India has emerged as a trading superpower and as an increasing magnet for FDI.

Its role in the international economy to this point has been less remarked than the rise and dominance of China but increasingly India will be appreciated for the opportunities it is creating for its citizens, employers and foreign and domestic firms. At first glance, India doesnt look like a major trading superpower or a place where your company should be considering siting a factory. Major complaints heard by visit execs often involve the poor state of infrastructure, the chaotic traffic, that the democratic process hinders development, that corruption is endemic and that bureaucracy is rampant. To this, many manufacturers must factor in that relations between China and India are formal but not warm and that apparently neither side trusts the other, which to this point has limited either location from generally serving the other for exports. To better understand what India is and what it is not, lets compare it to China. First, forget the hype about both China and India. Keep in mind that despite all the talk of China or Indias rising status, both China and India are still desperately poor countries with large disparities in incomes across each country. 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. (Indias illiteracy rate is nearly 40 percent and Chinas 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 worlds third-largest country after Russia and Canada and is the second largest country by land area. India is about a third of Chinas 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 worlds 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. Further, in terms of manufacturing Chinas lead over India in terms of manufacturing is considerable. China is the worlds third largest nation in terms of manufacturing after the U.S. and Japan. India is a still impressive, but much further back 12th place in the same list

according to Global Insight and the Financial Times. This points out the fact that to this point, Indias success in expanding its service industry has yet to be as firmly demonstrated in the manufacturing sector. In terms of performance, here are some charts comparing and contrasting the two economies in terms of first GDP, then exports and finally imports:

Top 15 Manufactuing Nations

2006 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 US Japan China Germany France UK South Korea Italy Brazil Canada Russia India Spain Mexico Indonedia 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

2025 China US Japan Germany South Korea France India UK Italy Brazil Russia Indonesia Mexico Taiwan

Canada

Top Ten Trading Partners of India As of 2008-09, Indias top ten trading partners and the trade carried out with them has been summarised as

Country

Trade 2008-09 (Rs. In crores)

Trade Balance

CHINA USA UAE SAUDI ARABIA GERMANY SINGAPORE UK HONG KONG BELGIUM NETHERLAND

1,63,202 1,55,353 1,52,668 1,05,602 67,602 63,280 50,144 50,129 41,552 33,099

-92,676 12,254 -1,934 -64,303 -19,497 2,934 524 1,772 -5,294 19,049

Top Exports Products:

Name of Commodity Apr 2005 - Feb 2006 Export Value of Goods Value (INR in Crores) 1 INDIA EXPORT OF GEMS & JEWELLARY INDIA EXPORT OF 2 PETROLEUM (CRUDE 47,016.18 10,624.02 76,683.05 16,889.83 63.10 & PRODUCTS) INDIA EXPORT OF 3 RMG COTTON INCL ACCESSORIES INDIA EXPORT OF 4 MACHINERY AND INSTRUMENTS INDIA EXPORT OF 5 6 DRUGS,PHRMCUTES 19,553.87 4,418.49 & FINE CHEMLS INDIA EXPORT OF MANUFACTURES OF 16,674.57 3,767.87 20,156.05 4,439.47 20.88 17.82 3.95 3.95 21,833.63 4,808.97 11.66 8.84 4.28 4.28 19,773.71 4,468.17 26,512.59 5,839.53 34.08 30.69 5.19 5.19 25,535.86 5,770.21 27,520.53 6,061.54 7.77 5.05 5.39 5.39 58.98 15.02 15.02 Value (US$ in Millions) Apr 2006 - Feb 2007 Export Value of Goods Value (INR in Crores) Value (US$ in Millions) %Growth %Growth %Share %Share Value (INR in Crores) Value (US$ in Millions) -0.59 Value Value

