  China has prioritised sector level productivity growth and resource realigning across sectors and across firms within a sector, to concentrate on productivity growth. Comprehensible, cautious and tenacious institutional substitutes and policy correction have played a substantial role to dwindle distortions and manipulations and overcome the obstacles on the way to economic progress. Improved economy and economic incentives are the main reasons for the productivity growth.

Historical Background of China’s Economic Performance
China was economic and technologically superior in the pre-modern or early medieval era. The country’s economic performance reached a peak in the Song Dynasty (Circa 1200) when china is thought to have had the most advanced technologies (Needhan and Ronan 1978), the highest iron output (Hartwell 1962), the highest urbanisation (Chao 1986), and the largest national economy (Madison 2007) in the world. However, between 1500 and 1800, China lost its economic and technological prowess to Western Europe due to colonisation. According to scholars, China already started to lag behind Western Europe before the Industrial Revolution began in England. Some historians and economists accredit China’s falling behind during this period to the centralised and inward-looking political systems of the Ming Dynasty (1368 -1644) and Qing Dynasty (1644 – 1911) that affected the innovation and commercial activities in China.

Brandt, Ma and Rawski (2012) say that China’s economic failure during this time was because of an imperial political and institutional system as industrialisation had already taken place in Western Europe, that preserved the vested interests of elite groups – like imperial households, members of the bureaucracy, and local gentry – who were not in favour of introducing new technologies. On the other hand, a lengthy civil war, crisis-mired political circumstances and the Second World War dramatically slowed the economic momentum of China until the 1950s.

After the People’s Republic of China was established in 1949, the Chinese Communist party decided to expedite the industrialisation process increasing investment in heavy industries such as steel, concrete and heavy machinery. The government deployed the resources for investment by limiting household consumption and setting low prices for agricultural goods so that forced savings and surpluses extracted from the agricultural sector could be used for investment in such industries. However, this strategy of extensive growth did not prove sustainable and had grave welfare consequences. China’s industrialisation was completely paralysed during the period of ‘The Great Leap Forward (1958- 1960)’ which not only resulted in a depressed GDP growth but also severely impacted agricultural productivity causing a horrible famine when China ‘was hit by adverse weather shocks in 1959’ (Li and Yang 2005). The Great Leap Forward actually turned out to be the ‘Great Leap Famine’ of 1959 to 1961. Official statistics put the resulting death toll at 15 million which has been estimated unofficially to be closer to 35 to 55 million.

Despite all these catastrophic results, the Chinese government did not get discouraged to halt its strategy and kept on its unbalanced growth strategy with only minor adjustments after the famine. Later, the government restricted farmers to leave rural areas. And that too, farmers were banned to get engaged in non-farm activities. The industrialisation policies initiated by the then Chinese government from 1952 to 78 resulted in gross misallocation of resources that resulted in reducing aggregate productivity with relatively little improvement in living standards.

Evolution and Productivity Growth since 1978
Communist Party Chairman Mao Zedong died in 1976 and the Cultural Revolution ended. Under the leadership of Deng Xiaoping, the country moved towards a new phase of economic development. He sought to increase its legitimacy by improving aggregate economic performance and uplifting the life standard of Chinese people. Deng was the main leader of the CCP’s second generation leadership. He was named Time Person of the Year for 1978 and 1985.

In December 1978, the government took an important decision on a general policy known as the  Kāifàng meaning reform and opening up which has remained as the biggest cornerstone in Chinese economic development.

The revered Chinese thinker Zheng Bijian in his article ‘China’s Peaceful Rise to Great –Power Status’ (2013) says that the government of China initiated three monumental strategies or “three transcendences”.

The first one was to transform the old model of industrialisation and to advance a new one.  It had facilitated a new avenue of industrialisation based on “technology, economic sufficiency, low consumption of natural resources as per the size of population, low environmental pollution, and the optimal allocation of human resources. It tried to construct a “society of thrift’

The second strategy was to transcend the customary ways for great powers to emerge, as well as the cold war mentality that described global relations along with ideological streams. China pledged that it would not follow the path Germany went through leading up to World War 1 or those of Germany and Japan that resulted in World War 2, when these countries savagely stripped resources and imposed their hegemony. Neither would China follow the path of great powers vying for global domination during the cold war period. Instead, China would transform ideological differences to endeavour for peace, development, and cooperation with all the countries of the world.

