American companies are watching history in the making as India and China become economic superpowers -- even though both face some headwinds. Anja Manuel, a former State Department official and now advisory to U.S. companies in emerging markets with Condoleezza Rice and others, describes what we can expect. The following work is based on her new book, This Brave New World: India, China and the United States.
Indian Prime Minister Narendra Modi was recently in the United States, proclaiming that India’s economy is now growing faster than China’s -- at 7.6 percent -- and inviting investment. Despite some impressive progress in India, China’s growth will continue to rival it even as U.S. headlines call China the “Doomed Dragon” and investors worry about China’s slowdown.
The Chinese economy’s fundamental strengths mean that even if it slows temporarily to four percent, it will likely keep growing at between six and seven percent in a few years: rates the U.S. would only dream of. Asia’s other rising giant, India, will also grow, but not as quickly as Prime Minister Modi hopes. India’s decentralized political system means that no matter how well-meaning, the Modi government cannot achieve change nearly as quickly as Beijing.
The Chinese Economy Will Be Fine
In China, over-investment, inefficient state-owned enterprises, and mounting government debt are unsustainable. However, several factors weigh in its favor. The economy is large with plenty of natural resources, labor and capital. Its high savings rate means that China doesn’t have to rely on fickle external capital. In spite of its rapidly aging population, China will still have surplus labor for at least the next few decades. Moreover, the government is raising retirement ages and has relaxed its one-child policy. With more than 1.3 billion consumers, China’s large internal market makes it less sensitive to external economic shocks than small economies.
Yet there are real headwinds. China’s long-term growth will depend on whether President Xi continues to push forward with key market-friendly reforms, instead of prioritizing short-term stimulus. The Communist Party knows it must build a larger consuming class, but this will take time. Most Chinese still save instead of shopping wildly because there is no real safety net to help them care for sick or elderly relatives. The government is moving quickly to fix this. It is building schools, growing healthcare spending by over 10 percent a year and shoring up pensions. Allowing Chinese to have more children will also help boost demand: two-child families spend far more money. These reforms are already paying off. Household consumption is growing at one and a half times the rate of China’s GDP growth.
Finally, Xi and his team are trying to make state-owned enterprises more accountable to the market by feeding them less free capital. Recent leaked reports say that coal and steel SOEs alone will have to lay off over 5 million workers in the next few years -- a very difficult transition. As the private sector grows, however, this will matter less and less. If China’s reformers are able to move the economy closer to a true market system, a big internal market, growing consumption, and high savings will help the country grow.
High Expectations During Modi’s First Two Years
India has further to go. A noisy collection of interest groups stalls many key economic reforms. Modi’s Bharatiya Janata Party does not have a majority in the upper house of Parliament, and many key issues, such as energy, infrastructure and even many labor policies, are reserved for the states and cannot be changed easily from Delhi.
Modi and his team have been trying valiantly with some success: just in the last month, he opened many more sectors to foreign investment and companies can now obtain many licenses and permits online, making the process faster and less susceptible to corruption. India’s government agreed to invest $52 billion in to upgrade the country’s creaking infrastructure. This is a great start, but India needs $1.5 trillion over a decade for new roads, rails, airports and ports.
Key legislation that would make it easier for companies to buy land, to hire and fire workers and an important law to simplify India’s byzantine tax system have been held up in Parliament in Delhi for nearly two years.
Despite Modi’s speeches promising “Make in India” campaign, India lags far behind China in the push for manufacturing might. Even with a slowing economy, China created more than 13 million jobs in 2014, while India struggled to achieve even a million. These are jobs India needs to absorb its rapidly growing workforce. India also has the herculean task of educating its young people. To do so the government believes it must train between 1 and 2 million new teachers.
If Modi’s zealous reforms continue, India can unlock some of its latent potential and keep growing faster than China. Yet it is more likely that the current trajectory of 5 to 7 percent growth continues, and so India will be Asia’s key economic engine outside China.
The economic weight of the world will continue to shift towards both Asian giants. By 2030, China and India will be the first and third largest economies in the world, with the largest middle classes that U.S. companies will wish to sell to. They will lead the world in demand for natural resources and energy, and be its largest carbon emitters. American companies have good reason to pay attention.
(Top image credit: Getty Images)
Anja Manuel is Co-Founder and Partner of RiceHadleyGates LLC, a strategic consulting firm. She previously served as Special Assistant to Under-Secretary for Political Affairs Nicholas Burns at the U.S. Department of State.
All views expressed are those of the author.