China And India

Acknowledgements

We would like to extend our sincere and profound gratitude to our guide Mrs. U J, Faculty Economics department of IBS Chennai for her experience guidance, perseverance and hospitality. This paper work would have been a difficult task to complete without profiting from his expertise, encouragement and valuable time and criticisms. We are grateful to Mr. R.Subramanian, Faculty of Finance IBS Chennai, for providing us the necessary material for this project report.

CONTENTS

1.

INTRODUCTION.

2.

DIFFERENCES.

3.

CHINA AHEAD INDIA.

4.

CONCLUSION.

5.

BIBLOGRAPHY.

PREFACE : “China

and India, the two largest and fastest growing economies in the world, are grabbing the attention of the world media. They have long been accepted as the regional super powers and are now perceived as the rising super powers of the world. This project report brings to light some of the similarities and differences between the two countries in term of demography, financial systems and economic environment and takes a look at the long term perspective of their economies.”

INTRODUCTION: China and India seem to be the hot topics in the world economy today. In the international press, there is almost an obsession with these two economies, and how their current growth presages the coming "Asian century". It is not just that they both are countries with large populations covering substantial and diverse geographical areas, but also with huge economic potential. Most of all they are cited as the current "success stories" Two economies in the developing world that have apparently benefited from globalization, with relatively high and stable rates of growth for more than two decades and substantial diversification. In India too the obsession with China is now well-developed, mostly in the form of a longing eastern gaze. The rapid economic growth and structural transformation in China are not just eyed with envy; they are typically invoked to justify the economic policy of choice. Thus there are those who argue that the recent Chinese economic success is because of liberalization and openness to foreign trade and investment. By contrast, others point out that the early Communist history of land reforms and egalitarian policies formed the essential basis upon which all subsequent change has depended. In the outside literature, these economies are often treated as broadly similar in terms of growth potential and other features, and this even infects some Indian analyses. But in fact there are crucial differences between the two economies which render such similarities very superficial, and which mean that individual policies cannot be taken out of context of one country and simply applied in the other to the same effect

DIFFERENCES: We compare the recent economic performances of China and India using a simple growth accounting framework that produces estimates of the contribution of labor, capital, education, and total factor productivity for the three sectors of agriculture, industry, and services as well as for the aggregate economy. Our analysis incorporates recent data revisions in both countries and includes extensive discussion of the underlying data series. The magnitude of output growth in China is roughly double that of India at the aggregate level, and also higher in each of the three sectors. In China the post-1993 acceleration was concentrated mostly in industry, which contributed nearly 60 percent of China’s aggregate productivity growth. In contrast, 45 percent of the growth in India came in services. Reallocation of workers from agriculture to industry and services has contributed 1.2 percentage points to productivity growth in each country. There are Ten significant differences:-

The FIRST relates to the nature of the economy itself, the institutional conditions within which policies are formulated and implemented. India could be described until recently as a traditional "mixed economy" with a large private sector, so it was and remains a capitalist market economy with the associated tendency to involuntary unemployment. So the need for macroeconomic policies to stimulate demand, as common in capitalist economies, operated in addition to the usual developmental role of the state. China, by contrast, has been for the most part a command economy, which until recently had a very small private sector, and only recognized the legal possibility of home-grown capitalists a few years ago. Throughout the period of "liberalization", that is the 1990s and later, there have remained important forms of state control over macroeconomic processes that have differed from more conventional capitalist macroeconomic policy. Even in 2004, public enterprises accounted for more than half of GDP and more than two-fifths of exports.

