Mohan Guruswamy: Elation at India overtaking China’s growth rate is premature

India has once again surpassed China’s GDP growth rate and there is elation in certain circles about this. But they seem to forget that even growing at 6%, China will add about $750 billion to world GDP growth, whereas at 7% India will add about $175 billion.

Even growing at 10% as India did in a couple of UPA years, it will add only a third of what China adds to World GDP. That will ensure that it has far greater heft in global affairs, and its ability to invest, innovate and envision will always be much larger than India’s.

For India to close in on China in terms of economic power, soft power and hard power its GDP will have to get close to China’s in size. That is still some decades away, and we should avoid getting elated so far away from a possible goal.

India has a demographic advantage in the coming decades, that if it uses effectively and productively it might very well close that huge gap between the Chinese and Indian economies, and consequently their places in the world of the two.

China hits a demographic wall

China seems to have hit an impenetrable economic wall. The Peoples Republic now has a people crisis. It has now stopped growing and is getting old. The reason is paradoxical. China’s one-child policy worked exceedingly well for it. By preventing almost 400 million births since 1979, it gave the living Chinese greater prosperity. It is estimated that between 1980-2010, the effect of a favorable population age structure accounted for between 15% and 25% of per-capita GDP growth. That bonus to the demographic dividend has now ended.

Since the advent of the one-child policy China has had 336 million abortions and 193 million sterilizations. By all yardsticks the one-child policy was a spectacular success.

But it came at a huge cost, not anticipated then. China’s population is expected to stabilize in 2030 at 1.391 billion, moving at a slow crawl from 1.330 in 2010. In 2050, China is projected to decline to 1.303 billion. The flattening population and its somewhat unfavourable demographic profile has been causing concern in China for some years now.

In 2013 the CPC’s Central Committee allowed couples to have a second child if one parent was an only child. But Chinese families have gotten used to one child existence. The demographic wall is not going to be crossed. China’s workforce is not growing any more.

In the decade 2015-2025, at present trends China will add only 5 million to its workforce, when in the previous decade it added as many as 90 million. In 2010, there were 116m people aged 20 to 24; by 2020, the number will fall by 20% to 94m. The size of the young population aged 20-24 will only be 67m by 2030, less than 60% of the figure in 2010.

One immediate consequence of this slowdown is that by 2030 its above 60 years cohort will increase from 180 million now to 360 million. The other immediate economic consequence of this is that its savings rate will precipitously decline.

The Dependency ratio

As a nation climbs the economic ladder people inevitably live longer, but old age is also more expensive. For instance in the USA, the old actually consume more than the rest due to medical expenses. Either they support themselves or families have to support them. Apart from low consumption in the first few years of life, consumption is reasonably constant over the life cycle. But while income is earned, and output produced, in the working life between 20 and 65 it is not so before and after. This ratio of working age and non-working age cohorts is called the dependency ratio. As Indian and African, and surprise, surprise the US dependency ratio’s turn increasingly favourable in the coming decades, China’s goes downhill and it will join Europe and Japan as the world’s aged societies.

China’s total fertility rate—the average number of children born to each woman—is among the lowest in the world, at only 1.4. The developed-world average is 1.7. Replacement rate is 2.1, meaning that at this rate the number of births and deaths will be balanced; India’s is 2.5.

At purchasing power parity (PPP), China’s per-capita income is just a fifth or less of other large economies. But China’s fertility level is far below that of the United States, UK or France (all around 2.0), and is on par with those of Russia, Japan, Germany and Italy—all countries with sharply declining populations. This is a big reason why Germany so readily accepted to take about a million refugees from Syria and Libya.

Over the next 20 years, China’s ratio of workers to retirees will drop precipitously from roughly 5:1 today to just 2:1. Such a big change implies that the tax burden for each working-age person must rise by more than 150%. This assumes that the government will maintain its current level of tax revenue.

In addition, mounting expenditure on pensions and health care will put China in a difficult position. If the government demands that taxpayers pay more, the public will demand better scrutiny of how their dollars are collected and spent. This could very well open the floodgates of challenges to the CPC?

Can China succeed to get out of the low growth rate cycle? The conditions now are against it. The cost of rearing a child in China has now gone up hugely. The state may require more children, but most families will find the costs unaffordable. This is mainly because China is now a predominantly middle-class nation. How will this policy reversal pan out for China?

Demographers give three scenarios. The highest outcome will mean 1.43 billion in 2050, while the more plausible outcome will be between 1.35- 1.37 billion. Either way it is not going to alter the future very much for China. It will become old before it becomes rich.

The question that still remains is whether the inevitable slowdown of China be enough of a handicap for India to draw abreast of it. For that India needs to show a determination and vision among its leadership that has largely been missing, particularly in the past few years.