The size of the economy of China and India is big and influences how the world produces and trades.  The total share of the world GDP, of China, India and other South Asian nations in 2023 was 31.2% and is expected to rise to 35.8%, whereas the figures for G7 nations are 25.8% and 23.8% respectively for the same period. The share of China is 19% and 21.9% and that of India is 9.9% and 11.5%. These figures indicate that a typical political set up like democracy, communism, socialism and such is not mandatory for economic well being and progress. The people of China and India are governed by differing political dispensations and their economies did not necessarily emulate any text book stereotypes for decades.

The main difference between socialism and capitalism is that in socialism the private property rights don’t exist or are cover controlled, research initiatives and decisions are normally with the State, property rights do not exist. There are no financial rewards for entrepreneurs, competition and financial prudence. Yet the data shows that China was far more successful in enhancing its economy than India. While China increased its GDP from $372.2 bn in 1987 to $17.9 tn in 2022, India’s figures were $283.37 in 2022 to $3.7 tn in 2022.

Communist China and socialism

What role does the Chinese Communist Party, the controlling authority of the Chinese government, play in a seemingly thriving capitalist economy? China’s dynamic entrepreneurialism seems wholly incompatible with its people’s deference to authority. Then, they delivered over four decades.

Deng Xiaoping, the man who changed China in the late 1980s, once said, “It does not matter whether the cat is black or white as long as it catches mice”. His idea that a market economy could be compatible not only with capitalism but also with socialism was a breakthrough. His model does not (did not) fit into any category from the textbook. The reforms carried out by Deng (December 1987 – November 1998) and his allies gradually led China away from a planned socialist economy and Maoist ideologies, opened it up to foreign investments and technology, and introduced its vast labor force to the world, thus turning China into one of the world's fastest-growing economies (from the late 1980s till 2019). He was criticized for ordering a military crackdown on the 1989 Tiananmen Square protests, yet was praised for his reaffirmation of the reform program in his Southern tour (southern China) of 1992, regarded as a critical point in the modern history of China, as it saved the Chinese economic reform as well as the capital market, and preserved the stability of the society after the fiasco of Tiananmen Square. He also oversaw the reversion of Hong Kong to Chinese control in 1997 and the return of Macau in 1999. The endeavor continues till today, albeit with a few hiccups.

The State in China is unique in that it has the ability to mobilise collective action in the interest of the nation than what a multiparty democracy with a quest for power can do. More economic freedom and less political freedom – political centralization with economic decentralization. In this system, local governments control major resources and market opportunities but they are just as economically savvy and tend to give rather than take. Developing countries traditionally neither have state capacity nor good institutions.

China followed a path of state guidance at macro level and market mechanism at micro level to guide the economy. Contrary to beliefs the private sector in China produced (2022) 60% of national output, 70% of nations wealth and 80% of urban employment. Today China is a 18 trillion economy and second only to the USA.

Democratic India and socialism

Only centuries earlier, India was the strongest economic power in the world. India’s share in the world income was 22.6% in the 18th century which declined to 3.8% in 1952 – in the interim India was conquered and colonized till it became an independent democracy in 1947.  It then by design or by default followed the Soviet socialist model of economy. The Indian government in the 1950s focused on achieving economic self-sufficiency through rapid industrialization by creating large state-owned enterprises known as PSUs (public sector undertakings). The decadal average growth rate between 1952-60 was 3.9%. Liberalization combined with significant government spending led to an improvement in  GDP growth reaching 5.7% in the 1980s.

After taking over as the prime minister, Rajiv Gandhi introduced policies and reforms that broadened the then existing economic model which was based on Soviet Union’s protectionist policies. He introduced reforms that reduced taxes for technological upgradation and liberalised import policies related to telecommunications, defense and aviation. His policies were aimed at modernizing industries, in a bid to attract higher foreign investments in the economy. The 1984 policy providing the provision for exports through satellite links was approved by the Indira Gandhi cabinet earlier in the year, but was announced by Rajiv Gandhi’s government on 18 November 1984. Gandhi and his advisors are responsible for shaping India’s foreign and domestic telecommunications policies.

India's tryst with Soviet style socialism was not succeeding even after many long years of independence. In the summer of 1991, it was all coming home to roost. The balance of payments situation was bad; even the GDP growth of 3 per cent or so was tapering off, and the foreign exchange reserves had virtually dried up.  The situation was desperate with India left with no choice but to change track and go in for a dramatic restructuring of its economy. The actions may, in hindsight, now seem logical but India in 1991 was distinctly different, having grown up on a steady diet of socialism-laced mixed economy. Rao did steadfastly maintain his reformist zeal throughout his stint as prime minister. In 1992, a series of measures opened the Indian stock markets for a boom (and a whole lot of scams too). He set up the National Stock Exchange in 1994, and progressively reduced limits on FDI and areas where foreign investors could come in. The economy reversed.

The next phase of reforms took place during the NDA government's two terms in office from 2014 to 2024.  India has on average been one of the fastest-growing large economies. Between 2014 and 2022, GDP grew at an average of 5.6 per cent in compound annual growth rate (CAGR) terms. An average of 14 other large developing economies had a CAGR of 3.8 per cent over the same period. Economists said India’s economy would need to grow faster than its current 6-7 per cent rate in order to absorb a growing number of entrants into the workforce and meet Prime Minister Narendra Modi’s goal of reaching developed country status by 2047.

India needs more reforms

As late as in 1987, India and China were at the same starting block in GDP terms. Twenty five years later, in 2022, China’s GDP was a whopping six times more than that of India. The two major reforms that sort of propelled the Indian economy were taken in 1984 by Rajiv Gandhi’s government who then had more than two-thirds majority in parliament and in 1991-92 by Narasimha Rao’s minority government. 

It is not possible for India to follow the China model of governance of less political freedom and more economic freedom. Yet, the present government may be well advised to implement pending reforms like land, labor, and judicial at the earliest.

(The author is an Indian Army veteran and a contemporary affairs commentator. The views are personal. He can be reached at  kl.viswanathan@gmail.com )