India is a very different story as its recent past proves. With an average growth rate of around 7% for the last 10 years, India is expected to keep it given the very rapid past of urbanization from a much lower level than China today (35% versus 60%), positive population growth as well as a very favourable external environment. In fact, India is expected to become a large magnet of foreign direct investment into manufacturing, as investors search for alternatives to China in an era of great power competition between the US and China. India’s central role in the Indo-Pacific, given its population and GDP size, will keep the US interested in supporting India. This is true for the European Union for a different reason, namely its increasing economic rivalry with China as the two largest exporting engines in the world. All in all, the convergence of the Indian economy with that of China is bound to continue until India reaches China’s economic size by 2050 when it will also double China’s population.
Had I asked this question ten years ago, the answer would have been clear cut: Impossible. But things are changing. The Chinese economy is five to six times bigger than that of India, but India’s growth rate is clearly higher than that of China, especially since 2022, and there is no expectation this trend will change any time soon. This means that, unless a major shock hits the Indian economy, it will continue to converge in size with that of China for at least 30 years until India completes its urbanization process. Whether this will make the Indian economy bigger than that of China is hard to tell since it will depend on how fast China will decelerate but also how long India will continue to benefit from its current long-hanging fruits to create growth, from urbanization, a growing population and a very favourable external environment as the most obvious hedge for the West against the rise of China.
The speed of China’s structural deceleration is probably the least difficult to predict among all the above uncertainties. China’s growth rate has been coming down since 2010 from over 10% to barely 5%. Since China reached US$10,000 ($13,613.45) per capita in 2019, the deceleration has been faster although masked by a very large volatility in growth stemming from the Covid pandemic. China’s growth at 5% for an economy with an income per capita above US$10,000 is a very good record and, therefore, very hard to beat. Only South Korea grew over 5% on average (5.5% in particular) for the ten years after it reached US$10,000 per capita. In other words, China’s structural deceleration is a normal feature of any economy, which also means that a renewed acceleration of growth would be like defying gravity. Every factor behind potential growth is slowing down in China, from the contribution of labour and labour productivity to the contribution of investment (still oversized at 40% of GDP) and the return of investment coming down for the past 10 years and now at levels similar to any developed economy. Under the current circumstances, i.e., without major structural reforms, China’s growth rate will land at 2.4% by 2035 but will continue to slow, at a much faster rate thereafter as China’s urbanization rate, currently at 60% of total population, will reach that of developed economies at around 75%. As Chinese cities start to suffer from depopulation, China’s growth will come down much faster, hovering around 1% per year, similar to Japan today.
