Abhishek randev

10902226

CHINA AND INDIA - THE FUTURE POWERS

The economic performance of China and India is critical. This holds the key
to global progress.

China and India have been relatively ‘closed’ economies with limited
dependence on trade. But they have been opening up. This is particularly so
in the case of China.

Trade as a % of GDP has been 32% in China compared to 25% in India.

This should be seen against a backdrop of relatively open East and South
Asian economies: Malaysia (206%), Korea (Republic) (72%), Thailand (82
%), Pakistan (36%) and Bangladesh (35%). India’s import duties as a % of
imports, a key measure of openness, have also been declining in China and
India. But it is lower in China compared to India: 3% in the former and
24% in the latter.

Foreign Direct Investment (FDI) can enable access to resources and

increase productivity. There are two types: one by the transnationals from
industrialized countries and the other by overseas Chinese and Non
Resident Indians. In China overseas Chinese have been primarily
responsible for Chinese FDI while India’s FDI has been channeled through
the Transnationals. Net flows of FDI as a % of GDP in China have been
12% in contrast to India’s 0.61% .

Both countries have been growing fast over the last 25 years: China by 21
fold and India by 8 fold. The growth rate in China has been over 9% per
annum making it possibly the fastest growing world economy while India’s,
too, has been impressive with over 8% per annum. The % living below the
poverty line (1 $ a day) has also been appreciably reduced in both though it
is more impressive in China compared to India: 12% in the former and 26%
in the latter.

The major effect of China’s and India’s economic advance is evidenced by

their contribution to global output: China’s and India’s share being 20%
and 7% respectively in 2004. Both, moreover, have rising demand for
energy, raw materials and commodities. This has a positive impact on
increasing the exports of developing countries, improving their terms of
trade, and initiating shifts in their pattern of trade and investment.

Effect of liberalization in India and china

Liberalisation policies have enhanced the economic prowess of both
nations. China, moreover, as a recent member of the World Trade
Organization (2001), could firmly influence global trade negotiations,
possibly joining forces with India, and champion the rights of poor nations.
They could establish a ‘level playing field’ in world trade. Indeed the
combined efforts of China and India could ensure that the Uruguay Round
(1986-93) to accelerate trade liberalization can be successful. They could
pressurize the developed nations to fulfil their promise of opening up their
markets to developing country agricultural and non agricultural exports

Liberalisation emerged much earlier in China, in 1978, while it was

initiated in India in 1991 though initial steps were taken in the 1980’s. Pre-
reform or pre-liberalisation forces laid the basis on which such measures
were evolved. China’s policies unfolded in the context of bold economic
policies in the East Asia region between 1960-1990 emphasizing
agricultural development, primary education, macroeconomic stability, firm
public policies to support markets, and regional dynamism.

China’s liberalization has been embodied in market based thrusts in

agriculture, industry and services, state owned enterprises, and
deregulation of product prices. These have been backed by measures to
induce labour mobility, and formation of Special Economic Zones.

On the domestic front, in the pre reform era in China, the savings level was
high with significant capital formation (30%) and investment in
infrastructure, irrigation and land development. Literacy and primary
health care, too, have been impressive with virtual elimination of
landlessness. It has also shed surplus labour- a move which has been
inhibited in India possibly due to strong trade unions to safeguard the
interest of workers. On the external front China’s integration with the world
economy, as mentioned earlier, has been advanced through its trade and
FDI policies. This has made a significant contribution to China’s growth
and productivity.

India’s growth rates have been relatively low in the pre-liberalisation

period-4%-5% per annum compared to East Asia’s 7%-8% per annum. The
level of savings, too, has been lower than in China and East Asia; the levels
of literacy and health care, too, have been lower, coupled with the presence
of significant landlessness, and marked poverty and inequality between and
within regions, sectors and socio-economic groups.

Liberalisation was initiated in India in the 1980’s with a shift in attitude

towards the private sector. Its momentum was increased from 1991
onwards. The high growth rate
( 8% per annum) in the post liberalization period and the future targets
(9%-10%) are necessary but not sufficient. The structure of the economy
has to be transformed. In this respect, though the % contribution of
agriculture to GDP has been reduced to about 25% it still absorbs over
60% of the employed, while manufacturing and services contribute 28% and
55 % respectively to GDP. Over 62% of India’s growth over 1990-2003
has been in services but it has been employment inelastic. Hence, the pace
of industrialization has to be reinforced.