Rank

(INR in (US$ in Crores) Millions) 12.26 12.26

61,369.32 13,867.33 62,586.53 13,785.00 1.98

METALS Top products exported to India This includes air machinery, electrical machinery, optical and medical instruments and aircraft. Top products exported to U.S The list includes jewellery, woven apparel, knitted apparel, misc. textile articles, machinery. Cultural difference responsible for growth difference between India and China While China and India are touted as the new global economic super powers who would give the mighty Americans a run for their money but in reality, China and India are poles apart. The Foreign Direct Investments flowing into China is far greater than those making inroads into India are. Chinese infrastructure is far better than the potholed Indian roads and its undependable power supply. The political difference between the two countries authoritarian China and democratic India is always not necessary to explain the difference in attitude. China has always considered its diaspora as its own. In China, citizenship is determined by bloodline, whereas in India it is the place of birth that is more important; except for a few exceptions when a foreignborn individual married to a politically privileged family is considered suitable to adorn the prime ministerial office. The difference in diaspora management made all the difference in the rate of FDI flowing in the two countries. In the early years of globalization, 80% of Chinas FDI came from the non-resident Chinese. It was only in 2002 that the Indian government started to court the Non-resident Indians or the NRIs to invest in India. In fact, the composition of the Indian and Chinese diaspora is quite different. The Indian diaspora consists of mostly professionals while the Chinese are largely entrepreneurs outside China. Chinese emphasis on hard power and Indias emphasis on soft power. Employment and unemployment outcomes Although in general, economic growth has a positive impact on employment growth, the magnitude of the impact varies considerably among the BCIS countries and the periods observed, depending on the initial labour market structure and composition as well as on the labour market regulations and policies in place. Over the past decades, the main challenge of the BCISs has been to increase employment rapidly enough to cope with the growth in the labour force. In the period 1993-2008, the working-age population (15-64) has increased on average by more than 7 million people each

year in China, by almost 6 million in India, by around 2 million in Brazil and by 300 000 in South Africa. In both the 1990s and 2000s, employment growth was below GDP growth in Brazil, China and India, whereas South Africa registered higher employment growth in the first period compared to GDP and a significant decline in the second. The elasticity of employment to economic growth is larger in both Brazil and South Africa compared to China and India4, which means that a higher rate of economic growth has to be maintained in the latter in order to create enough employment to absorb the numbers of people entering the labour force every year.5 This also confirms the differences in the growth pattern of the BCISs, with China and Indias low employment elasticity pointing to important structural changes and productivity growth. In contrast, in Brazil and South Africa economic growth since the late 1990s has favoured bringing more people into employment instead of redistributing the existing employment between sectors and favouring rapid economic structural change, as has been the case in China, and to a lesser extent in India. Literacy in India and China COMPARISONS between India and China have often been made in the development literature. These comparisons can indeed be quite enlightening, given the similar challenges faced by the two countries in the late 1940s, and the different routes they have taken in addressing these challenges. Right now, economic growth tends to be the most common focus of comparison, and there is indeed much to learn from China's achievements in this field during the 1980s and 1990s, In assessing that success, however, it is important to take note of the social conditions that have formed the basis of rapid and participatory economic growth in China over that period. One of these social conditions, which is solidly rooted in the 'pre-reform' period, is widespread literacy.' The importance of literacy, of course, is not exclusively or even primarily related to its role in promoting participatory economic growth. The diverse social and personal contributions of basic education also include the intrinsic value of activities that require literacy and related skills (e g, reading newspapers), lower mortality and fertility rales, more informed participation in civil society and political activity, and so on. Even more important, perhaps, is the role of basic education as a tool of empowerment and redistribution. In India, the persistence of widespread illiteracy among disadvantaged groups tends to reinforce diverse kinds of social inequality (eg, relating to class, caste and gender), and the expansion of basic education must certainly be seen as an essential requirement of more rapid elimination of these inequalities, and of positive social change in general. The Growth - China & India

