India & China Global Economy Drivers

8/7/2019 India & China Global Economy Drivers

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India & China - Global Economy Drivers

By:

Sanjay Sinha

Dr Neerja Sinha



India and China – Global Economy

Both, India and China are the fastest growing and largest emerging

markets economies. In fact, according to Economic Times dated 23rd

March 2011, in the very recent visit to India, billionaire Warren Buffet

has described India as a ‘large market’ and not an ‘emerging market’.

These two countries account for almost one third of the total population

of the world and in recent times, have also contributed to the majority of

world GDP growth.

For the past two decades, China has been growing at an astounding 9.5%

a year, and India by 6%. Given their young populations, high savings,

and the sheer amount of catching up they still have to do, most

economists figure China and India possess the fundamentals to keep

growing in the 7%-to-8% range for decades. As per the estimates of

leading economists, within three decades India should surpass Germany

as the world's third-biggest economy.

By mid-century, China should have overtaken the U.S. as No. 1. Going

by the trends of manufactures and service outputs, China and India could

account for half of global output. It has been observed that the two

countries are becoming important and powerful as they complement each

other's strengths. An accelerating trend is, that technical and managerialskills, in both China and India are becoming more important than cheap

assembly labour. China will stay dominant in mass manufacturing, and is

one of the few nations building multibillion-dollar electronics and heavy

industrial plants. India is a rising power in software, design, services, and

precision industry.



World over, every country, developed and developing have realised that

both India and China are a force to reckon with as, though the global

economy is still recovering after the recent economic shock it is said that

the economies of India and China were best able to withstand the jolt and

were somewhat prepared for the global recession as it hit them last.

It was only in these two countries that the rate of growth of the economy

declined but it not go into negative figures. In both these countries the

export growth also declined but again the economies could sustain itself

because of the government stimulus packages and growth in domestic

consumption.

China Economy Overview:

Since the late 1970s China has moved from a closed, centrally planned

economic system to a more market-oriented one that plays a major role in

the global economy - in 2010 China became the world's largest exporter.

Reforms began with the phasing out of collectivized agriculture, and

expanded to include the gradual liberalization of prices, fiscal

decentralization, increased autonomy for state enterprises, creation of a

diversified banking system, development of stock markets, rapid growth

of the private sector, and opening to foreign trade and investment. China

generally has implemented reforms in a gradualist fashion.

In recent years, China has renewed its support for state-owned enterprisesin sectors it considers important to "economic security," explicitly

looking to foster globally competitive national champions. After keeping

its currency tightly linked to the US dollar for years, in July 2005 China

revalued its currency by 2.1% against the US dollar and moved to an

exchange rate system that references a basket of currencies.



From mid 2005 to late 2008 cumulative appreciation of the Renminbi

against the US dollar was more than 20%, but the exchange rate remained

virtually pegged to the dollar from the onset of the global financial crisis

until June 2010, when Beijing allowed resumption of a gradual

appreciation.

The restructuring of the economy and resulting efficiency gains have

contributed to a more than tenfold increase in GDP since 1978. Measured

on a purchasing power parity (PPP) basis that adjusts for price

differences, China in 2010 stood as the second-largest economy in the

world after the US, having surpassed Japan. The dollar values of China's

agricultural and industrial output each exceeded those of the US; China

was second to the US in the value of services it produced. But per capita

income is below the world average.

India Economy - overview:

India is developing into an open-market economy, yet traces of its past

autarkic policies remain. Economic liberalization, including industrial

deregulation, privatization of state-owned enterprises, and reduced

controls on foreign trade and investment, began in the early 1990s and

has served to accelerate the country's growth, which has averaged more

than 7% per year since 1997.

India's diverse economy encompasses traditional village farming, modernagriculture, handicrafts, a wide range of modern industries, and a

multitude of services. Slightly more than half of the work force is in

agriculture, but services are the major source of economic growth,

accounting for more than half of India's output, with only one-third of its

labour force. India has capitalized on its large educated English-speaking

population to become a major exporter of information technology

services and software workers.



In 2010, the Indian economy rebounded robustly from the global

financial crisis - in large part because of strong domestic demand - and

growth exceeded 8% year-on-year in real terms. Merchandise exports,

which account for about 15% of GDP, returned to pre-financial crisis

levels. An industrial expansion and high food prices, resulting from the

combined effects of the weak 2009 monsoon and inefficiencies in the

government's food distribution system, fuelled inflation which peaked at

about 11% in the first half of 2010, but has gradually decreased to single

digits following a series of central bank interest rate hikes.

