Two Reasons India Will Overtake China By 2025

Although the Commonwealth Games in Delhi ended up more like a joke compared with the Beijing Olympic Games, you cannot ignore the potential of the Indian economy.

In 1991, Indian economy was on the brink of total collapse after running a centrally planned economy since independence.  The Prime Minister P. V. Narasimha Rao, together with the Finance Minister Manmohan Singh (who is currently the Prime Minister), embarked on an economic reform to save the economy.  They abolished the licence Raj system, effectively liberalised many parts of the Indian economy.  Now, we see an India which is a major centre for outsourcing from developed countries.  The IT services industry in India is thriving on their cheap labour costs, educated and English-speaking workforce, and their entrepreneurial bosses.

Also as mentioned in previous discussions, India has a young and expanding workforces while China will probably face a serious ageing problem in 15-20 years time.  In the longer-term, I believe this is giving India a very important advantage over China as it has a much healthier dependency ratio.  Expanding workforce will certain means expanding output even if productivity gain is minimal, while China economic growth will have to be dependent on increasing productivity in 15-20 years time, all else being equal.


 Truth be told, India is still much poorer than China.  The GDP per capita of India in 2009 was US$1,030.785 according to IMF, compared with China’s US$3,677.857, it was still just a fraction of it.  China’s autocratic leadership might be able to make decision fast, versus the Indian democracy which slows down everything.  That is why we have seen wonderfully organised Olympics and great infrastructure in China, which India would envy.  However in the long run, I still see advantage in democracy (which I may elaborate later).

To quickly summarise, I believe demography matters in the economic rival between India and China.  As India is still much poorer than China, perhaps it also makes sense to say that the need for catch up will mean a faster growth in the years to come.  For investors, perhaps you should take an extra look at India.