So did the IAF. IAF has also cut down the number of squadrons drastically, and relies more on the newer MKIs and mirages and mig 29s. But the number of older mig 21s and mig 27s and mig 23s (now fully decommissioned) was so large that we simply could not purchase newer platforms at the same rate.
Several squadrons of mig 21s and mig 27s and mig 23s have been decommissioned in the past decade, and at least one squadron of mig 21s is decommissioned each year now.
And no, China's defence budget was NOT lower than India's before 2000. In fact, the decade of 1989-1999 was the worst for the Indian armed forces, because of the economic disaster that happened in the late 80s/early 90s. The financial crisis of 1993 meant that for the rest of the decade, virtually no money was available to the armed forces, and they could not do a single modernization program during that period. Indeed, they call it the "lost decade".
It is because of the "lost decade" that the armed forces are plagued with so much obsolescence now. Since no new fighters were procured during that time, and we cannot simply retire half our fleet with no replacement in sight, the IAF had no choice but to bravely soldier on using whatever was available. And that is why the pilots had to fly fighters that were older than themselves.
China's military spending was much bigger than India's in that period, and it is so today. By the way, you should know that what china used to call "military budget" did not give the true picture of their military spending. Development of military infrastructure, military education were all paid for separately, under "construction budget" and "education budget" and so on. And even without taking into account all that, China's budget was substantially bigger than India's - which is not surprising, since the Indian economy was in death throes at that time. The subsequent economic reforms and the resulting economic growth is what made funds available after 2000.
Here is an analysis of China's military spending from 1989-1998:
www.cuhk.edu.hk/gpa/wang_files/Milex.pdf