Can India overtake China?

India has around 1.1 billion inhabitants. Of those, 400 million are illiterate — a full one third of the population. Only 27 million pay any tax; Mumbai alone is said to be responsible for as much as 40 per cent of the country's entire tax intake. The poverty level is arguably worse than sub-Saharan Africa. How then, is it possible that investors can compare India and China, in the same breath, as economic powerhouses?

Are India's social problems surmountable? There are very serious concerns over the social and educational problems that beset India, in its rural areas in particular. The average number of years of education Indian children enjoy is just five.

How do you rebuild India's education system, given the statistics mentioned above? At the moment, some observers argue that the government has almost given up on the state system and relies on the private sector to educate the nation's next generation of doctors, teachers and software engineers. This matters a great deal; India's continued economic growth relies on taking the one third of the population that are illiterate and transforming them into productive workers.

Does the bureaucratic political system have the stomach to enact the reforms needed to transform the economy? Certainly, there have been some success stories; the first majority government in decades has spent the past 18 months trying to improve land reform, cut red tape, privatise parts of its portfolio of state-owned companies and invest heavily in infrastructure. Its success is most obviously seen in the new roads, airports and power plants that are springing up. But much more needs to be done.

Delays in democracy

The challenge is that India is a democracy; unlike China, where the one-party government can make decisions quickly and act on them, India goes through due process, which can delay investment programmes. India has a very long way to go to become a self-propelling econ-omic success story, and there is scope for it to be derailed along the way.

So how does India compare with China?

Both have witnessed immense double-digit growth in recent years. Both are investing heavily in improving their infrastructure to sustain growth. Both are at the forefront of the current Asian economic recovery. And both have the potential to lead global growth over the next few years. China is clearly outperforming India at the moment and is likely to do so in the short term.

However, it's not all bad news for India. The positives are based on domestic demand growth; per capita incomes are half those of China and 10 per cent those of the US. Meanwhile, high credit growth in the corporate sector is growing from a very low base. This should drag up productivity growth in the long term, even if there are hiccups along the way.

While it is accepted that China will overtake the US as the world's largest economy, Beijing has introduced measures to avert asset bubbles and inflation. According to Morgan Stanley, this means that India is likely to become the world's fastest growing economy by 2015.

The economic growth rate in India has averaged 7.1 per cent over the past 10 years while China has averaged around 9.1 per cent. However, the analyst community believes India will match China's growth within the next two years and overtake it shortly afterwards.

India's ability to catch up with China is seen in the projected increases in the two nations' workforces and the move to rapidly improve infrastructure. First on workforces, India is expected to add 136 million workers to the labour force — more than the entire population of Japan — by 2020, compared with an equivalent figure for China of just 23 million.

Enormous investment

Improving the current infrastructure, meanwhile, means investing on an enormous scale. China is currently investing 11 per cent of GDP in improving, roads, railways, airports and extending cities. Meanwhile, India is spending eight per cent of GDP in vastly improving its cities. It is estimated that $1.2 trillion (Dh4.4 trillion) of capital investment is needed to expand Indian cities to accommodate the growing middle classes.

Among this infrastructure boom, 7,400 kilometres of metro and subway will need to be constructed and 2.5 billion square metres of road will have to be paved. It took almost 40 years for India's current urban population to grow to 230 million. The next 250 million of urban development could be created in just half that time.

The expanding middle classes in both countries are also important. Over the next 20 years, more than 91 million households will move into India's middle classes, while China's middle class will grow by an estimated 200 million.

The future of India's growth can be seen in its demographics. Around 60 per cent of the current population is under 30. Indeed, by 2030, it is anticipated that India will have a net growth of 270 million people of working age.

Both China and India have serious fundamental issues to face: China in taming the beasts of inflation and asset bubbles; and India in addressing its social issues, resuscitating its education system and keeping the reform agenda on track.

Even so, India and China remain at the forefront of the emerging market-led revival of the global economy. It seems likely that China and India will continue to expand at their expected growth rates over the next 30 years, outperforming all developed economies.

 Spencer Lodge is the regional director for Middle East P.I.C de Vere.