Professional Documents
Culture Documents
Submitted by:
TABLE OF CONTENTS
1
Acknowledgement …………………………………………
………………. 01
Executive summary…………………………………………
………………. 02
Overview ……………………………………………………
…………………… 03
Globalization …………………………………………………
…………….. 10
Growth Trends: China’s Fast Track vs. India’s
Gradualism Model…………………………………………
………………………………… 11
2
Summary of Key Reforms in India and China………
……………… 23
ACKNOWLEDGEMENT
3
Executive Summary
The Asia-Pacific region is experiencing tremendous demographic
changes and
Unprecedented levels of urbanization.
➢ China has been ranked first overall, having received a score far
above any other country. The score is a result of high marks for
market size, growth, and intensity, as well as population – all
pointing to the potential for high levels of reward.
➢ However, China ranks lower for per capita spend and social
structures, reflecting the widespread poverty in the country
and some regulatory issues.
4
➢ Like China, India ranks low for per capita spends – again a
reflection of widespread poverty – and for commercial
infrastructure, a result of the country’s highly fragmented retail
market.
5
1625AD – 1650AD- The gross domestic product of India in 1650 was
estimated at about 80 per cent that of China.
1650AD – 1675AD- The gross domestic product of India in 1675 was
estimated at about 90 per cent that of China.
1675AD – 1700AD- Annual revenue by the Emperor Aurangzeb's exceeded
£100 million in 1700 (twice that of Europe then). Thus, India emerged as the
world's largest economy followed by China and France.
1700AD – 1725AD- During this period however China was the world's
largest economy followed by India and France. Collapse of the Mughal Empire
and the resultant chaos triggered India's long but slow decline on the world
stage. The gross domestic product of India in 1725 was estimated at about
90 per cent that of China.
1725AD – 1750AD-During this period, Mughals were replaced by the
Nawabs in north India, the Marathas in central India and the Nizams in south
India. China was the world's largest economy followed by India and France.
The gross domestic product of India in 1750 was estimated at about 80 per
cent that of China.
1750AD – 1775AD- China was the world's largest economy followed by
India and France. The gross domestic product of India in 1775 was estimated
at about 70 per cent that of China.
COLONIAL PERIOD
1775AD- 1800AD- During this period, the East India Company began tax
administration reforms in a fast expanding empire spread over 250 million
acres (or 35 per cent of Indian domain). China was the world's largest
economy followed by India and France. The gross domestic product of India
in 1800 was estimated at about 60 per cent that of China.
6
1800AD – 1825AD- China was the world's largest economy followed by
India and France. The gross domestic product of India in 1825 was estimated
at about 50 per cent that of China.
1825AD – 1850AD- China was the world's largest economy followed by the
UK and India. The gross domestic product of India in 1850 was estimated at
about 40 per cent that of China.
1850AD – 1875AD- China was the world's largest economy followed by the
USA, UK and India. The gross domestic product of India in 1875 was
estimated at about 30 per cent that of China.
1900AD – 1925AD- USA was the world's largest economy followed by the
UK, China, France, Germany, India and the USSR. The gross domestic product
of India in 1925 was estimated at about 10 per cent that of the USA. During
this period, India became a net importer from net exporter of food grains.
1925AD – 1950AD- USA was the world's largest economy followed by the
USSR, UK, China, France, Germany and India. The gross domestic product of
India in 1950 was estimated at about 7 per cent that of the USA. About one-
sixth of the national populations were urban by 1950.
1950 – 1975- Socialist Reforms were introduced.USA was the world's
largest economy followed by the USSR, Japan, Germany and China. The gross
domestic product of India in 1975 was estimated at about 5 per cent that of
the USA. Current GDP per capita grew 33% in the Sixties reaching a peak
growth of 142% in the Seventies, decelerating sharply back to 41% in the
Eighties and 20% in the Nineties. From FY 1951 to FY 1979, the economy
grew at an average rate of about 3.1 percent a year in constant prices, or at
an annual rate of 1.0 percent per capita. During this period, industry grew at
an average rate of 4.5 percent a year, compared with an annual average of
3.0 percent for agriculture. Many factors contributed to the slowdown of the
economy after the mid-1960s, the main one was the socialist policies
pursued by Nehru and his cabinet.