Though poverty in India has been reduced to about 26% it is critical to

widen participation by the poor in development programmes. This can
ensure that high growth rates are sustained. This calls for the use of labour
intensive techniques, investment in human and physical capital, and
infrastructure, enhanced flexibility in labour laws, and supporting
institutions to meet socio-economic goals. The state has to play an active
role to fulfil such goals though market forces may guide policies. This could
enable the poor to be lifted from poverty.

No doubt China has grown faster and sharply reduced the % of people
below the poverty line compared to India. However, inter regional and
inter group inequalities in China have increased. China and India need to
persist with their integration with the international economy to sustain
growth. This should encompass incorporating the poor in the process,
particularly in India, and reducing regional and inter-group disparities in
China. Such goals are intertwined with maintaining peace within the
respective regions. This is exemplified in India by efforts to minimize
conflicts with neighbouring Pakistan, curbing terrorism from within and
outside the state, resolving historical border disputes between India and
China, and meeting the needs of dissatisfied groups within the state. In
China it is essential to respect human rights.

China-India relationships and co-operation

Enhanced economic cooperation between India and China could bolster
their economic power in spite of differing positions on politics and
international affairs. Thus, it emerges that the economic relationship
between China and India has taken place against a backdrop of tensions.
This is exemplified by China’s past political, military and economic support
for Pakistan, and China’s claim to Arunachal Pradesh which has been
vehemently challenged by India. Leaving aside such differences China and
India are seen as contributors rather than competitors to each other’s
development. This is welcomed by India which has adopted a ‘Look East’
policy to expand trade and investment links with East Asia and forge strong
ties with regional institutions (eg. Association of South East Asian Nations,
Asia Pacific Economic Cooperation).

Thet visit of the Chinese President Hu Jintao to Delhi (November 2006) is a

significant move in initiating a platform on development, peace and stability
in Asia and the world. This was underscored by the Chinese President. He
perceived the relationship between China and India as being between ‘old
and close brothers’ citing the vision of Rabindranath Tagore the Nobel
Indian poet. The President’s visit culminated in a pledge to double trade
between the two nations to $ 40 billion by 2010. This contrasts with $ 250
million in the 1990’s.

China and India have been competing for resources in Asia . China has
been the winner in virtually all the sectors excepting technology. However,
the two nations could devise policies to complement each other’s need.
Thus, India could meet China’s growing appetite for raw materials (iron
ore, steel and plastics) fuelling its massive manufacturing sector. China in
turn could furnish manufacturing expertise and investment for Indian
infrastructure. Indian critics of Chinese policies have expressed concern
over the lack of transparency exemplified by their high level of subsidies.
They are also anxious over the sharply increasing Indian imports from
China of clothes, electronic goods and even fireworks. The Chinese have
responded by highlighting India’s blocking of their investments in ports and
telecommunications. This has been justified by India on grounds of security.
Overall, though, as the Chinese President reaffirmed, the relationship
between China and India was “an opportunity and not a threat.” This could
pave the way for cooperation between China and India and enhance the
nature and pace of globalisation.
Foreign Direct Investment (FDI) in India and china
Foreign direct investment (FDI) is also an area where India appears to lag
behind China. In 2006, China attracted 10 times more FDI than India. This
is because China’s policies for foreign investors are more liberalized than
India. Moreover, the Chinese economy is growing faster and infrastructure
is better. Although strict protection policies remain in place in China in
selected sectors such as automobiles, India’s restrictive labour laws and
limits affecting foreign shares in ownership) restrain foreign investment in
general. And in particular, India’s inadequate infrastructure development
makes it very difficult for multinational companies to ship products in and
out of the country, and even within the country.

China is certainly a star performer in attracting FDI, but India did not
perform as badly as China did well, as would be expected, given the large
disparity. China accounts for 5 per cent of world GDP and India has about
2 per cent, at current exchange rates (World Bank, 2007).
.
China has invested three times more in infrastructure than India, whose
fiscal deficits, both in national and state levels, present an impediment for
its infrastructure development. This is partly the reason to explain why
China attracts more FDI than India. But at least there is one sector where
India has been doing pretty well and that is telecommunications, one of the
most competitive and lowest cost fields in the world. (Thomsen, 2007)

China is more open to trade liberalization, but openness is a relative

concept. China may be more open to foreign investment, but that does not
mean that foreign investors find it easy to operate in the country. The
technology transfer and intellectual property rights are still difficult issues
for multinational companies in China.

