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Decimal Digest
27 Jun 2011


A Tale of Two Reforms

It is a well-known fact that since its 1978 reforms, China has been growing very strongly, without any significant pause. However, many readers would be surprised to note that before 1978, India’s then tiny economy was larger than that of China. The reforms of 1978 helped China overtake India and it has never looked back.

India launched its own reforms in 1991, helping it to accelerate its economic growth. However, India has not been able to match the growth of China in a consistent manner.

The chart below shows the relative size of Chinese economy as compared to India.

The chart shows that the Chinese economy, which was 1.8x of India in 1991, is now 3.3x that of India. During this period, both the countries have ostensibly reformed their economies. Why should reforms have paid much higher dividends in China compared to India?

We offer two plausible explanations.

Firstly, reforms in China were launched as a result of self realization by the Chinese leaders that the then prevalent economic model was not producing results. Hence, their approach had a long-term commitment to it.

However, in the case of India, the then political leadership failed to realize that the prevalent model was not working. Reforms in India were a result of the IMF conditionality to bail out India from the external debt crisis. The reforms were carried out without much belief in them. As the last six years have shown, the Indian political leadership still does not want to take reforms to their logical conclusion, in spite of overwhelming evidence of their efficacy.

Secondly, the political structures of India and China vary significantly. China is an authoritarian state, and hence its leaders constantly fear a peoples uprising if the economy falters. This keeps them on their toes.

India, on the other hand, has a democracy, which is riddled with corruption, caste and religious issues. The political system in India has perfected the art of influencing votes based on religious, caste and monetary grounds. As a result, economic reforms do not play a central role in the survival of governments in India. This makes a strong, vibrant economy an afterthought for the Indian political leadership.

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