The following shows the GDP of India at market price.
Y Gross Domestic US Dollar
ear Product Exchange in Rs.
1
99,340 4.79
950
1
108,730 4.79
955
1 171,670 4.77
7
960
1
276,680 4.78
965
1
456,770 7.56
970
1
832,690 8.39
975
*source: Ministry of Statistics and Programme Implementation
1975 - 2000
Privatization Reforms were introduced.USA was the world's largest economy
followed by Japan, Germany and China. The gross domestic product of India
in 2000 was estimated at about 4 per cent that of the USA. India started
having balance of payments problems since 1985, and by the end of 1990, it
was in a serious economic crisis. The government was close to default, its
central bank had refused new credit and foreign exchange reserves had
reduced to the point that India could barely finance three weeks’ worth of
imports. The government introduced reforms such as the liberalization.
The following shows the GDP of India at market price.
Y Gross Domestic Export Import US Dollar Inflation Index
ear Product s s Exchange in Rs (2000=100)
1
1,380,334 90,290 135,960 7.86 18
980
1
2,729,350 149,510 217,540 12.36 28
985
1
5,542,706 406,350 486,980 17.50 42
990
1 1,307,3 1,449,5
11,571,882 32.42 69
995 30 30
2 2,781,2 2,975,2
20,791,898 44.94 100
000 60 30
* Source: Ministry of Statistics and Programme Implementation
2000 – THE PRESENT SCENARIO
There was the rise of Oligarchy. The gross domestic product of India in 2007
was estimated at about 8 per cent that of the USA. Currently, the economic
activity in India has taken on a dynamic character which is at once, curtailed
by creaky infrastructure, cumbersome justice system, dilapidated roads,
severe shortages of power and electricity yet at the same time accelerated
by the sheer enthusiasm and ambition of the industrialists and the populace.
The following shows the GDP of India at market price.
Y Gross Domestic Export US Dollar Inflation Index
Imports
ear Product s exchange in Rs (2000=100)
8
2 2,781,2 2,975,23
20,791,898 44.94 100
000 60 0
2
34,195,278 44.09 121
005
* Source: Ministry of Statistics and Programme Implementation.
THE CHINESE ECONOMY – A HISTORICAL PERSPECTIVE
The history of the china can be studied by dividing into the Qing dynasty
(1625AD-1911AD), the nationalist republic economy (1911-1950), and the
People’s Republic (1950 onwards).
THE QING
DYNASTY
1625 – 1650- China was the world's largest economy followed by India and
France.
1650 – 1675- China was the world's largest economy followed by India and
France. From this time to about the 1800s, the seclusion of China on a world-
scale grew to its peak during the Ming Dynasty after the Yung-lo emperor's
reign in the 1400s.
1675 – 1700- India was the world's largest economy followed by China and
France.
1700 – 1725- China was the world's largest economy followed by India and
France. Collapse of the central authority of the Mughal Empire and the
resultant chaos triggered India's long but slow decline on the world stage.
1725 – 1825- China was the world's largest economy followed by India and
France.
1825 – 1850- China was the world's largest economy followed by the UK
and India. Industrial Revolution in the UK catapulted the nation to the top
league of Europe for the first time ever.
1850 – 1875- China was the world's largest economy followed by the UK,
USA and India.
1875 – 1911- USA was the world's largest economy followed by China, UK,
Germany and India. Collapse of the central authority of the Qing Dynasty and
the resultant chaos triggered China's short but rapid decline on the world
stage.
NATIONALIST REPUBLIC
1911 – 1925- USA was the world's largest economy followed by the UK,
China, France, Germany, India and the USSR. The gross domestic product of
China in 1925 was estimated at about 20 per cent that of the USA.
