Is India closing the gap with China?

The header is wrong for two reasons. One is that it gives the impression that the gap is now a lot smaller. Even if it does not intend to convey that impression, the reader will walk away with that impression. It is only a relative statement: compared to some starting point, is the gap becoming bigger or smaller? The header says that it is becoming smaller. The second objection to that header is that such comparative statements are largely meaningless.Every government must do the right thing by its society and economy and the outcomes will be incidental. Comparisons with other nations are not appropriate and could be misleading. All that stated upfront, I shall proceed to engage in this ‘gossip’ stuff.

I was trying to analyse the evolution of US GDP per capita over the years. That is one measure of declining productivity and hence of competitiveness. Only the Conference Board has international productivity data. It is available as part of their Total Economy Database. US per capita GDP growth rate has slowed considerably. Clearly, productivity has slowed to a crawl. By some measure, the productivity growth rate is now at a 37-year low in the USA. In fact, It is hard to see how this recovery, especially post-2008, could be termed normal.

US Per capita GDP

US Bureau of Labour Statistics (BLS) gives us two other charts that reinforce the message from the chart above.

US non-farm productivity

If one calculated the gains in non-farm productivity (real output per hour) since the recovery began officially in 2Q2009, the CAGR is 0.9%, until 2Q2016.

US manufacturing productivity

While I was doing this, my interest was piqued. I wanted to see how India and China were doing. Interestingly, as they had announced sometime ago, the Conference Board now presents two sets of GDP data for China – ‘Alternate’ and ‘Official’. The Conference Board just does not think that the official Chinese data is reliable. Not that other Chinese data make much sense. See this on the Capital flows out of China.

The Conference Board calculates PPP-adjusted GDP under two methods – GK and EKS. These letters refer to the initials of the persons/academics/researchers whose methods are being adopted. GDP-GK is in 1990 dollars. GDP-EKS is in 2015 dollars.

Under GDP-GK, China’s PPP adjusted Official GDP based on 1990 prices is USD18.6trn. The ‘Alternate’ GDP estimate is USD10.7trn‘. The figure for India is USD5.8trn. Under this method, India’s per capita GDP was above China’s up to 1978 although the lead had started shrinking from the 1960s. But, India’s per capita GDP went below China’s from 1979 onwards.

India China Per capita GDP_GK

Under GDP-EKS, China’s PPP adjusted Official GDP based on 2015 prices is USD20.8trn. The ‘Alternate’ GDP estimate is USD18.4trn. The figure for India is USD8.3trn. Under this method, India lost its lead to China in the 1960s itself. But, China increased its lead the most in 1977-80 and in 1990-2010.

India China Per capita GDP_EKS

Under both the methods, the gap between India’s per capita GDP and that of China’s peaked out in 2013. In the last three years, the gap had begun to close ever so slightly. Chances of the gap closing further in the years ahead are good for India. A recent Bloomberg article shows that China is fast at work stimulating the wrong areas of the economy through public enterprises. Nothing much has changed, if ever, in China.

China, after having denied India membership in the Nuclear Suppliers Group has had the chutzpah to ‘suggest’ that if India backed China’s stance in the South China Sea disputes with some ASEAN countries (and with the USA), it would consider India’s NSG application favourably. China threw the rule book at India to deny the NSG membership. The International Court of Justice threw the rulebook at China. China was the instigator. I doubt if there is any need for India to fall for this bait. India has all the time in the world to wait as China goes about scoring self-goals and throwing audacious warnings at other nations too. See here and here.


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