In 2010 reduced subsidies in fuel and fertilizers, sold a small percentage

of its shares in some state-owned enterprises and auctioned off rights to

radio bandwidth for 3G telecommunications in part to lower the

government's deficit. The Indian Government seeks to reduce its deficit to

5.5% of GDP in FY 2010-11, down from 6.8% in the previous fiscal year.

India's long term challenges include widespread poverty, inadequate

physical and social infrastructure, limited non-agricultural employment

opportunities, insufficient access to quality basic and higher education,

and accommodating rural-to-urban migration.

India- China trade relations :

Among the most encouraging recent developments in India China

Economy and India-China ties is the rapid increase in bilateral trade.China and India established diplomatic relations on April 1, 1950.

India was the second country to establish diplomatic relations with China

among the non-socialist countries.

In 1954, Chinese Premier Zhou Enlai and Indian Prime Minister

Nehru exchanged visits and jointly initiated the famous Five Principles

of Peaceful Coexistence. Relations soured because of two sudden

http://www.economywatch.com/world_economy/china/indo-china-trade-relations.html




invasions of China in India in the 1960s and it was only after a gap of 15

years, in 1976, that the two countries decided to restore ambassadorial-

level diplomatic ties .

The next major step was foreign minister Vajpayee's visit to China in

February 1979 which laid the foundation for today’s trade relation.

In 1984 India & China signed a Trade Agreement, providing for Most

Favoured Nation Treatment. In 1994 the two countries signed the

agreements on avoiding double taxation. Agreements for cooperation on

health and medical science, MOUs on simplifying the procedure for visa

application and on banking cooperation between the two countries have

also been signed.

In December 1988, Indian Prime Minister, Rajiv Gandhi's visit to

China, facilitated a warming trend in relations. The two sides issued a

joint statement that stressed the need to restore friendly relations on the

basis of the Panch Sheel and noted the importance of the first visit by an

Indian prime minister to China since Nehru's 1954 visit.

India China Economy agreed to broaden bilateral ties in various areas,

working to achieve a "fair and reasonable settlement while seeking a

mutually acceptable solution" to the border dispute. Border trade resumed

in July 1992 after a hiatus of more than thirty years, consulates reopened

in Mumbai and Shanghai in December 1992.

Top-level dialogue continued with the December 1991 visit of Chinese

premier Li Peng to India and the May 1992 visit to China of Indian

President Ramaswami Venkataraman and, in June 1993, the two sides

agreed to open an additional border trading post. Rajiv Gandhi signed

bilateral agreements on science and technology cooperation, on civil

aviation to establish direct air links, and on cultural exchanges. The two



sides also agreed to hold annual diplomatic consultations between foreign

ministers, and to set up a joint ministerial committee on economic and

scientific cooperation and a joint working group on the boundary issue.

The latter group was to be led by the Indian foreign secretary and the

Chinese vice minister of foreign affairs. As the mid-1990s approached,

slow but steady improvement in relations with China was visible.

Recently Chinese Premier Wen Jiabao visited India, where he said

that India and China must take their trade to $30 billion level by

2010. Seeing the whopping growth in Sino-Indian trade, China outlined a

five-point agenda, including reducing trade barriers and enhancing

multilateral cooperation to boost bilateral trade.

Chinese Premier Wen Jiabao said "We have set an objective (in the

joint statement) to increase the two-way trade volume from 13.6

billion dollar at present to 20 billion dollar by 2008.....we plan to take

it to 30 billion dollar by 2010." Addressing Indian business leaders at

New Delhi, he said that the two countries agreed for a joint feasibility

study for a bilateral Free Trade Agreement.

India China Economy have also agreed to work together in energy

security and at the multilateral level at the WTO to support an "open, fair,

equitable and transparent rule-based multilateral trade system", the joint

statement signed by Prime Minister Manmohan Singh and Wen said.

Wen also offered to cooperate with New Delhi in its infrastructure

programme.

Indian Commerce Minister Kamal Nath said China was poised to become

India's largest trade partner in the next two-three years, next only to the

US and Singapore.







According to a CII study, special focus on investments and trade in

services and knowledge-based sectors, besides traditional manufacturing,

must be given, in view of the dynamic comparative advantage of India.

Indian companies could enter the $615 billion Chinese domestic market

by using it as a production base.

Presently, Iron ore constitutes about 53% of India's total exports to China.

