China and India Are Soon to pass the United States as the Number 1 & 2 World Economies

Hi everyone, I’m Rick Barron, your host, and welcome to my podcast, That’s Life, I Swear

According to Yahoo Finance, currently, the United States of America is the world's largest economy, with a GDP of over $25.4 trillion in 2023. The key word here is ‘currently.’

Let’s jump into this 

Before I jump into this episode, I’d like to call your attention to a fairly new podcast launched a few months ago. 

What Do We Call This Podcast. Courtesy of Kalyn Bree

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Ok, back to this week’s episode.

So, take a deep breath and let this sink in for a moment. China’s economy is 70% of the U.S. today, and growing at more than twice the rate. China is at the front door knocking, poised to become the world’s largest economy between 2035 and 2040, about 12 to 17 years away. But guess what? The United States now has someone knocking on their back door. India’s economy is also on track to surpass the U.S. economy.

Project GDP for India, China & USA. Courtesy of: Quora

Here’s a data point that will make you scratch your head. Goldman Sachs predicts India will overtake the United States, becoming the world's second-biggest economy behind China by 2075 or maybe by 2073. It’s also predicted that when India makes this move, it will leapfrog Japan’s and Germany’s economies simultaneously.

Think about that for a moment.

China will soon go to the head of the world’s largest economy line, with India not that fall behind.

India's population is much younger than China's. In 2022, India's median age was 28.2 years, while China's was 41.4 years. This means that India has a much larger workforce than China, and its workforce is also growing at a faster rate.

China & India projected populations. Courtesy of: New York Times

In 2022, India's economy grew by 8.7%, while China's grew by 8.1%. This trend is expected to continue, with India's economy growing by an average of 7.5% per year between 2023 and 2035, while China's grows by an average of 6.5% per year.

India is becoming more integrated into the global economy. It's exports have grown rapidly in recent years, and the country is now one of the world's largest exporters of services. This integration into the global economy is helping to boost India's economic growth.

These are just a few factors that suggest India is on track to surpass China as the world's largest economy one day. This is an important development, as it will mean that the global economy will be increasingly driven by two countries that are very different in size, culture, and political systems.

My thoughts on this are that it is an exciting time to be alive. We are witnessing the rise of two new economic superpowers, and it will be fascinating to see how they shape the world in the years to come.

Of course, there are also some challenges that India will need to overcome in order to achieve its economic potential. These include:

1.     Poverty and inequality: India is still an impoverished country, and there is a great deal of inequality in terms of income and wealth. This will need to be addressed to ensure that economic growth benefits are shared more widely.

2.     Infrastructure: India's infrastructure is still underdeveloped, and this is a major obstacle to economic growth. The country needs to invest heavily in roads, railways, airports, and other infrastructure in order to improve its connectivity and competitiveness.

3.     Corruption: Corruption is a major problem in India and hinders economic growth. The government needs to take steps to reduce corruption in order to create a more level playing field for businesses and investors.

These are just some of the challenges India will need to overcome to become the world's second largest economy. However, if it can do so, it will significantly impact the global economy and the world order.

Why does this matter?

As with all things, change happens over time. If we go back in history there have been countries that once held the title of being the largest economy in the world.

The Netherlands was the first state to gain clear dominance in the 17th century, after its revolution led to a new financial system that many historians consider revolutionary.

In the 19th century, Britain took the title away from the Netherlands. Due to British dominance, the world system became relatively stable again during the 19th century. The British expanded globally, with many colonies in the New World, Africa, and Asia.

Industrialization was another ongoing process during British dominance, resulting in the diminishing importance of the agricultural sector. In the 18th century, Britain was Europe's leading industrial and agricultural producer; however, by 1900, only 10% of England's population was working in the farming sector

The U.S. began to replace the British as a new dominant state after World War I. With Japan and Europe in shambles after World War II, the U.S. was able to dominate the modern world system more than any other country in history, while the U.S.S.R. and to a lesser extent China were viewed as primary threats. At its height, U.S. economic reach accounted for over half of the world's industrial production, owned two-thirds of the gold reserves in the world and supplied one-third of the world's exports.

In my research for this episode, there was a time when India’s and China’s economies were dominant back in the 16th and 18th centuries, respectively. Apparently, history is going to repeat itself.

It is worth noting that the concept of a "world's largest economy" is a relatively recent one. Before the 19th century, there was no single global economy, and countries' economies were largely isolated from each other. As the world has become more interconnected, it has become possible to compare and rank countries' economies on a global scale.

As for India journey to becoming a world-class economy, if not one day the worlds largest economy, many factors spring up as to why this is coming.

Around 2005 and up to 2020, before COVID-19 kicked in, India maintained a real GDP growth rate of 8% compared with less than 2% for the U.S. If India can keep this up for the next two decades and grow 5% a year thereafter while the U.S. maintains its growth rate of 2%—two possible scenarios, if not likely—it would overtake the U.S.A by 2075.

Another factor working in India’s favor is their GDP per capita is less than 20% of China's and 5% of the United States. This huge gap in productivity per person provides India with vast opportunities to catch up. As the country accumulates capital and its workforce enhances its skills, it can achieve large productivity increases just by deploying the superior existing technologies.

As for China, they’re currently facing an aging population and young people unable to find work who are expected to care for older population. By 2035, around 400 million Chinese people will be aged 60 and over, or some 30% of the population.

