There is, once again, widespread excitement about the prospects of the Indian economy. This comes on the heel of news that India’s Q3 growth has now marginally edged above China’s, after a statistical adjustment. Can we now expect the Elephant to replace the Dragon as the motor of the world economy?
At times like these it helps to take a longer term view. Assembling GDP growth data since 1960 from the World Bank and taking a moving average of 5 years, I made the following two graphs of the longterm economic performance of the world’s two demographic giants.
The comparison does not come out well for India. It has underperformed China without break, even when China was ruled by Maoists who made Soviet central planners look like paragons of competence by comparison. (The dip at the very beginning is an artifact of the Great Leap Forward and the ensuing chaos and famine). The Licence Raj might not have exactly been a panacea either, but at least markets functioned, and that alone should have made conditions for economic growth orders of magnitude better. Even though China is now about two and a half times richer per capita than India in PPP terms, there are no signs of convergence even to this day, as India continues falling relatively behind.
The difference is, if anything, even more profound when you adjust for population growth, which has been systemically higher in India than in China since the 1970s.
Will India’s growth rate eventually converge with and overtake China’s? That is almost certain, since relatively poorer countries should in theory be able to grow much quicker than richer one’s by buying/stealing knowhow. The main question is how long will it take: Will it happen in the next few years? Or a decade? Or a few decades?
Increasing numbers of economists are coming round to the view that human capital is the main, overriding determinant of economic growth. According to my own calculations, there is an astounding R2=0.84 correlation between PISA-derived national IQs and GDP (PPP) per capita amongst countries that do not benefit from a resource windfall or suffer from a Communist economic legacy. Unfortunately, India’s IQ appears to be very low, somewhere in the low 80s, so I remain very skeptical of its prospects for becoming a second China.
Still, I don’t want to come off as an India basher. There are a few factors working in its favor too. First, it’s got a very substantial “smart fraction,” i.e. it has relatively more bright people than you would expect from the standard bell curves you have in more homogenous countries. Thank the caste system for that. As Heiner Rindermann showed, smart fractions have a disproportionate effect on a country’s overall economic performance. Furthermore, Indian IQs might be even more environmentally suppressed than in Sub-Saharan Africa. India has comparable rates of malnutrition, likely worse sanitation and hyeginic standards, and more inbreeeding. All this might sound bad and it is but that likewise creates the potential for very rapid improvement, should a strong and capable hand be there to help it along.
In this respect, India is lucky to have gotten Modi.