1925 – 1950- USA was the world's largest economy followed by the USSR,
UK, China, France, Germany, India and Japan. The gross domestic product of
China in 1950 was estimated at about 10 per cent that of the USA.
9
PEOPLE'S REPUBLIC
1950 – 1975- USA was the world's largest economy followed by the USSR,
Japan, Germany and China. The gross domestic product of China in 1975 was
estimated at about 10 percent that of the USA.
10
2007 11.4 2.70 %
2008 9.272 -18.67 %
Now that we have seen the historical economic importance of both the
economies, we now need to see the current trends and the happenings of
both the economies in the present scenario.
The contrast between the two approaches is dramatic. The industry share of
China’s GDP has risen from 42% to 47% over the past 15 years, maintaining
a huge gap over India’s generally stagnant 28% manufacturing portion over
the same period. By contrast, the services share of India’s GDP increased
from 41% in 1990 to 54% in 2005 –well in excess of the lagging performance
in China’s services, where the GDP share went from 31% in 1990 to 40% in
2005.
China’s macro character fits its manufacturing-led growth dynamic to a tee.
Benefiting from a high domestic saving rate, huge inflows of foreign direct
investment (FDI), and major efforts on the infrastructure front, China’s
economic growth has been increasingly fueled by exports and fixed
investment. Collectively, these two sectors now account for over 75% of
China’s GDP – and are still growing at close to a 30% rate today. India’s
macro story is the mirror image of China’s in many key respects. Constrained
by a lower saving rate, limited inflows of FDI and a sorely neglected
11
infrastructure, India has turned to a fragmented services sector as the
sustenance of economic growth. The labor-intensive character of services
has provided support to India’s newly emerging middle class – a key building
block for India’s consumption-led recovery. As a result, private consumption
currently accounts for 61% of India’s GDP, far outstripping the 40% share in
China. The growth contribution of India’s export and investment sectors
pales in comparison to that in China.
12
Annual GDP growth has averaged 10% in China in the past three years and
8% in India. During the same period, the global economy has enjoyed the
biggest boom in decades, averaging 4.5% growth a year. The unprecedented
economic expansion is due to rising productivity growth from globalization
and information technology. China and India have been at the center of
increasing global integration and have done well in keeping the fruits of
globalization at home
to fuel their economies.
The two economies have used different approaches to retain some of the
globalization benefits. China has pursued the typical East Asian model of
recycling export revenue into fixed investment. As capacity expands in line
with rapid export growth, the domestic economy does not suffer from high
inflation, merely floating upward with the global economy. Indeed, inflation in
China is less than 2% despite 33% annual growth in exports for the past
three years. This reflects the excessive savings and investment bias of the
political system. In addition to the traditional East Asian investment/export
approach, China has taken advantage of its strong government and the
country’s size to achieve unprecedented economies of scale for productivity
gains. In infrastructure, for example, the economies of scale have cut capital
costs in transportation, telecommunications, and electricity to below those of
any other economy. In the production and distribution of consumer goods,
the economies of scale that China has achieved are unmatched elsewhere in
the global economy. The increase in scale economies has also contributed to
low inflation. India has also achieved a breakthrough in trade. Exports grew
25% a year in 2002-05 compared with 10.5% in the ten-year period prior to
this. However, India’s export base at 19.5% of GDP in 2005 is much lower
than that for China (38%) and so its export success is not sufficient to drive
the economy’s strong growth. India has taken advantage of its flexible
financial markets to attract foreign capital to fund its growth. Consumer
credit, funded substantially by foreign capital inflows into its capital markets,
has given the Indian economy a strong consumption anchor in this boom.