The control over the domestic economic in China has been most significant in terms of the financial sector, which describes the SECOND big difference between the two economies. In India, the financial sector was typical of the "mixed economy" and even bank nationalization did not lead to comprehensive government control over the financial system; in any case, financial liberalization over the 1990s has involved a progressive deregulation and further loss of control over financial allocations by the state in India. But the financial system in China still remains heavily under the control of the state, despite recent liberalization. Four major public sector banks handle the bulk of the transactions in the economy, and the Chinese authorities have essentially used control over the consequent financial flows to regulate the volume of credit (and therefore mange the economic cycle) as well as to direct credit to priority sectors. Off-budget official finance (called "fund-raising" by firms) has accounted for more than half of capital formation in China even in recent years, and that together with direct budgetary appropriations have determined nearly two thirds of the level of aggregate investment. This means that there has been less need for more conventional fiscal and monetary policies, although the Chinese economy is now in the process of transition to the more standard pattern.

The THIRD difference is quite apparent to all the dramatically high rate of GDP growth in China compared to the more moderate expansion in India. The Chinese economy has grown at an average annual rate of 9.8 per cent for two and a half decades, while India’s economy has grown at around 5-6 per cent per year over the same period. Chinese growth has been relatively volatile around this trend, reflecting stop-go cycles of state response to inflation through aggregate credit management.

This higher growth in China essentially occurs because of the FOURTH major difference, the much higher rate of investment in China. The investment rate in China (investment as a share of GDP) has fluctuated between 35 and 44 per cent over the past 25 years, compared to 20 to 26 per cent in India. In fact, the aggregate ICORs (incremental capital-output ratios) have been around the same in both economies. Within this, there is the critical role of infrastructure investment, which has averaged at 19 of GDP in China compared to 2 per cent in India over the 1990s.

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FIFTH: It is sometimes argued that China can afford to have such a high investment rate because it has attracted so much foreign direct investment (FDI), and is the second largest recipient of FDI in the world at present. But FDI has accounted for only 3-5 per cent of GDP in China since 1990, and at its peak was still only 8 per cent. In recent times, the inflow of capital has not added to the domestic investment rate at all, but to the holding of international reserves, which have increased by $100 billion per year. In terms of economic diversification and structural change, China has followed what could be described as the classic industrialization pattern, moving from primary to manufacturing activities in the past 25 years. The manufacturing sector has doubled its share of workforce and tripled its share of output, which, given the size of the Chinese economy and population, has increasingly made China "the workshop of the world". In India, by contrast, the move has been mainly from agriculture to services in the share of output, with no substantial increase in manufacturing, and the structure of employment has been stubbornly resistant to change. The recent expansion of some services employment in India has been at both high and low value added ends of the services sub-sectors, reflecting both some dynamism and some increase in "refuge" low productivity employment.

The SIXTH major difference relate to trade policy and trade patterns. Chinese export growth has been much more rapid, involving aggressive increases on world market shares. This export growth has been based on relocative capital which has been attracted not only by cheap labour but also by excellent and heavily subsidized infrastructure resulting from the high rate of infrastructure investment. In addition, since the Chinese state has also been keen on provision of basic goods in terms of housing, food and cheap transport facilities, this has played an important role in reducing labour costs for employers. In India, the cheap labour has been because of low absolute wages rather than public provision and underwriting of labour costs, and infrastructure development has been minimal. So it is not surprising that it has not really been an attractive location for export-oriented investment, its rate of export growth has been much lower, and exports have not become an engine of growth. There is another issue relating to trade policy. In China, the rapid export growth generated employment which was a net addition to domestic employment, since until 2002 China had undertaken much less trade liberalization than most other developing countries. This is why manufacturing employment grew so rapidly in China, because it was not counterbalanced by any loss of employment through the effects of displacement of domestic industry because of import competition. This is unlike the case in India, where increases in export employment were outweighed by employment losses especially in small enterprises because of import competition.

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The SEVENTH difference is in terms of poverty reduction. China has been much more successful in this regard official data suggest that 4 per cent of the population now lives under the poverty line, unofficial estimates suggest around 12 per cent. The poverty ratio in India is much higher, between 26 per cent and 34 per cent according to the 1999-2000 NSS data. The Chinese success in this regard can be related to several features: to begin with, the basic issues in terms of asset redistribution and basic need provision were the focus of the Communist state until the late 1970s. This also assisted in economic growth: because of the more egalitarian system, there was a larger mass market for consumption goods, which has allowed producers to

take

advantage

of

economies

of

scale.