Among the potential exports to China, marine products, oil seeds, salt,

inorganic chemicals, plastic, rubber, optical and medical equipment and

dairy products are the important ones. The study said that services and

knowledge trade between India and China have significant potential for

growth in areas like biotechnology, IT and ITES, health, education,

tourism and financial sector.

Value added items dominate Chinese exports to India, especially

machinery, including electrical machinery, which together constitute

about 36% of exports from that country. The top 15 Chinese exports to

India have recorded growth between 29% (organic chemicals) and

219.89% (iron and steel).

Going by the basic facts, the economy of China appears to be more

developed than that of India. While India is the 11th largest economy in

terms of the exchange rates, China occupies the second position

surpassing Japan. Compared to the estimated $1.3123 trillion GDP of

India, China has an average GDP of around $4909.28 billion. In case of

per capital GDP, India lags far behind China with just $1124 compared to

$7,518 of the latter.



To make a basic comparison of India and China Economy, the figures

given below gives one an idea of the economic facts of the countries.

Facts India China

GDP around $1.3123 around 4909.28

GDP growth 8.90% 9.60%

Per capital GDP $1124 $7,518

Inflation 7.48 % 5.1%

Labor Force 467 million 813.5 million

Unemployment 9.4 % 4.20 %

Fiscal Deficit 5.5% 21.5%

Foreign Direct Investment $12.40 $9.7 billion

Gold Reserves 15% 11%

Foreign Exchange $2.41 billion $2.65 trillion

World Prosperity Index 88th Position 58th Position

Mobile Users 842 million 687.71 million

Internet Users 123.16 million 81 million.

Source: Maps of India

Comparison between India & China



If we make the analysis of the India vs. China economy, we can see that

there are a number of factors that has made China a better economy than

India. Here it is very relevant to mention that, India was under the

colonial rule of the British for around 190 years. This drained the

country's resources to a great extent and led to huge economic loss. On

the other hand, there was no such instance of colonization in China. As

such, from the very beginning, the country enjoyed a planned economic

model which made it stronger. The other major indicators which may be

compared are as follows:

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.

IT/BPO:

One of the sectors where India enjoys an upper hand over China is the

IT/BPO industry. India's earnings from the BPO sector alone in 2010 is

$49.7 billion while China earned $35.76 billion. Seven Indian cites are

ranked as the world's top ten BPO's while only one city from China

features on the list.

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



a little 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.

Company Development:

Tax incentives are one area where China is lagging behind India. The

Chinese capital market lags behind the Indian capital market in terms of

predictability and transparency. The Indian capital or stock market is both

transparent and predictable. India has Asia's oldest stock exchange which

is the BSE or the Bombay Stock Exchange. Whereas China is home to

two stock exchanges, namely the Shenzhen and Shanghai stock exchange.

As far as capitalization is concerned the Shanghai Stock Exchange is

larger than the BSE since the SSE has US$1.7 trillion with 849 listed

companies and the BSE has US$1 trillion with 4,833 listed companies.



But more than the size what makes both these stock exchanges different

is that the BSE is run on the principles of international guidelines and is

more stable due to the quality of the listed companies.

In addition to this the Chinese government is the major stake holder of

most of its State-owned organizations hence the listed firms have to run

according to the rules and regulations laid down by the government.

Hence India is ahead of China in matters of financial transparency.

Company Management Capabilities:

It is said that Indians have great managerial skills. India also leaves China

behind as far as management abilities are concerned. As compared to

China India has better managed companies. One of the major reasons for

this is that management reform training in China began 30 years ago and

sadly the subject has still not picked up as a matter of interest by the

citizens of the country.

Another important factor behind China not doing well in the business

forefront is that most of the countries came to China and manufactured

their goods. It was not China’s exports that drove the economy instead it

was the export products of outsiders. Even in the case of mergers and

acquisitions China still has not managed to do too well. On the other hand

Indian companies are rapidly expanding mergers and acquisitions. Some

of the recent examples include; Tata Steel's $13.6 Billion Acquisition of

Corus, Tata Tea's purchase of a controlling stake in Britain's Tetley for

US$407 million, Indian Pharmaceutical giant Ranbaxy's acquisition of

Romania's Terapia etc.



Barriers to the growth of India Economy:

A report of the McKinsey Global Institute, (McKinsey & Company's

business and economics research arm) on the Indian Economy observes

that:

1. Product market barriers and the rules and policies governing

different sectors of the economy impede GDP growth by 2.3 percent a

year.

2. Due to the damaging features of the current regulatory regime are:

inequitable and ill-conceived regulation, uneven enforcement,reservation of products for small-scale enterprises, restrictions on FDI,

and licensing and quasi-licensing requirements.