Government policies in China and India have been very different in terms of the approach to generating growth. The difference illustrates the importance of the consumer sector in a modern economy. China has directed the massive investment percentage of GDP into the creation of industrial capacity, aimed substantially at export markets. It is therefore vulnerable to downturns in global markets, particularly in the USA. Significantly since 2004 China has commenced a slow re-orientation towards strengthening consumption in the home market relative to investment. The savings rate in China has been exceptionally high, and the level of credit in relation to GDP has been very low by world standards. The level of consumption had fallen to 38% of GDP by the end of 2005, just about the lowest level of any major world economy. Coupled with this we note that the excess capacity generated by the high level of investment relative to consumption has resulted in overcapacity, stagnating or reducing prices, growing levels of unsold inventory and pressures on profitability. Excessive construction and the reluctance of the majority of the population to draw down on savings have prompted falling prices in the property sector. One economist has recently calculated that if personal consumption in China as a percentage of GDP had remained at its 1990 level it would be 30 per cent above current levels - a more rational balance in relation to other GDP components (Lardy 2006). There is sufficient spare capacity and inventory backlog in China to enable consumption to rise significantly without resulting in price inflation. The effect of FDI on India and Chinese Economy India and China are the two emerging economic giants of the developing world, both situated in Asia with 37% of world population (Asian Development Outlook2005) and with more than 8% growth in their respective GDP of their economies (World Development Report 2006). Both the economies have immense natural resources, skilled and unskilled, cheap but quality labour force, huge domestic market and above all the relatively stable political environment. Both the economies hence have vast potential to attract Foreign Direct Investment (FDI) to serve the local market and to become a more important part of the global integration. China got independence in 1949, after 2 years of Indias political Independence (1947), but today, China has surged far ahead of India in socio-economic development indicators (Comparative analysis figures in annexure1). After Chinas entry into World Trade Organisation (WTO) China has emerged into the most attractive FDI destination in the developing world. The UNCTAD (2005) and Asian Development Outlook (2005) highlight the fact that Indias FDI is far below that of China and there is a wide gap between approvals and actual realization. The FDI in India is just 3.4% of FDI flows as a percentage of Gross Fixed Capital Formation in India by 2004 and 5.9% of FDI stocks as

a percentage of GDP by 2004, whereas in China it was 8.2% of FDI flows as a percentage of Gross Fixed Capital Formation and 34.9% of FDI stocks as a percentage of GDP during the same year, In absolute terms China attracted US$ 53,510 million in 2003 whereas India attracted only US$3420 million and during 2004 China attracted US$ 60,600 million, whereas India attracted only 4374 million US$ during the same period. Hence it appears India can learn a lot from the FDI policy and experience of China in not only attracting FDI but also utilizing it successfully for its development.

Conclusions and Recommendations

Given the relatively high levels of protection in the Indian economy, it might be expected that greater opening to trade would yield large gains. However the most striking overall result of the simulations in this study is that the gains for the Indian economy from both multilateral and bilateral trade agreements are surprisingly modest. Other studies have also shown limited gains from Indian trade opening. Multilateral liberalization through the WTOs Doha Round would produce larger gains for India than free trade agreements with any of its major trading partners, including the EU, the United States, and China. Nonetheless, a Doha agreement would represent only a small gain for the Indian economy. In the simulation presented here, the gain in real income for India from Doha is $1.2 billion. Other modelsusing dynamic modeling frameworks in which gains in investment, productivity, and overall growth are assumed to accompany trade policy changeshave shown the Indian economy gaining from $1.6 to $2.8 billion by 2020, still very modest changes. Even the highest gains projected using dynamic frameworks in global models represent only about a one-quarter of one percent (0.27 percent) gain for the Indian economy. The World Bank study showed gains of $2.2 billion from an ambitious Doha outcome if additional investment is also realized, but actual losses for the Indian economy from a Doha agreement when only the direct effects of Doha changes are taken into account. India has liberalized its trade gradually during the past two decades while maintaining significant policy levers to achieve desired outcomes in terms of growth, poverty reduction, and income distribution. The results presented here indicate that continued trade liberalization, particularly through multilateral agreements such as the Doha Round, can contribute to the countrys development and growth in the future. However it should be recognized that the gains are likely to be modest, and the possibility of negative effects is real. Trade agreements must be negotiated with great care if they are to contribute to the countrys development and broadly improve the living standards of its people.