Here's another data point that favors India, and that’s a having a population of a young and large population. Let’s take the population's size to the side for a moment and focus on the advantages a young population provides. 

1. It potentially translates into a relatively larger workforce and, consequently, higher output per capita. 

2. Given that the young tend to save for old age while the old spend more than they save, a younger population also translates into higher savings and therefore higher investment. The higher investment directly adds to output and indirectly facilitates the adoption of superior technology. 

3. A younger population brings greater energy and vibrancy to a nation, leading to more innovation.

Now, there is an ‘however’ to consider. To be sure, India must do more to raise its labor participation rate by including more women than they are currently to take full advantage of its young population. A Goldman Sachs report stated, and I quote; “A mere 25% of all working-age women in India are in employment", end quote.

The investment banker wrote in a separate report in June of 2023, citing that the low figure could be due to women being primarily engaged in piecework, which is not accounted for by the economic measures of formal employment.

India women working in factories. Courtesy of: AVPN

Less than one-quarter of women 15 years old, and up, participate in India's workforce, compared with three-fifths in China and the U.S. Additionally, better education at all levels will play an essential role in that endeavor.

As for population size, India surpassed China in April of 2023 to become the world’s most populous country, and the gap will only widen in the near future. When you think about that prediction, it presents additional benefits through economies of scale in providing public goods. 

Here’s a case in point. Take, for example, India’s digital payments infrastructure built on the biometric identity system known as Aadhaarand the United Payments Interface (UPI) platform, which serves as host to hundreds of banks. 

UPI mobile app. Courtesy of: PYMNTS

Now, very quickly, Unified Payments Interface (UPI) is an instant payment system developed by the National Payments Corporation of India (NPCI). The interface facilitates inter-bank peer-to-peer (P2P) and person-to-merchant (P2M) transactions. It is used on mobile devices to instantly transfer funds between two bank accounts.

UPI Transactions in India map. Courtesy of: The Maps Daily

Using Aadhaar to verify identity, UPI clears transactions between bank-account holders in real-time. The larger the number of users, the lower the per-capita cost of building the infrastructure for it. Are you getting it?!

India is not letting the grass grow beneath their feet. What do I mean by that? A Goldman Sachs report said India’s government has prioritized infrastructure creation, especially in setting up roads and railways. The India’s recent budget wants to continue their 50-year interest-free loan programs to state governments. Why? Simple, to spur investments in infrastructure.

It’s relatively simple Economics 101. Once an expressway has been built, for example, the larger the population in the communities around it, the lower the per-capita cost of connecting them. The same goes for railway and air connectivity, electricity, and piped water. Once these amenities have been brought to one village, the extra cost of extending them to other nearby towns is small.

Another even more pronounced benefit is that a larger population creates supply chains. A larger population means greater scope for collection and cost efficiencies. With the risks of investing and operating in China today multiplying, multinationals are switching to the
 so-called "China+1" strategy, looking for an additional, less risky but cost-effective location for their investments. Apple is already taking this step with India.

India has a distinct advantage in becoming that "+1" country because it constitutes the most significant single market among potential competitors. Components produced in different locations can move freely without facing a customs border. A large internal labor market also makes for better prospects for a closer match between the skills needed and those available.

Above all else, India needs to remember the spirit of its economic reforms in 1991—which centered around liberalization, privatization, and globalization—that have gone some distance toward accelerating growth. If the country wants to return to being one of the world's top two economies in the next 50 years, if not number one, it must deepen and widen the reforms it began three decades ago.

A footnote about why China’s young people are struggling to find work today. These include:

• The economic slowdown: China's economy has been slowing down in recent years, which has led to a decline in demand for labor. This has been particularly felt in the manufacturing sector, which has shed millions of jobs.
• The rise of automation: Automation is also playing a role in the decline of jobs in China. As more and more tasks become automated, fewer jobs are available for human workers.
• The education bubble:  There is a growing mismatch between the skills young people learn in school and the skills employers seek. This leads to a surplus of graduates who cannot find jobs that match their qualifications.
• The 996-work culture: The long hours and high pressure of the 996 work culture make it difficult for young people to find time to look for jobs.

According to the National Bureau of Statistics of China, the youth unemployment rate in urban areas reached a record high of 21.3 percent in June 2023. This means that one in five young people in urban China is unemployed.

The situation will likely worsen in the coming years, as the economy slows down and automation takes over jobs. Young people in China will need to be prepared to adapt to the changing job market and develop the skills in demand.

Here are some additional data that support my analysis:

·       A 2022 report by the World Bank found that the number of unemployed young people in China is expected to reach 20 million by 2025.

·       A 2023 survey by the Chinese Academy of Social Sciences found that 60% of young people in China are dissatisfied with their current jobs.

·       A 2023 report by the Chinese Ministry of Human Resources and Social Security found that the average number of job applications per vacancy in China is now 100.

What can we learn from this story? What’s the takeaway?

It's important to note that economic rankings can fluctuate over time due to various factors, including financial policies, technological advancements, geopolitical shifts, and natural resources. As the global economic landscape continues to evolve, new contenders may arise, as seen in the projected rise of China and India in the coming decades.

Well, there you go, my friends; that's life, I swear

For further information regarding the material covered in this episode, I invite you to visit my website, which you can find on either Apple Podcasts/iTunes or Google Podcasts, for show notes calling out key pieces of content mentioned and the episode transcript.

As always, I thank you for listening and your interest.

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