With a population of over 1.3 billion, India has long been compared to China. For decades since China embraced reforms in 1978, the comparison remained limited to demographics and not actual economics. Almost every year from 1978 until 2013, China's economy grew faster than India's by a wide margin.
Just as China started to face the challenges associated with the higher middle-income category it belongs to, India surpassed China to be the world's fastest-growing major economy in 2014. With an expectation of robust growth rate for years to come, India is more important than ever for your emerging markets portfolio. The Indian economy still faces many challenges and China remains a good measuring stick to use for comparison.
How does India's economy compare to China's?
Given the comparison, it makes sense to look at India's economy in the context of China's. On the GDP and GDP-per-capita fronts, India remains far behind China. China's GDP came in at USD $12.2 trillion in 2017, making it the second-biggest economy in the world. On the other hand, India was a distant sixth with a GDP of USD $2.7 trillion (although it's set to overtake the UK and claim the number five spot by the end of 2019).
However, a more important measure of economic development is per capita income. China's per capita income of USD $8,826 was more than four times India's USD $1,980 in 2017. On a purchasing power parity (PPP) basis, China's GDP came in at USD $16,842 against India's USD $7,166 in the same year.
Most investors are probably aware that China's economy is much more geared toward manufacturing while India's is focused primarily on services. This shows up in the data as manufacturing accounts for almost 30% of China's GDP compared to just 15% of India's, according to the World Bank.
When it comes to demographics, India, with a median age of 28 years, boasts a much younger population than China's (37 years). As a result of the younger workforce, India is expected to continue to bridge the gap with China, albeit slowly, by growing faster in the years to come. The International Monetary Fund (IMF) expects India's economy to grow at above 7% in the years to come while China is expected to see deceleration with growth falling to 5.5% in 2024.
Will India overcome its challenges?
Although the prospects look bright, the ongoing technological changes pose unique challenges. The general shift toward automation and artificial intelligence might make it challenging to employ the millions of Indians who join the workforce every year. The government needs to quickly adapt to the changing landscape by up-skilling and reskilling the workforce to match the demand. And while improving, India's bureaucracy still needs to evolve faster to take on the challenge.
Meanwhile, the banking sector in India needs a lot of cleaning up as bad loans threaten to disrupt India's growth story. The government is spending more than it earns, leading to a growing budget deficit. In the manufacturing sector, it needs a boost if India wants to put more people to work. India's participation of women in the workforce is the second-lowest among the G20 countries.
In spite of all these challenges, or because of them, there is a great opportunity to transform the world's largest democracy. How the economy shapes up depends on how fast the policies evolve in response to the ever-changing global environment.
A version of this article was written by Mayur Sontakke and originally appeared on our Fool Asia site. For more coverage like this head over to Fool.hk.en