Subsequently (EIGHTH), poverty reduction in China has been concentrated into two main phases: 1979-82 and 1994-96, which were both phases of higher crop prices and rising agricultural incomes. In the first phase, institutional change in the form of allowing peasant production in diversified crops played a great role in increasing productivity and allowing peasants to benefit from rising prices. Also, since Chinese economic growth has been more employment generating, this has also operated to reduce poverty. _____________________________________________________________________________ _

This brings into focus the NINTH big difference: that of political systems. It can be argued that the political democracy in India, which now appears deeply entrenched even though it has not translated into universal economic enfranchisement, has played some role in creating more confused but less extreme patterns of economic growth. Certainly, historic and potentially transformatory economic legislation such as the Employment Guarantee Act could only come about because of impact of political changes. Perhaps the ability of the political system to force at least some change of direction in economic policies in India can serve as an important example to the rest of the world, and one of which Indians can justly be proud.

TENTH: Until recently, there was much more focus on "human development" in China, and public provision of health and education. This included universal education until Class X, as well as better public services to ensure nutrition, health and sanitation. However, in recent years, this emphasis has been much reduced and there is greater privatization of such services in China, which has also led to worsening conditions especially in particular areas. In India, the public provision of all of these has been extremely inadequate throughout this period and has deteriorated in per capita terms since the early 1990s. In terms of inequality, in both economies, the recent pattern of growth has been inequalising. In China, the spatial inequalities across regions have been the sharpest. In India, vertical inequalities and the rural-urban divide have become much more marked. In China recently, as a response to this, there have been some top-down measures to reduce inequality, for example through changes in tax rates, greater public investment in western and interior regions, and improved social security benefits. In India, it is political change that has forced greater attention to redressing inequalities, though the process is still very incipient.

CHINA AHEAD OF INDIA Both India and China have also been major contributors to the global centre of economic gravity moving towards Asia, and are expected to play a significant role in making the 21st century largely about Asia. Naturally, when countries the size of China and India – together accounting for 2.5 billion people – begin to unshackle their creative energies, the impact is bound to be realized worldwide. Though China and India enjoys many similarities, China has searched ahead of India in terms of economic progress while India’s per capita income is $440, China stands at $990.In China,3% of the population is below poverty line and in India it is 30-40%.China opened up its economy before India and could therefore attract foreign investment which helped it to emerge as the ‘workshop of the world’. Though India is trying to catch up with china in terms of 

FDI Attractiveness.



Sectoral. •

Agriculture.

•

Manufacturing.

•

Services.

•

Infrastructure.

 Education.  Population.  Trade.  Merger and acquisitions.

FDIChina was the sixth largest recipient of the FDI in the world over the last decade. China success in attracting more FDI was due to its authoritarian political structure and resulting flexibility to make policy changes. The Chinese government provided incentives to foreign companies and MNC’s in form of taxes to attract huge amount of foreign investment, china developed foreign exchange centers for its account operations, making it easier for foreign firms to balance their foreign currencies. Huge FDI inflows enabled china to develop its infrastructure and become the world’s largest manufacturer of consumer’s durables. It has also liberalized and privatized stateowned enterprises for attracting more FDI. This is proved in the favour of china that the existence of more than one lakh state owned undertakings, which were being considered for privatization. This was done to get credibility to the venture through presence of strategic foreign partners that helped them to secure loans from international strategies also the state owned units were up for sale at low prices and so were able to attract of foreign capital.

SectoralChina has grown at an annual average of 9.3%since economic reforms were initiated in 1978 whereas India has followed a consensual democratic market model and GDP has grown at 5.8% since the economy was opened in 1991.sectorwise china has followed a model similar to that of other Asian companies.

