Issue 3 | Article 9

ABSTRACT

The recent deterioration in the political relationship between Australia and China has led to the establishment of an interim free trade agreement between Australia and India. This may be viewed as a way of reducing the cost to Australia of its greater difficulties in accessing the Chinese market. However, it is also likely that it is speeding up Australia’s adjustment to the reality that, during the coming decades, the Indian market will grow more quickly and will become permanently larger than that of China. The shift in focus from China to India would have happened anyway; the change in the political environment is merely speeding up the process.

INTRODUCTION

On 2nd April 2022, Dan Tehan (then Australia’s Minister for Trade, Tourism, and Investment) and Piyush Goyal (India’s Minister for Commerce and Industry, Consumer Affairs and Food, Public Distribution and Textiles) signed the Australia-India Economic Cooperation and Trade Agreement (AI-ECTA). The Agreement emphasises trade in goods and services but also covers the movement of people between the two countries, telecoms, customs procedures, and other areas of cooperation. It is an interim step towards a full Australia-India Comprehensive Economic Agreement, taken mainly to counter China’s growing importance and more aggressive political and economic stance in the Indo-Pacific region. However, the interim Agreement is substantial, covering more than 80 percent of what is likely to be included in the later, comprehensive agreement.

Trade

The Agreement ensures that 85 percent of Australia’s goods exports to India will be free of tariffs. These goods include sheep meat, wool, metallic ores such as manganese, copper, and zinc, coal, alumina, titanium dioxide, some critical minerals, and certain non-ferrous metals. An additional 5 percent of goods exports will have their tariffs removed during the coming 10 years. Included in this category are infant formula, seafood, wine, pharmaceutical products, and specified medical devices.

The Agreement binds existing market access for services and ensures that concessions extended by India in current and future free trade agreements with other countries will also be granted to Australia in 31 sectors. These sectors include higher and adult education, business services, research and development, and tourism and travel. Education-related travel services, which constitute Australia’s largest overall services export, will benefit from a new work and holiday program and from increased incentives for Indian students to study in Australia through the post-study, work-visa program. This program allows Indian students who have finished their studies in Australia to remain for up to two years for those who graduated with a bachelor’s degree, three years for graduates who completed a master’s degree, and four years for those who obtained a doctoral degree. India will provide similar opportunities to Australian graduates who wish to supplement their training with professional experience in India.

The AI-ECTA will support the establishment of a professional services working group to facilitate the mutual recognition of qualifications, licensing, and registration procedures between professional services bodies in the two countries. Australia will also provide market access for a total of 1,800 qualified professional traditional chefs and yoga instructors a year to enter Australia as contractual service suppliers of India.

Importance of the Agreement

The Agreement reinforces a move by Australia to diversify its trading pattern away from China and towards India. This may seem to be a risky strategy. Currently, in purchasing power parity (PPP) terms, China has the world’s largest GDP (in 2020, it was 16% bigger than that of second-placed United States and 2.7 times larger than that of fourth-placed India). China is Australia’s biggest two-way trading partner accounting for about a quarter of its total trade. India, on the other hand, is only Australia’s seventh largest trading partner, and its exports to and imports from India are well below those to and from China. However, irrespective of changes in the global political landscape, the Indian market will become increasingly attractive to Australia, both in absolute terms and relative to the market of China.

The aggregate size of a country’s market – its GDP – is, by definition, equal to the product of its work force and the average productivity of those in the work force. In the following sections the authors compare the recent and prospective performance of these two variables for India and China.

Work force
The size of a country’s work force depends mainly on the size of its population, the age composition of this population, and the composition of its production. The table below contains estimates and projections for total population and work force for India and China from 1950 to 2100, with global numbers also included to provide perspective. Data for population in all years and for the work force in 2020 were derived from the websites of the United Nations Population Division and The World Factbook. Estimates of the work force for 1950 and 2000 and projections of the work force for 2050 and 2100 were made by the authors based on data for countries and regions at comparable stages of demographic and economic development.

In 1950, India’s population was 376 million and accounted for 15% of the global population. China’s population was 554 million and comprised 22% of the global total. In 1950, India’s population was only two-thirds that of China. Since then, the average annual growth rate (AAGR) of population has been 1.8% in India and 1.3% in China, resulting in India’s population in 2020 being just 4% below that of China. The United Nations Population Division expects the AAGR of India’s population to fall to 0.2% in 2023-50 and minus 0.5% in 2051-2100. These rates imply that India’s population will rise from 1,380 million in 2020 to 1,639 million in 2050 (17% of global population) but will then fall to 1,450 million by 2100 (13% of global population). However, the AAGR of China’s population will be lower than that of India, at minus 0.1% in 2023-50 and minus 0.6% in 2051-2100. China’s population will decline to 1,402 million in 2050 (15% of the global population) and 1,065 million in 2100 (slightly less than 10% of the global population). If the United Nations’ projections are realised, India’s population will pass that of China in 2027, will be 17% larger in 2050, and will 36% greater in 2100.

Table 1. Performance and Prospects for India and China, 1950-2100

Source: United Nations – World Population Prospects, The World Factbook,
and estimates and projections made by the authors.

