Why in news?
India and China are facing structural economic challenges. India’s private investment and manufacturing are stagnant, while China’s economy shows weak household consumption, over‑investment and rising debt. Observers describe this as a shared “reform deficit.”
Historical background
India and China share a long history of trade and cultural contact through the Silk Route and the spread of Buddhism. In 1954 the two countries signed the Panchsheel Agreement and the slogan “Hindi–Chini bhai‑bhai” suggested friendship. Relations deteriorated after the 1962 border war and have since seen recurring tensions, such as the Doklam stand‑off in 2017 and the Galwan clash in 2020.
Relations today
- Political and security dimension: The boundary disputes in Aksai Chin and Arunachal Pradesh remain unresolved despite agreements in 1993 and 1996. Skirmishes continue along the Line of Actual Control.
- Economic ties: China is one of India’s largest trading partners, with bilateral trade exceeding USD 135 billion in 2023. However, India runs a large trade deficit and has restricted Chinese apps and investments in sensitive sectors after the 2020 clashes.
- Multilateral engagement: Both countries are members of BRICS, the Shanghai Cooperation Organisation and the G20. They disagree on United Nations reform, climate negotiations and global governance.
- Strategic concerns: China’s Belt and Road Initiative passes through Pakistan‑occupied Kashmir, which India opposes. India’s involvement in the Quad and Indo‑Pacific strategies is viewed by China as balancing its influence. The two nations compete for influence in South Asia, the Indian Ocean and Africa.
- People‑to‑people ties: Cultural links continue through yoga, Buddhism and education, but tourism and student exchanges have declined due to the pandemic and border tensions.
India’s reform deficit
- Investment stagnation: Despite schemes such as Production‑Linked Incentives and lower corporate taxes, private investment has not revived. Manufacturing remains concentrated in a few states.
- Manufacturing plateau: The share of manufacturing in GDP has remained around 15–17 percent for decades. Informality, low productivity and limited job creation persist.
- Consumption‑led policy: Recent tax cuts and cash transfers boost consumption but leave less fiscal space for education, health and infrastructure.
China’s reform deficit
- Over‑investment and excess capacity: The investment‑to‑GDP ratio is around 40 percent, and industries like steel and cement have large unused capacity.
- Weak household consumption: Household spending forms a small share of GDP; confidence is low due to an ageing population and high savings.
- Debt‑led growth: Corporate and local government borrowing fuels investment. A large trade surplus hides underlying vulnerabilities.
Comparative analysis
- Growth drivers: India relies on consumption and services, whereas China depends on investment and exports.
- Structural issues: India faces low investment and weak manufacturing; China suffers from low consumption and excess investment.
- Political economy: Populist policies shaped by elections dominate in India, while China’s centralised leadership avoids welfarism.
- Currency strategies: India maintains a relatively stable rupee to support imports; China keeps the yuan undervalued to encourage exports.
Broader implications and way forward
- For India: Reform land, labour and capital markets; spread manufacturing across more states; deepen financial markets and encourage household savings; redirect fiscal resources from short‑term populism to long‑term investments in infrastructure and human capital.
- For China: Shift decisively towards domestic consumption through social security and income redistribution; curb debt‑fuelled investment and rationalise excess capacity; strengthen household purchasing power.
Conclusion: Both India and China stand at critical junctures. Consumption‑led growth in India and debt‑led investment in China are temporary fixes. Long‑term prosperity requires bold structural reforms, even if they are politically difficult.