News: India’s spending-led growth looks superior to China’s

(DNA 01/05/2006) Mumbai - Here’s more proof that the Indian growth story is powered by Indians spending more, while China’s is export led. The World Bank’s World Development Indicators (WDI) 2006 show that household final consumption expenditure (HFCE, a measure of spending by individuals) in India increased from 66% of gross domestic product (GDP) in 1990 to 68% in 2004. In China, this indicator declined - from 50% of GDP to 49%. The annual average growth rate of HFCE also grew in India’s case - from 4.9% to 6.2% between 1990-2000 and 2000-04, while it declined in China, from 9% to 7%.

India’s growth is being seen as more sustainable because it is driven by domestic consumption. However, China has woken up to the vulnerability of its development model and has started adjusting the skew. When that starts to take effect remains to be seen.

What could also work in India’s favour is the fact that spending patterns are more evenly distributed across income categories, going by the percentage share of different sections of the population in income or consumption show

The lowest 10% in China account for only 1.8% of income/consumption while the highest 10% accounts for 33.1%. The differences are less sharp in India. The poorest 10% are better off than China’s - they account for 3.9% of income/consumption while the richest 10% accounts for 28.5%.

Clearly, China’s is the more unequal society. China’s Gini Index (a measure of the degree of inequality in an economy), as of 2001, was a high 44.7, while India’s, in 1999-2000, was 32.5. A Gini index of 0 is a situation of perfect equality, while an index of 100 implies perfect inequality.

“Inequality has been increasing in China, especially since the last 20 years,” acknowledges Basant Pradhan, senior economist at the National Council of Applied Economic Research (NCAER). But he also expresses his discomfort with the fact that the figures relate to either income or consumption, since like-to-like comparisons become a problem.

The urban-rural disparities, Pradhan notes, are particularly stark. Indeed, WDI data shows that while 69% of the urban population had access to improved sanitation facilities in 2002, this privilege was available to only 29% of the rural population.

India, however, is worse off in this respect. Only 58% of its urban population and 18% of rural population had better sanitation facilities.

What’s creditable about China’s record in this area is the fact that it is urbanising much faster than India. The percentage of urban to rural population jumped from 27% to 40% between 1990 and 2004, an annual average rise of 3.6%. The increase in India’s case was almost negligible - from 26% to 29%, with an average annual growth rate of 2.5%.

Clearly, India still has a lot to learn from China.