China and India were about equal in economic capacity in 1980, when the Chinese began the reforms that moved China toward capitalism and an openness to foreign investment. Since 1980, the Chinese have averaged 9% annual growth, a remarkable achievement. India grew very slowly up to 1985, when the first set of reforms improved the economy. But it was the Congress Party’s reaction to a balance of payments crisis in 1991 that put India on the road to economic reform. Since then growth in India has accelerated to an average rate of about 6%. Even a relatively reformed India finds itself slipping further behind China.
Why has nominally capitalist India done worse than communist China? India has a number of handicaps that it has yet to address. First, the basic lack of human development constricts growth. China’s literacy rate is 90% compared with 60% for India. Chinese life expectancy and infant mortality are substantially better than India’s.
Second, the quality of governance in China is better. Local governments in China have done a better job of assisting economic development than in India. In China the Communist party has morphed into the party of development, and party functionaries have a consensus that delivering economic growth is their primary job, and the primary justification for their monopoly on power. In India, the corruption of the system, and the fractious nature of politics, has prevented a culture of civic virtue from taking hold among its political class.
India has also been pursuing a strategy of service sector growth which provides a nice living for thousands of English-speaking call center workers and software engineers. This lends itself to breathless articles in the financial press, but let’s be serious. India cannot become a modern nation writing software code and answering phone calls. It is industrial growth that really matters, and there India is falling short. Lifting the tens of million s of Indians in poverty up the economic ladder will take creating millions of low-tech manufacturing jobs. This cannot be done on the backs of thousands of software writers.
Finally, the underlying social problem in India is daunting. That of course is the caste system with untouchability and the marginalization of the Muslim minority. If you put these two groups together, almost 40% of India’s population is shut out of the system, and this acts as a drag on economic growth. It was only after the civil rights revolution that the American South industrialized and began to catch up with the rest of the country. Until then, India will hobble along with the Hindu rate of growth.