India’s credit rose by 25% a year over 2002-05 versus 19% growth in fixed
investment. In contrast, China’s credit increased by 17% and fixed
investment by 27% in the same period; even though the share of China’s
fixed investment in GDP is one third higher than India’s. India’s growth model
bears more resemblance to the Anglo- Saxon than the East Asian model. Its
external accounts have
evolved in a similar fashion. Its current account balance deteriorated to a
deficit equivalent to 1.7% of GDP in 2005 from 1.5% of GDP in surplus in
2003. In contrast, China’s current account surplus improved to 7.2% of GDP
in 2005 from 2.8% in 2003. While China and India have different growth
models, they have both captured the opportunities from the current wave of
globalization. Productivity gains have benefited from a low-base effect. As
the production chain becomes fully integrated across the world in the coming
years, the low-base effect will disappear and the tailwinds from globalization
13
for China and India will weaken. How to sustain fast productivity growth
beyond the current boom is a major challenge for both economies.
… AND CHINA:
The challenges to China in sustaining its high growth are quite different. The
fundamental weakness of the economy is low consumption. Household
consumption at 40% of GDP is exceptionally low by any standard. The
excessive dependence on investment and exports makes China vulnerable to
the global economic cycle. The dominant role of the government in the
economy, its bureaucratic bias towards investment, and lack of organized
forces in society to check government excesses have led to macro
vulnerabilities. Excessive liquidity due to low consumption and foreign
speculation on a possible renminbi revaluation has resulted in rapid growth
in the property market in terms of both production and price. The rise in
property prices has become another deterrent to consumption, as Chinese
households hunker down to shelter from escalating living costs. This further
sustains the liquidity boom that feeds the property sector. This sort of
dynamic increases the imbalance in the economy. China’s cyclical risk and
structural imbalance are one and the same. Unless China is able to rebalance
its economy, it could suffer from mounting appreciation pressure on its
currency and deflationary conditions at the same time. The required reforms
in China would not be hard to implement.
China just needs to find ways to give money to households.
To rebalance the economy, China has to address the wealth, income, and
security issues that have caused the household sector to shrink relative to
the overall economy.
1) On wealth, the government owns land, natural resources, and state
monopolies. As these assets are not on the household balance sheet,
consumption remains below what national wealth can support. Government
wealth has to be shifted to the household sector to balance the economy.
2) On income, the labor surplus has kept the rise in wages below that in
labor productivity. This causes labor income to contract relative to the
15
economy and contributes to insufficient consumption, excessive liquidity,
and speculative mania.
16
➢ Accounting for growth differences: A simplistic way to account for
growth in a country would be to consider the contributions from the
three basic drivers:
(1) labor force inputs,
(2) capital inputs and
(3) total factor productivity.
17
Consumption - Macro: China Spends Twice As Much
As India
19
Consumption - Micro: Markets for Most Products in
India Are a Third to a Tenth of China’s
21
Investments: China’s Total Capex is more than Four
Times India’s
➢ China’s investment-to-GDP ratio is 1.6 times that of India: In
2005, China’s investment was 49% of GDP (US$1,082 billion) while
India’s was an estimated 30% of GDP (US$240 billion). The key driver
for China’s high investment rate is a higher domestic savings rate. FDI
accounts for about 5.5% of total investment in China versus 2.7% for
India. Indeed, China’s capex to GDP is now 2.7 times that of the US and
it accounts for about 11% of global investment.
23
combined share in goods and services rose sharply to 6.6% in 2005
from 1.6% in 1990 and 0.9% in 1980.
24
25
SUMMARY OF KEY REFORMS IN INDIA AND CHINA
India China
How did the reform process begin?