AgricultureChina has also focused on agriculture reforms from the second half of 1970’s.it increased investment in rural infrastructure, pursued de-collectivization which allowed ownership of farm lands by individuals laborers, reduced the mandatory delivery of output to the state by farmers and allowed farmers to have a amore market oriented output mix.

Manufacturing –

In manufacturing sector india has a remarkable CGR of 11.46% during the period 19602003,whereas the CGR of china is only 5.73%.but india’s manufacturing sector contributes just half of what china’s manufacturing sector contributes. According to some estimates, half of the world’s machines are manufactured in china. That gives china 92% of whose exports comprise manufacture goods, a share of 6.46% of world exports. But India’s export share is only0.82%and only three-fourths of the exports are manufactured goods.

Services- (Telecom ) China has invested heavily in telecom infrastructure in 1990’s.India and China expected to be the top two telecom networks in next five years. Comparing the teledensity , in India-8.5 connections per 100 persons, whereas in China-20 it is connections per 100 persons.

InfrastructureIndia manufacturing is handicapped with relatively inefficient and high cost infrastructural facilities namely electricity, roads, ports and airways, china on the other hand has relatively superior basic infrastructure. Policy makers who realized the importance of good infrastructure to attain these goals heavily invested in basic infrastructure facilities. China is spending over 8 times more than what India is spending on infrastructure in absolute terms. China’s total capital spending on electricity, construction, transport telecom and real estate was US$260.compare to US dollar 31bn in India. China highway network amounts to 1.4 million km as compare to . 2million kms in India. A mount spend by china on highways is 2% to 2.5% of GDP, whereas India spends a paltry 0.3% of GDP .It is estimated that Chinese ports can handle 1/5 of worlds containers besides developing massive new ports in Shenzhen and shanghai. In India though, initiatives are taken to upgrade to port handling facilities, yet Indian ports are poorly prepared compared to those in china.

EducationIn the field of education china has more world class institutions and is turning out more high quality graduates every year. For American students, pursuaing education abroad, china is one of the most desirable destinations. There are more than 60,000 foreigners studying in Chinese universities. China has setup its educational systems taking into consideration the government as the investor and other social partners as the co-investors. China’s education system is composed of four components: basic education, occupational/polytechnic education, common higher education and adult education. Since 1978, china has set up a “nine year compulsory schooling system” where every child in china should attend the school till they reach 9 years. Historically India has been an important centre for education. Since independence the Indian governments introduces several schemes to increase literacy rates. As in china, the disparity between states is high, in India in terms of education standards.

PopulationIndia and china are most populist countries in the world and the most population explosion which was a matter of serious concern in both the countries is now transforming into one of their strengths. Present population in India is approximately 1.1 billion and in china 1.315 billion which is expected to rise to around 1.392 billion in china and to 1.592 billion in India in 2050 which might result in more slums and seriously create social economic and environmental problems in india.another concern is food security. the working age population in India is expected to grow until 2045 and decline their after and in china it is expected to start declining between 2020 and 2050.china’s population increase has been generally around 12-13 million people but its strict family planning policy and one child policy. It has some how been able to control the growth rate of population to some extent. China’s population will continue to growth at a rate of 10 million per year and is expected to increase to 1.6 billion in the next century. the government of china is also trying ton control the population thereby limiting the population quantity and improving the quality.