3. Unrecognized land market distortion accounts for close to 1.3

percent of lost growth per year. These distortions include unclear

ownership, counter-productive taxation, and inflexible zoning, rent and

tenancy laws.

4. Government-controlled entities, accounting for 43% of capital

stock and 15% of employment outside agriculture have lower

productivity of capital and labour compared to their private competitors.

Their suppression of potential competition and productivity

improvements result in the loss of 0.7 percent GDP growth per year.

5. Contrary to common belief, inflexible labour laws and poor

transport infrastructure are minor barriers to growth and together account

for less than 0.5 percent of lost GDP growth.

Economic Prospects:



The Indian economy, was hit in the latter part of the global recession and

the real economic growth witnessed a sharp fall, followed by lower

exports, lower capital outflow and corporate restructuring. In order to

sustain economic growth during the time of the worst

recession, government authorities in India have announced the

stimulus packages to prop up economic growth.

To finance the stimulus packages, the Indian government has raised over

$100 billion over the last four quarters in a way to finance the stimulus

package. The country’s public debt, according to the RBI, has surged to

over 50% of the total GDP .The effect of stimulus programs is yet to bear

fruit and tax cuts are working their way through the system in 2010. Due

to the strong position of liquidity in the market, large corporations now

have access to capital in the corporate credit markets.

India’s Economic over the year

Year 2007 2008 2009 2010

GDP Growth 9.40% 7.30% 5.40% 7.20%

CPI 6.40% 9.30% 5.50% 4.90%

http://www.economywatch.com/indianeconomy/indian-economy-overview.html

http://www.economywatch.com/indianeconomy/indian-economy-overview.html



Barriers to the Growth of Economy of China:

Though China is doing very well economically, there are certain factors

which impede the growth to a certain extent. The Chinese government

faces numerous economic development challenges, including:

1. Reducing its high domestic savings rate and correspondingly low

domestic demand.

2. Sustaining adequate job growth for tens of millions of migrants and

new entrants to the work force.

3. Reducing corruption and other economic crimes.

4. Containing environmental damage and social strife related to the

economy's rapid transformation. Deterioration in the environment -notably air pollution, soil erosion, and the steady fall of the water

table, especially in the north - is another long-term problem. China

continues to lose arable land because of erosion and economic

development.

5. Economic development has progressed further in coastal provinces

than in the interior, and approximately 200 million rural labourers

and their dependents have relocated to urban areas to find work.

6. One demographic consequence of the "one child" policy is that

China is now one of the most rapidly aging countries in the world.

The Chinese government is seeking to add energy production capacity

from sources other than coal and oil, focusing on nuclear and alternative

energy development.



According to Kevin Meyerson, Editor of China Censorship Watch, the

other impediments to growth are :

• Human Rights - A number of organizations globally have stated

that the lack of many basic human rights in China are a significant

barrier to China's economic growth.

• Pollution - China has the distinction of being the most polluted

country in the world. A World Bank study estimated that 750,000

people per year die prematurely due to exposure to polluted air or water, or both. The environment in China is horrifying. Even

though there have been many announcements about China's

investments into green tech, the ecological situation in China is still

getting worse, unfortunately.

• Corruption - The World Bank estimated that 3% of China's GDP

is consumed by corruption.

Economic Prospects:

In the past the Chinese Economy has had a high growth rate of around 9

%. The high growth rate of China is attributed to high levels of trade and

greater investment effort. China is the world's second largest recipient

for FDI with total FDI inflows crossing US $ 53 billion in 2003. Growth

in Special Economic Zones (SEZ) has also helped China increase its

productivity. Though the global economic downturn reduced foreign

demand for Chinese exports, but China rebounded quickly,

outperforming all other major economies in 2010 with GDP growth

around 10%. The economy appears set to remain on a strong growth

trajectory at the moment, lending credibility to the stimulus policies the

regime rolled out during the global financial crisis. The government



vows to continue reforming the economy and emphasizes the need to

increase domestic consumption in order to make the economy less

dependent on exports for GDP growth in the future, but China likely will

make only marginal progress toward these rebalancing goals in the near

future.