The reform process in India The Third Plenum (of the 11th
was triggered by a major Party Congress Central
macroeconomic crisis in Committee) held in 1978 is
early 1991. This was caused widely regarded as the starting
by a large fiscal and current point of China's reform
account deficit, high process. The government
inflation, increasing internal initiated market oriented
and external debt, three reforms with the gradual
changes of government in a experimentation approach in
span of two years and socio-
the rural sector and later
political upheaval. In June
followed it up in the industrial
1991,the new government
sector. On the rural front,
(led by Mr. PV Narsimha Rao
China initiated a massive de-
from the
collectivization program
Congress Party, with Dr. whereby the land was
Manmohan Singh as the distributed or contracted out
Finance Minister) to households. This program
immediately made a was accompanied by a sharp
commitment to structural increase in agricultural
reform. The rupee was procurement prices and a
devalued by 19% against the decrease in agricultural input
26
US dollar in two quick moves prices.
in July 1991.Various external
The government later initiated
as well as internal reform
a “big bang” industrialization
measures have been
plan with gradual liberalization
implemented subsequently. of product pricing, the setting
The government cut tariffs up of new systems that
on imports, reduced rewarded local government for
quantitative restrictions on promoting development,
trade, liberalized the foreign allowing greater autonomy of
investment policy and management to
encouraged exports through
SOEs, encouraging external
tax exemptions. On the
trade through deregulation,
internal front, licensing
implementing labor reforms,
requirements were removed
setting up special economic
for most major sectors,
zones, attracting FDI,
undue control on trade &
establishing township & village
business was reduced,
enterprises and transferring
banking reforms were
commercial banking
initiated and the process of
operations from just one bank
fiscal consolidation was
(People's Bank of China) to
initiated.
four banks.
32
labor shortage in recent years
in the coastal cities.
Fiscal Tax Structure: India Tax Structure: China has
Reforms initiated major tax reforms in implemented major changes in
the early 1990s. It has its tax structure over the past
reduced the marginal rate of 20 years. It has already cut its
personal tax from 56% in import tariff such that the total
F1992 to 30% currently, import tariff as a proportion of
lowered the corporate tax the value of imports is less
rate from 50% in F1992 to than 2.5%, compared with
30%, and cut the peak excise 10% in India. China adopted
and non-agriculture import the value-added tax system in
tariff from over 100% and the mid-1990s, which further
150% in F1992 to 24% and improved the efficiency of the
12.5%, respectively. Since tax system. Tax incentives
the mid-1990s, the have been widely used to
government has expanded attract foreign capital, but the
the tax net by levying taxes upcoming reform on unifying
on services. In 2005-06, the tax rates on local vs. foreign
government replaced the enterprises will be a landmark
multiple-rate sales tax (ST) change towards a more level
system, which was playing-field in China.
independently managed by
Fiscal Prudence: China has
various states, with a
initiated several measures for
synchronized single-rate
better management of
system. The new system
government finances.
leaves the central tax
Previously, all government
collection system
revenue and expenditure had
independent. The
to go through the central
government has since
government. However, in the
announced its intentions to
1980s, the process was
shift to a country-wide
decentralized, with the local
common goods and services
government transferring a
tax (GST) by 2010-11.
negotiated amount to the
Fiscal Prudence: India central government and
pursued some public finance keeping the rest. This gave
reforms from the early 1990s increased incentives to the
to the mid-1990s by reining local governments to improve
in expenditure and revenue collection and tax
33
augmenting revenues. This efficiency. Government
helped reduce the accounts in China are
consolidated fiscal deficit to relatively well placed. The
6.4% of GDP in F1997 from aggregate
9.4% in F1991. However, the
fiscal deficit in China has
emergence of coalition
remained under 3% of GDP
government at the center
over the past 10 years.
resulted in major slippage in
government finances and
pushed the fiscal deficit to a
new high of 9.9% of GDP in
F2002. Although the headline
fiscal deficit has since
dropped to 7.8% of GDP in
F2006, the off-budget oil and
electricity subsidy burden
remains high at 1.9%. We
believe the government
needs to initiate major
expenditure reforms and
move effectively to outcome-
based expenditure
management from the
current outlay-based system
to cut non-interest revenue
expenditure.
