Report of the National Intelligence Council's 2020 Project

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India vs. China: Long-Term Prospects

India lags economically behind China, according to most measures such as overall GDP, amount of foreign investment (today a small fraction of China’s), and per capita income. In recent years, India’s growth rate has lagged China’s by about 20 percent. Nevertheless, some experts believe that India might overtake China as the fastest growing economy in the world. India has several factors working for it:

Its working-age population will continue to increase well into the 2020s, whereas, due to the one-child policy, China’s will diminish and age quite rapidly.

India has well-entrenched democratic institutions, making it somewhat less vulnerable to political instability, whereas China faces the continuous challenge of reconciling an increasingly urban and middle-class population with an essentially authoritarian political system.

India possesses working capital markets and world-class firms in some important high-tech sectors, which China has yet to achieve.

On the other hand, while India has clearly evolved beyond what the Indians themselves referred to as the 2-3 percent “Hindu growth rate,” the legacy of a stifling bureaucracy still remains. The country is not yet attractive for foreign investment and faces strong political challenges as it continues down the path of economic reform. India is also faced with the burden of having a much larger proportion of its population in desperate poverty. In addition, some observers see communal tensions just below the surface, citing the overall decline of secularism, growth of regional and caste-based political parties, and the 2002 “pogrom” against the Muslim minority in Gujarat as evidence of a worsening trend.

Several factors could weaken China’s prospects for economic growth, especially the risks to political stability and the challenges facing China’s financial sector as it moves toward a fuller market orientation. China might find its own path toward an “Asian democracy” that may not involve major instability or disruption to its economic growth—but there are a large number of unknowns.

In many other respects, both China and India still resemble other developing states in the problems each must overcome, including the large numbers, particularly in rural areas, who have not enjoyed major benefits from economic growth. Both also face a potentially serious HIV/AIDS epidemic that could seriously affect economic prospects if not brought under control. According to recent UN data, India has overtaken South Africa as the country with the largest number of HIV-infected people.

The bottom line: India would be hard-pressed to accelerate economic growth rates to levels above those reached by China in the past decade. But China’s ability to sustain its current pace is probably more at risk than is India’s; should China’s growth slow by several percentage points, India could emerge as the world’s fastest-growing economy as we head towards 2020.