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 managerial
skills, 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 enterprises
in 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, modern

agriculture, 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
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

trillion billion
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

Reserves
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%

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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