The third strategy was to expel outdated modes of social control and to construct a harmonious socialist society. The administration and political functions of the Chinese government began to move into modernisation and industrialisation with self-governance supplementing state administration. China started consolidating its institutions to build a stable society based on a ‘Spiritual Civilization’. A big number of ideological and moral education programmes based on the teachings of ancient Chinese philosophers Confucius and Lao Tzu were launched aiming for the holistic development of the country’s citizens.

Under the leadership of Deng, the Chinese government set up focal point strategies for development for the next 50 years which was divided into 3 phases. In the first phase of 2000 to 2010, the aim was to double the country’s GDP. The second phase aimed to again double the GDP by 2020. The ongoing third phase, from 2020 to 2050, has aimed to ‘transform China into a prosperous, democratic, and civilized society’.

India’s Rise as the South Asian Titan
From the mid-1960s to the early 1990s, the Indian economy was in a state of disarray and growth was unsatisfactory. The country’s national income growth was slow with significant year-to-year fluctuations (S. L. Shetty, 1978). Agriculture contributed most to the economic growth whereas the performance of the industrial sector had been discouraging. Service sectors including banking and insurance alongside public administration and the defence sector grew better than the industrial sector. In agriculture, while the sources of growth had changed over time, the overall rate of growth had crashed because the influence of the new agricultural strategy had been restricted to a few crops and to a few regions and even this impact had started to get discouraged. Production of pulses and coarse grains went through a terrible setback (S. L. Shetty, 1978). Inter-regional and inter-class divergence in rural income and asset distribution had got vastly accentuated.

In industry, the fundamental and capital goods sectors had to endure severe conditions and more significantly, the production of mass consumption goods had lagged behind. The increment of non-farm employment had been the most sluggish. The proportion of people below the ‘poverty line’ soared up instead of plummeting.


The primary cause of the structural retrogression of the Indian economy was the decline in planning, saving and investment efforts, particularly in the public sector. Public sector plan outlays were initially slashed  and thereafter their growth had been drastically diminished, funds for the maintenance of past plan projects had not been allocated adequately, resource deployment efforts had been both scarce and immoral, deficit financing had been resorted to indiscriminately and, finally, a significant proportion of public sector disbursements had been fiddled away into non-development expenditure in the form of subsidies and transferred to state governments for such purposes as drought relief, clearance of overdrafts etc.

India began to see economic prosperity, especially after the full scale economic liberalisation in the early 1990s (Koichi Fujita, 2010). The serious economic and political crises India faced in the mid-1960s, triggered a complete restructuring by the government of its agricultural policy from traditional to modern technology. The government felt the need for technological innovation and acquisition of new agricultural technologies from abroad. During this period, India’s production of wheat and rice rose significantly.

During the 1980s, India observed a very favourable agricultural growth in almost all regions of the country and in almost all types of major crops. The rapid increase in rice production during the 1980s was a paradigm shift for the Indian economy which helped to fight of poverty in rural areas.

During the early 1990s, India embarked on a new journey of economic development. However, per capita consumption of food grains, particularly rice and wheat, started declining and the growth rate in the agriculture sector was not as expected. The demand for higher value-added commodities such as livestock products, vegetables, fruits and flowers grew (Koichi Fujita, 2010) creating a disparity between agricultural and non–agricultural sectors which later became a serious socio-economic problem for India. The government led by P.V. Narsingh Rao in which Dr Man Mohan Singh was the finance minister introduced some monumental policies to lower that disparity.

The seeds of modern economic growth in India were sown during the premiership of Rajiv Gandhi. He drew organisations such as the Association of Indian Engineering Industry (AIEI) closer to the government (Rahul Mukherjee, 2009) for the country’s industrial development.

During 1991-93, technocrats in the Indian government pushed for far reaching reforms in trade, industrial and foreign investment policies. The efforts gave way to pharmaceuticals, gems and jewellery, and automotives emerging as leading sectors in the later years. India did a spectacular job in reforming telecommunications, airlines, the stock market and banking sectors.

After Narendra Modi came to power in 2014, he focused on developing India’s international relations.  In 2019, Modi announced to make India a USD 5 trillion economy. On the other hand, the Chinese President Xi Jinping is focusing more on national security as a stepping stone of economic statecraft. In 1978, Deng gave priority to a stable environment for economic prosperity, whereas Xi’s emphasis is greatly on the use of economic means for the pursuit of China’s security goals.

(Koirala is a PhD. scholar. He can be reached at [email protected])

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