In China nearly half of the country's labor force remains in agriculture

(about 60 percent in India). Also, despite all the talk about Indian software
engineers and Nobel laureates and Chinese engineering whizzes, India has
the largest number of illiterate people in the world and China also is
burdened with a large number of rural poorly educated who will offer
continued challenges for economic development. (India’s illiteracy rate is
nearly 40 percent and China’s is nearly 10 percent according to World Bank
statistics.) Of the total of 2.3 billion people in these two countries, nearly
1.5 billion earn less than US$2 a day, according to World Bank
calculations. The opportunities in both countries are substantial; the
challenges are also large.

With this in mind, lets compare the two countries by size: China is the
world’s third-largest country after Russia and Canada and is the second
largest country by land area. India is about a third of China’s size. In terms
of population, China tops India at 1.3 billion people compared to India at
just over 1 billion but India is growing at a faster rate and has a younger
population. In terms of political systems, China is a communist country
which economically is following market reforms that encourage free trade
and capitalist-based business models. India, by comparison, is the world’s
largest democracy, but with a system of commerce that until the 1980s was
based on the Soviet model and has since been reforming itself to follow
more free trade and capitalist-based models. China has been reforming its
economy since 1978; India has been working since 1991 but at a faster rate
of speed.

china

• Corporate Income Tax: 24%

• Tax-Incentives for high-tech industries: 15%
• Tax Holidays for manufacturing industries:
• Initial two years of profitability: 0 percent tax
• Next three years of profitability: 50% of tax rate (This is assumed to
be 12%)

india

• India’s tax system is being reformed as we write this. Following is

the tax system for India’s “Special Economic Zones”:
• Corporate Income Tax: 15%
• First five years of profitability: 0% tax
 • Second five years of profitability: 50% tax (This is assumed to be
7.5%.)
• Third five years of profitability: 50% of tax rate for any invested
dividends that are invested back into India.

India and China: An Economic Comparison

India and China are the world’s next major powers. And in a global
economy, affected by the financial crisis, where most advanced countries
are slumped into recession, India and China are growing. In a PPT India
and China it has statistically compared the economies and industries
between these two countries.

Both the countries have an important role to play in the world economy,
with China embracing private entrepreneurship and India facilitating
globalization within its economy.

Growth of the Indian and Chinese Economies

Both India and China have registered strong economic growth since 1980
and opening up to international trade and capital. The Indian and Chinese
economies have benefited from FDIs that have provided new goods and
services and therefore a spurt in industrial growth. The Chinese and the
Indian economies rank number 1 and 2 respectively as the fastest growing
economies in the world.

But the growth of the Chinese economy has been more spectacular than
India and China today has surpassed India on the more important economic
and welfare indices. China’s per capita GDP growth has averaged 8% since
1980, which is double that of India’s per capita GDP growth rate. The
Chinese economy is much larger than the Indian economy and labor-
intensive manufacture exports contribute almost 40% to the Chinese GDP
compared to only 16% in India.

Welfare Indicators of India and China

As compared to India, China also scores higher on welfare indicators such
as living standards, poverty ration, female adult literacy and life expectancy
by a wide margin.

Since 1990, China has tripled per capita income and has eased 300 million
out of poverty. While India still presents a picture of extreme poverty,
Indians are playing invaluable roles in the research and development
centers of global tech giants, sprouting all over India. Indian companies are
also excelling in producing high-quality goods and services at very low
prices, competing for a global marketshare.

Growth Focus for India and China

Technical and Managerial skills in both China and India are becoming
more important than cheap assembly labor. China will continue to dominate
mass manufacturing and is still investing in building multibillion-dollar
electronics and heavy industrial plants. While India is a leading force in
software, design, services and the precision industry.

A huge and demanding consumer class is also pushing through innovation

in India and China. Chinese and Indian consumers want the latest
technology and features.

China and India, are set to transform the of the 21st-century, through its
young, dynamic and driven workforce, powering worldwide growth and
change in a range of industries.

Agriculture

Agriculture is another factor of economic comparison of India and China. It

forms a major economic sector in both the countries. However, the
agricultural sector of China is more developed than that of India. Unlike
India, where farmers still use the traditional and old methods of cultivation,
the agricultural techniques used in China are very much developed. This
leads to better quality and high yield of crops which can be exported.