Banking India has steadily Although China has initiated
sector strengthened its banking reforms for the banking sector,
system, improving the its progress pales when
reforms
regulatory framework, compared with India. Until
imposing strict prudential 1980, there was hardly any
norms and encouraging competition. The government
greater competition. The then created four large banks.
government has allowed Subsequently, joint stock
private sector entry since the banks were formed and foreign
mid-1990s. Private players banks were also allowed to
have already built a 27% open branches. By 2007,
share of loan assets in the foreign banks will receive
banking system. The national treatment in China
prudential norms in terms of under the WTO agreement. Of
34
capital adequacy a total of around 115 banks in
requirements have gradually China, 53 do not yet comply
tightened, and currently with the Basel I requirement of
banks are required to capital
maintain a CAR of 9%. Most
adequacy ratio of 8%.
banks already comply with
However, over the past few
the norm of 9% CAR and will
years the government has
move to meeting Basel II
taken steps to reduce NPLs
requirements by March 2007.
and has recapitalized the
In 2002, the government
weaker banks. China has also
enacted the Foreclosure Act,
announced that certain banks
which gave lenders powers
with a large number of
to forfeit assets of defaulting
overseas branches will adopt
borrowers, enabling quick
Basel II norms from 2010 to
recovery of NPAs. One area
2012. On balance, China lags
where the Indian banking
India in banking sector
system lags is in the
reforms.
relatively restricted access to
foreign capital, which is
capped at 20% for the SOE
banks and 74% for private
banks.
Infrastruct Except for telecoms, overall While the overall regulatory
ure progress in infrastructure has system in China is still fairly
historically been slow in weak, the government has
Reforms
India. However, over the past undertaken major initiatives to
two years, infrastructure has encourage adequate
gained the attention of investments in infrastructure.
policymakers.
Roads: China has largely relied
Roads: Investments in this on government investments in
long-gestation sector have this area. Investments have
been low, averaging just US$ averaged US$34 billion p.a.
2.5-3 billion over the past 10 over the past 10 years.
years. The government has Indeed, in 2005 China spent
now initiated a US$38 billion US$67 billion on road
seven-phase national development. The government
highway development, plans a major push on building
covering 65,000 kms of rural roads over the next the
national highways to few years.
35
increase road spending. Seaports: China has built
world-class port infrastructure.
Seaports: Over the past few
A large part of this is owned
years, the government has
and developed by the
introduced several measures
government. Hong Kong
to augment private
enterprises have played a big
investment in the sector. The
role in the development of
average turnaround time at
China’s ports, but they have
Indian ports improved to
also done so in partnership
about 3.4 days in F2005 from
with local governments.
8.5 days in F1996. Although
a good beginning has been Telecoms: Prior to 1994, the
made, progress is still slow, Ministry of Post and
leaving the overall cost- Telecommunications (MPT) was
efficiency at Indian ports the regulator as well as the
relatively low compared with
biggest player in the Chinese
world averages.
market through its arm, China
Telecom: The government Telecom. Subsequently, the
opened up services like entity was split into two parts:
cellular, radio paging, and the Ministry of Information
data services to the private Industry (MII), the operational
sector in F1993 and followed arm, and China Telecom. Later
it up with the opening up of China Telecom was further
basic telephony to private divided on the basis of
participation and foreign geography and business. In
equity (up to 49%) in F1995. recent years, China's telecom
It also fixed a 49% foreign sector has become more open
investment limit for cellular to foreign investment. The
telephony, which has government has encouraged
recently been increased to foreign companies to establish
74%. The favorable policy telecom companies by
environment has encouraged acquiring domestic companies
the private sector to and has also allowed
participate aggressively, and established joint ventures to
private investment has apply to operate telecom
contributed significantly to services. Over the last ten
growth in the sector. years, China’s telecom
Significant technological subscriber base has increased
change has resulted in a 17-fold to 744 million from 44
90% decline in the cost of million.
