New York Institute Of Technology
In this manuscript, we determine the sources of historic growth for the economies of India and China. Next, we estimate potential GDP growth for each country. The study concludes that India is more favorably positioned for long-term growth than China with a higher steady state growth rate. It is a large accumulation of capital or capital deepening, rather than improvement in the efficiency of capital that is driving the Chinese economy. Growth based on capital deepening as evident in China is not sustainable over time. Growth in India, in contrast, is very balanced as all major sources of growth (capital, labor and technology) contribute significantly to growth. Most positive for India was the fact that total factor productivity (TFP) growth in India was significantly higher than in China.
Potential GDP refers to the sustainable level of output for an economy and raising the level of potential GDP is the key to increasing the income and standard of living of the population.