Currently, the share of the population that is of working age (15-64 years) is about 67% in both India and China. This figure is not expected to change significantly during the remainder of the century, with decreases in the share of those younger than 15 years being roughly offset by increases in the share of those older than 64 years. However, the participation rate (the share of the working-age population that is in the work force – those who are both able and willing to work) will change significantly. Currently, China is enjoying what may be described as a demographic gift. Its participation rate is 83%, well above the global average of 70%. India, on the other hand, is carrying a demographic burden, with a participation rate of only 61%. As a result, the ratio of the work force to the total population is currently 57% in China but only 40% in India. This gap accounts for about one third of the current difference in GDP between India and China. However, as both countries continue to develop, their participation rates will tend to converge around the global average. The projections suggest that the ratio of India’s work force to that of China will increase from 86% in 2020 to 117% in 2050 and 136% by 2100.

Productivity
Convergence theory states that, as latest technical knowledge and business practices spread more evenly across the globe, labour productivity (GDP divided by the work force) in the low-income countries (LICs) will move towards the average level in the high-income countries (HICs). Empirical evidence from Asian countries since the 1960s shows that countries fostering open trading systems, welcoming foreign direct investment, and providing effective protection of property and people can enjoy annual productivity growth rates of 10% or more until their productivity levels approach about 80% of that in the HICs, at which time their level of productivity converges more slowly towards the average in the HICs.

China’s convergence prospects may be less bright than its recent performance suggests. First, most countries (e.g., South Korea, Taiwan, and Singapore) that moved successfully through the catch-up phase of economic development did so with investment to GDP ratios of less than 20%. However, when China was enjoying double-digit annual growth it was allocating about half of its GDP to investment. This suggests a very low level of efficiency of investment in China. Further, the share of investment in GDP is now falling as the government tries to “rebalance” the pattern of spending in favour of consumption. Second, the recent decline in China’s productivity growth rate, to now about 5%, is occurring while labour productivity is still less than 30% of that in the HICs. Ultimately (i.e., when a country is on the performance possibility frontier), there are trade-offs among objectives, and China’s strong focus on political stability appears to be carrying with it a very high economic cost.

In 2020, India’s labour productivity, of about $12,750, was only 43% that of China. The gap reflects partly China’s earlier move into the catch-up phase of convergence –at the turn of the 1980s in China, after Deng Xiaoping became leader of the Communist Party; and in the middle 1990s in India, following a major balance of payments crisis. However, while productivity growth has been declining in China, it has been trending upward in India. With its increasingly open approach to foreign trade, FDI, and free enterprise India’s productivity level should eventually converge on that of the prevailing HICs.

GDP
India’s GDP in 2020 was only 37% of China’s (The World Factbook, 2022). The model developed by Hooke and Alati (2021) and updated by the developers for this article assumes that the convergence of participation rates will be completed by the middle of the century, and with its work force moving increasingly above that of China and with the more open and liberal stance of its economy, India’s GDP will be 72% of China’s by 2050 and 60% larger than that of China in 2100 (Chart below). In the latter year, India’s GDP will be the largest in the world and will contribute 14% of gross world product (GWP). China’s GDP will be second largest but will account for only 9% of GWP.

CONCLUSION

Currently, India’s GDP – and therefore the total size of its market – is only a little more than a third that of China. However, during the present century India’s work force will surpass and then move well above that of China. The difference in weights assigned by India and China to economic development and political stability should also allow India’s labour productivity to exceed that of China. It is highly likely that India’s GDP will move increasingly ahead of China’s in the second half of this century, making it the more attractive trading partner for Australian businesses.

REFERENCES

ABC News. (2nd April 2022). Historic trade agreement with India will allow Australia to reduce economic dependence on China, ABC News.

https://www.abc.net.au/news/2022-04-02/australia-india-comprehensive-economic-cooperation-agreement/100959934

DFAT Australia. (2022). India ECTA benefits for Australia (Overview), https://www.dfat.gov.au/trade/agreements/negotiations/aifta/australia-india-ecta-outcomes/australia-india-ecta-benefits-australia-overview

Global SME News. (6th April 6, 2022).  India-Australia Economic Cooperation and Trade Agreement Signed. https://globalsmenews.com/india-australia-economic-cooperation-and-trade-agreement-ecta-signed/

Hooke, A. and Alati, L. (2021). Technological Breakthroughs and Future Business Opportunities in Education, Health, and Outer Space. IGI Global.

CEA, The World Economic Outlook (6th June 2022). https://www.cia.gov/the-world-factbook/

United Nations Population Division (6th June 2022). https://en.wikipedia.org/wiki/Projections_of_population_growth#Table_of_UN_projections

Zan Fairweather and Maxwell Sutton. (10 Dec 2020). Economic Developments in India. RBA Bulletin. https://www.rba.gov.au/publications/bulletin/2020/dec/economic-developments-in-india.html

BIOGRAPHIES

Angus Hooke is Professor, Senior Scholarship Fellow, and Co-Director of the Centre for Scholarship and Research (CSR) at UBSS. His earlier positions include Division Chief in the IMF, Chief Economist at BAE (now ABARE), Chief Economist at the NSW Treasury, Professor of Economics at Johns Hopkins University, and Head of the Business School (3,300 students) at the University of Nottingham, Ningbo, China. Angus has published 11 books and numerous refereed articles in prestigious academic journals.

Harpreet Kaur has a Master of Philosophy and a PhD in Economics. She teaches Economics, Statistics, Governance and Business Ethics at Charles Sturt University, Central Queensland University, and the Australian Institute of Higher education. Her research interests include development dynamics, socio-economic conditions, the role of women in India, and economic relationships between Asia, Oceania, and the rest of the world.