36
accessing telecom services Airports: Over the past 15
over the past seven years. years, China has spent
Overall progress in this approximately US$14.8 billion
sector is commendable with on upgrading its airport
the subscriber base having infrastructure. Recently, the
risen to 130 million as of Civil Aviation Administration of
2005 from 12 million over China (CAAC) announced plans
the past 10 years. to invest a further US$17.4
billion over the next five years
Airports: After neglecting
on airport infrastructure.
airport infrastructure for
years, over the past three Electricity: The Electricity Law
years, the government has was promulgated in 1995 and
initiated a number of policy was the first comprehensive
measures to attract the legislation for the electricity
private sector and improve sector. In 1997, the State
efficiency. Some of the major Power Corporation (SPC) was
initiatives taken by the formed. In 2002-2003, the
government in this context government split the SPC into
are an open-skies policy for 11 separate companies, which
passenger traffic, included two grid corporations,
restructuring and five power generating groups
privatization of Mumbai and and five other companies. The
Delhi airports, announcing government also established
construction of Greenfield the State Electricity Regulatory
airports in select cities and Commission (SERC) to be
undertaking the responsible for supervising
modernization of other and regulating market
domestic airports. competition in the electricity
industry. However, the SERC
Electricity: The electricity
shares power with regards to
sector is one area in need of
pricing and electricity sector
serious and immediate
investments and as a result
overhaul. The most
the government continues to
important investment
control the sector. Despite
deterrent in the power sector
this, the operations are far
is the poor financial condition
more efficient than those in
of the state electricity boards
India. The government has
(which own more than 90%
taken the lead in boosting
of the distribution in the
investments in the sector.
country). The electricity
37
operations of the public China has increased its
sector incur annual losses of electricity generation capacity
US$4-5 billion due to the to 508 GW currently from 217
large burden of subsidies and GW in 1995.
theft in electricity
SEZs: In 1980 China created
distribution. While the
four Special Economic Zones,
government has initiated
which enjoyed special policy
several measures over the
benefits like lower tax rates in
past few years, the effective
addition to good infrastructure
implementation of reforms in
facilities. The success of these
this area is far slower than
SEZs led to the creation of
required. This constrains
more such zones, and this has
investments in the sector
been a cornerstone of China’s
with peak electricity
reform success.
shortages at 12%.
CONCLUSION
38
China and India represent the future of Asia – and quite possibly the future
for the global economy. Yet both economies now need to fine-tune their
development strategies by expanding their economic power bases. If these
mid-course corrections are well executed – and there is good reason to
believe that will be the case – China and India should play an increasingly
powerful role in driving the global growth dynamic for years to come. With
that role, however, come equally important consequences. IT-enabled
globalization has introduced an unexpected complication into the process – a
time compression of economic development that has caught the rich
industrial world by surprise. The resulting heightened sense of economic
insecurity that has stoked an increasingly dangerous protectionist backlash
could well pose yet another major challenge to China and India – learning
how to live with the consequences of their successes. The Indian government
has recently signaled its intention to lift the economy to a higher growth
path, whereby GDP would expand at an annual rate of 10 per cent. High
growth, according to the government, provides the best antidote to
poverty.29 The economic expansion that started in 2003/04 provides
evidence that India’s growth rates in favorable circumstances are
comparable to Asia’s powerhouse, China. Whereas high domestic demand
has increased inflationary pressures in the Indian economy and dragged the
current account into deficit, China’s economy has experienced deflationary
tendencies that seem to reflect excess supply in the economy. In this regard,
investment in infrastructure is imperative to increase the supply-side
potential of the Indian economy. It is equally critical to push forward with the
economic reforms that have progressed slowly of late, especially in terms of
privatization and labor laws. The recent growth in industry is a positive sign
of the economic expansion reaching beyond the services sector – a
necessary evolution for employment growth and further progress in poverty
reduction. An increase in fiscal revenues would provide resources for
spending in education, health and infrastructure, without further worsening
the delicate state of fiscal balances. A gradual phasing-out of budget
subsidies, replaced by direct cash transfers, could also form an important
part of fiscal reform.
39
40