Liberalization of the market

In spite of being a Socialist country, China started towards the

liberalization of its market economy much before India. This strengthened
the economy to a great extent. On the other hand, India was very slow in
embracing globalization and open market economies. While India's
liberalization policies started in the 1990s, China welcomed foreign direct
investment and private investment in the mid 1980s. This made a significant
change in its economy and the GDP increased considerably.

Difference in infrastructure and other aspects of economic growth

Compared to India, China has a much well developed infrastructure. Some

of the important factors that have created a stark difference between the
economies of the two countries are manpower and labor development, water
management, health care facilities and services, communication, civic
amenities and so on. All these aspects are well developed in China which
has put a positive impact in its economy to make it one of the best in the
world. Although India has become much developed than before, it is still
plagued by problems such as poverty, unemployment, lack of civic amenities
and so on. In fact unlike India, China is still investing in huge amounts
towards manpower development and strengthening of infrastructure.

conclusion
The fast economic growth of China and India is not unusual in Asia.
Previous examples include Japan, South Korea, Hong Kong and Taiwan.
But size does matter when it comes to China and India: the sheer size of
their markets means they may influence the whole world in a way that
smaller economies did not.But why did these two ‘mega-emergers’ need so
long to take off and why should they have been so behind the take-off curve?
Is this indicative of a fundamental weakness in these two giants, which may
also be an impediment to their future economic growth? Political
constraints are probably one factor. Their immature legal systems may be
another, and it takes time for these to be constructed. And size matters
again. While smaller economies may have more flexibility to mobilize their
resources and push themselves ahead fairly
quickly to OECD standards, this may not be easy to handle for big
economies with huge populations and vast disparities between different
regions.
China’s successful strategy in the past twenty years has been the transfer of
its labour surplus from agricultural to manufacturing industry, from low-
efficiency state sectors to highly efficient commercial sectors. Without any
particular training, rural workers have proved able to work in
manufacturing industries, and this has led to increased output. It is
important to note that China has thereby achieved a big increase in
productivity, as well as in labour supply, particularly in recent years after
the country’s accession to the WTO.
China achieved productivity growth of 8.7% per year on average between
2000 and 2005(as opposed to 3.1% per year on average between 1995 and
2000). India’s productivity growth was lower – 4.1% on average in 2000–
04. This corresponded with a similarphase of modest increase in China
during the late 1980s and early 1990s (Conference Board, 2006).
However, China needs to further improve productivity in manufacturing
industries in order to respond to changing patterns of global production
networks. To some extent, China can still attain global competitiveness or
maintain existing positions thanks to its huge pool of cheap labour for at
least 10–15 years, but the country has to find the ways to move up in
the global production chains to sustain its economic growth in the long run
and shift its model from being investment-and-exports-driven to being
consumption-driven.
In recent years, China has been quick in changing sectors to prop its export
growth. Office machinery and equipments are becoming the fastest-growing
area for China’s exports.The electrical equipment industry gained a bigger
share from 5.9% in 1995 to 10.0% in 2004, while textiles lost share, from
26.0% in 1995 to 16.2% in 2004 (Table 6). Even if China’s share of office
machines and telecommunications equipments in world exports rapidly rose
to 15.2% in 2004, from only 1.0% in 1990 (see Table 1), this is a sector,
unlike footwear and clothing, with few trade disputes with OECD countries
because China does not compete directly with Europe and US in this
category but with east asia.

The Indian economy is also expanding, but so far the process of transferring
cheap labour from low-value agriculture to higher-value manufacturing
industry has been slow. This is mainly due to relatively weak industrial
growth and unfavourable labour laws, which have created a strong
incentive for firms to use more machinery and hire fewer workers. India
may choose to follow the East Asia model to attract foreign investment and
beef up its manufacturing industry. At the same time, it will continue to
expand its strong service sector in business and engineering services that
has drawn major global firms to outsource their operations to India and has
the potential to continually drive India’s foreign trade.
The fast pace of urbanization and industrialization in China and India leads
to more social problems and severe environmental degradation. More
attention is being focused on China than India in this regard. Clearly, these
are difficult issues, and attempts at resolution, understandably, always
result in disagreement. Nevertheless, China has performed reasonably well
despite such concerns, and this provides reasons to be optimistic about the
future. It is a big country, with considerable room for future growth. China
and India have achieved relatively successful outcomes, following their own
growth.
tracks. However, one of the current distinctions between China as the
‘factory of the world’and India as the ‘world’s back office’ in international
trade may be changing in the coming decade, since China is aiming to
develop its service sectors whereas India hopes to strengthen its
manufacturing industry.