China vs. India: Economy and Government Finances

China and India are two of the largest fast-growing emerging countries with populations of over one billion each. After Independence from Britain in 1947, India became the world’s largest democracy with a closed economy primarily based on agriculture. In 1949, Communist leader Mao Zedong took control of whole of mainland China and established a communist state. Following the USSR, both countries implemented five-year plans to varying degrees of success. Due to lack of foreign investment, capital controls, centralized planning, socialist policies and other factors the economies never reached their full growth potential.

However under the leadership of Deng Xiaoping China opened up its economy in the early 1990s focusing on foreign trade. Similarly India also liberalized its economy in 1991 and removed many barriers for foreign investment. Since then the economies of China and India have achieved tremendous growth almost each year becoming two of the hottest emerging markets in the world. Some have predicted that these countries would become the future superpowers replacing the U.S., the lone superpower now. While it is too early to speculate on the possibility of China and India becoming superpowers militarily it is likely that their economies would be much larger and become a powerful force in in the global economy. In this post lets a took a quick look at where they are today in terms of government finance and the composition of the economy.

Comparison of Government Finances

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China’s public debt as a percentage of GDP is 18%. India’s public debt to GDP is much higher at 75%.

At $2.4 Trillions, China holds the largest foreign currency reserves in the world. India on the other hand holds $263 billions which is just 11% of China’s reserves.

External debt of China is slightly higher than India’s. However as noted above China has a huge foreign reserve and the economy is much larger than the India economy.

Share of GDP by Sector


Sources: CIA World Factbook and other sites

The manufacturing sector accounts for about 47% of the economy in China. This is not surprising since China is now considered as the factory floor of the world. Industries account for 28% of the Indian economy. India’s services sector is higher than China’s with the sector accounting for over half of the economy. For example, India excels in service industries such as IT, call centers, Business Process Outsourcing(BPO), etc. Agriculture is still one of the major sectors in India providing jobs for millions. Despite the growth of IT and other industries in recent years, agriculture is still the life blood for majority of the population in India especially in rural areas. China has reduced it dependence on agriculture as a major industry due to the explosive growth in the manufacturing sector. As a result of this shift millions of Chinese have been pulled out of poverty.


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