Conclusion

It is an undisputed fact that both China and India are the largest market

due to their huge population. The rising middle income and upper

income group is swelling. What's more, Chinese and Indian consumers

and companies now demand the latest technologies and features. Studies

show the attitudes and aspirations of today's young Chinese and Indians

resemble those of Americans a few decades ago. Surveys of thousands of

young adults in both nations by marketing firm Grey Global Group found

they are overwhelmingly optimistic about the future, believe success is in

their hands, and view products as status symbols. In China, it's

fashionable for the upwardly mobile to switch high-end cell phones every

three months, says Josh Li, managing director of Grey's Beijing office,

because an old model suggests "you are not getting ahead and

updated." That means these nations will be huge proving grounds for

next-generation multimedia gizmos, networking equipment, and wireless

Web services, and will play a greater role in setting global standards. In

consumer electronics, "we will see China in a few years going from

being a follower to a leader in defining consumer-electronics trends,"

predicts Philips Semiconductors Executive Vice-President Leon

Husson.

The FDI of China is $ 65 billion in comparison to $3.5 billion that of

India. This shows that inspite of all the foreign investment policies of the



Indian Government, they are unable to make attractive for the FDI

inflows.

The main reason being the limitation to the extent of ownership. This is

well indicated in Warren Buffet statement in his recent visit to India that

“ an foreign investment cap of 26 per cent in insurance sector here

was a deterrent”. India currently allows only 26 per cent foreign

investment in insurance business, but a proposal is underway to hike it to

49 per cent.

The two countries are also becoming a new and reliable destination for

research work not only because Indian and Chinese brains are young,

cheap, and plentiful. In many cases, these engineers combine skills --

mastery of the latest software tools, a knack for complex mathematical

algorithms, and fluency in new multimedia technologies -- that often

surpass those of their American counterparts. As Cisco's Scheinman puts

it: "We came to India for the costs, we stayed for the quality, and

we're now investing for the innovation."

But in spite all the huge advantages they now enjoy, India and China

cannot assume their role as new superpowers. Today, China and India

account for a mere 6% of global gross domestic product -- half that of

Japan. They must keep growing rapidly just to provide jobs for tens of

millions entering the workforce annually, and to keep many millions

more from crashing back into poverty. Both nations have to confront and

fight ecological degradation that's as obvious as the smog shrouding

Shanghai and Bombay, and face real risks of social strife, war, inflation,

poverty and financial crisis.

Increasingly, such problems will be the world's problems. Also, with

wages rising fast, especially in many skilled areas, the cheap labor edge

won't last forever. Both nations will go through many boom and



harrowing bust cycles. And neither country is yet producing companies

like Samsung, Nokia or Toyota that put it all together, developing,

making, and marketing world-beating products.

Both countries, however, have survived earlier crises and possess

immense untapped potential. In China, serious development only now is

reaching the 800 million people in rural areas, where per capita annual

income is just $354. In areas outside major cities, wages are as little as 45

cents an hour.

But India's long-term potential may be even higher. Due to its one-child

policy, China's working-age population will peak at 1 billion in 2015 but

then shrink steadily. India has nearly 500 million people under age 19 and

higher fertility rates. By mid-century, India is expected to have 1.6 billion

people -- and 220 million more workers than China. That could be a

source for instability, but a great advantage for growth if the government

can provide education and opportunity for India's masses. India is now

opening its power, telecom, commercial real estate and retail sectors to

foreigners. These industries could lure big capital inflows.

India is considered efficient in contrast to China, as it had to develop with

scarcity. It gets scant foreign investment, and has no room to waste fuel

and materials like China. India also has Western legal institutions, a

modern stock market, a sophisticated manufacturing knowhow and

private banks and corporations. As a result, it is far more capital-efficient.

A study on the top listed companies in both nations shows Indian

corporations have achieved higher returns on equity and invested capital

in the past five years in industries from autos to food products. Export

manufacturing is one of India's best hopes of generating millions of new

jobs.



What holds India back is bureaucratic red tape, rigid labor laws, and its

inability to build infrastructure fast enough. It will take India many years

to build the highways, power plants, and airports needed to rival China in

mass manufacturing. With Beijing now pushing software and pledging

intellectual property rights protection, some Indians feel that design work

will shift to China to be closer to factories.

A few years ago, Indian markets were under the threat of being swamped

by Chinese imports. Today, India enjoys a positive balance of trade with

China. Major industry players or industrialist realised in India that giving

the Chinese a free ride into the domestic market so early would have

hampered India’s domestic manufacturing base. The Indian have become

more cost and quality conscious . The Indian customer prefers Indian to

Chinese products and our manufacturing base is again gearing up.

Whether or not India overtakes China in the next two decades, it is clear

that both countries will be economic powerhouses in the medium term.

Undoubtedly, their growth will have significant impacts on the World

economy.

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India & China Global Economy Drivers