Trade Trade has been the integral part of the burgeoning bilateral economic relationship between the two countries. Bilateral trade has grown by over 10 times since 2000-01 – from just US$ 2.33 billion in 2000-01, to US$ 25.68 billion in 2006-07. India's exports to China, likewise, have grown nearly ten-fold – from US$ 831.3 million (accounting for 1.87 per cent of total exports) in 2000-01, to US$ 8290.7 million (6.56 per cent of total exports) in 2006-07. The growth continued in 2007-08, with exports to China touching US$ 7868.6 million during April-January 2007–08 – as against US$ 6572.8 million in the same period last fiscal. Significant exports from India to China include cotton, organic chemicals, iron, steel and inorganic chemicals among others. Simultaneously, India's imports from China have increased from US$ 1502.2 million (accounting for 2.97 per cent of total imports) in 2000-01, to a whopping US$ 17399 million (9.53 per cent of total imports) in 2006-07. Furthermore, during April-January 2007–08, imports have increased by 60.1 per cent to US$ 22592.3 million against US$ 14108 million in the corresponding period last fiscal. On the other hand, imports from China are highest in the category of electrical machinery and equipment, organic chemicals, mineral fuels, oil and oil products. In fact, this surge in bilateral trade between the two countries has resulted in China displacing US to become the number one trade partner of India. During April-January 2007–08, Indo-China trade was US$ 30.46 billion against the Indo-US bilateral trade level of US$ 28.27 billion. This is no mean achievement, considering the fact that, bilateral trade between India and China was only about one-fourth of Indo-US trade in 2001-02. With such rapid growth, the bilateral trade target of US$ 20 billion by 2008 was achieved well ahead of time. Also, the next Indo-China bilateral trade target of US$ 60 billion by 2010 is likely to easily achievable. Further, to cement the rapidly strengthening bilateral trade ties, both countries are planning to sign a Free Trade Area agreement at the earliest. Both China and India are throwing up competition for countries like Hong Kong (China), the Republic of Korea, Singapore and Taiwan as the main sources of FDI in developing Asia. The

share of India and China in the total global FDI outflows has been increasing continuously. While both accounted for 10 per cent of total FDI outflows in 2005 in the Asian region, it increased to 25 per cent in 2007. India has emerged as the second most-attractive location after China, ahead of the US and Russia, for global foreign direct investment (FDI) in 2007. According to UNCTAD's world investment report, China is the most preferred investment location, followed by India, the US, the Russian Federation and Brazil, the report said. In the 2007 Foreign Direct Investment Confidence Index by AT Kearney too, China and India have been ranked first and second most preferred investment destinations. China leads the Index rankings for the fifth consecutive year and ranks first among Asian investors, 34 per cent of who plan to invest there over the next three years. Significantly, India continues to occupy the second place in the Index, a position it has held since displacing the US in 2005, as it attracts investors from more diverse destinations (about 75 per cent of investors who plan to invest India are from outside Asia). Not to mention, from being a complete non entity in the Indian power equipment market only a couple of years ago, Chinese companies will be supplying as much as 30 per cent of the equipment required to meet the Eleventh Plan capacity addition target of 78,000 mw. Chinese companies are also bagging large orders from private power companies in India.

Mergers & Acquisitions Both India and China have been moving aggressively to redraw the global landscape through their mergers and acquisitions (M&A) deals. In fact, the year 2007 has been a record year for both countries with respect to M&A activity. According to Thompson Financial, the value of China outbound M&A touched US$ 24.2 billion by December 19, 2007-up 60 per cent from 2006 and seven times that of 2004. Similarly, the Indian outbound M&A deals increased by almost five times over 2006 to over US$ 35 billion. Simultaneously, 2007 has also been a record year for inbound deals for both countries. While, the value of China inbound deals reached US$ 22 billion, India's inbound M&A deals value increased much faster to US$ 31.5 billion. Consequently, this steady rise of the Indian and Chinese economy along with their businesses is likely to transform the global business landscape. For example, according to a study by UKbased Chartered Management Institute, India & China (along with Brazil and Russia) would exert a greater influence on business markets and transform the business landscape by 2018. Both India and China provide huge investment opportunities across a myriad of sectors. For example, they are world's top two growing major economies, are set to be the among the top two global wireless network markets (by April 2008), are among the top three realty markets, and have the world's largest number of financially excluded households (opening huge opportunities in the financial sector). Consequently, these countries have been at the forefront in attracting global majors in a diverse set of industries. In fact, according to a report by Price Waterhouse Coopers, India is likely to become the third largest and China the largest economy by 2050. While the combined size of the two countries is likely to have major influence on global economy, both the countries have also their own respective natural advantages in a host of sectors. Certain factors that favour India include:

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The flow of European cash into Indian firms surged more than four-fold in 2007, surpassing EU investments into Chinese companies, as per estimates from the data agency Euro stat. India has been ranked 25th in terms of economic transformation (Transformation Index 2008), way ahead of China's 85th position, by German Bertelsmann Foundation. Indian business leaders – in a survey by Korn/Ferry International – are found to be more entrepreneurial than their Chinese counterparts, owing largely to their strong language skills and association with a society that encourages entrepreneurship. In a survey by the US-based business magazine Fortune, Indian products were found to be more preferred than Chinese products. India has fared better in providing social security like healthcare, education and child welfare to its people, compared to China and Malaysia, as per a new index brought out by the Asian Development Bank. India has overtaken the US and China to emerge as the largest developer location for Sun Microsystems. IT spending in India is estimated to record the fastest growth rate in the world in 2008, according to global research firm IDC. According to a survey by global consulting, technology and outsourcing services major Capgemini, India is all set to threaten China's position as the world's backyard for manufacturing in the next 3-5 years. In less than a decade, as per a study by the Barclays Wealth and Economists Intelligence Unit, Indian millionaires will hold more than double the wealth of their Chinese counterparts. 411,000 Indian households will be worth US$ 1.7 trillion in 2017. In contrast, 409,000 Chinese millionaires will be worth US$ 795.4 billion. A report by Barclays Wealth, ‘Evolving Fortunes’, signals the rise of emerging markets such as India, displacing more developed economies, with China, Brazil and Russia also making it to the ranking of the world’s top 12 wealthiest countries. And, according to a recent Boston Consulting Group report, India has the second-largest number of homegrown corporate champions holding their fort against the might of multinational giants. The country was ranked second behind China among the ten rapidly growing economies

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ConclusionBeing the two non- identical twins of the east both India and China didn’t have any disparities regarding poverty as it exists in both the countries. Though the cultural contact between them has been in existence for decades, there have had very little political contact. There had been a robust economic growth in both the countries, which brought about enormous differences between them in terms of their governments, ,political, financial systems and population and made them complete for western corporate attention and investments since mid 1990’s.Even the roles played by the two governments in attracting and retaining foreign participants have been diverse. Trade and commerce are the main reasons for the coordinal a relation between these two countries. There has been rapid growth and development in their economic corporation. Even the growth of the Chinese economy has increased tremendously over the past two decades and growth of the GDP is about 9.7% P.A. compare to the India’s rate of 5.7%.Chinaa has also been ahead of India in terms of a export growth by attracting a huge scale of FDI. Presently the major concern for china is its banking sector that is technically bankrupt whereas India is worried about its fiscal deficit and its deregulation. Both face the challenge of high HIV/AIDS infection rates that threatening to devastate their public health as well as derail their economic growth.

No doubt India and china are countries of enormous importance and opportunity. Both face distinctive challenges when it comes to attracting investment from abroad. to date, china has succeeded in attracting a diverse range of FDI in an unprecedented fashion. though behind in real number terms, India offer huge investment oppurtuinities.as economic barriers continues to fall, the government must be ready to take the steps

necessary to revitalize the economy, making India a magnet for foreign investment, improving productivity and adopting new technologies. If such a transparent action is initiated by the Indian government, no doubt, India will soon surpass china.

BIBLIOGRAPHY •

WWW.GOOGLE.COM

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WWW.YAHOO.COM

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FDI INFLOW IN INDIA AND CHINA - BY JAISHREE BOSE

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INDIA AND CHINA -BY E.MRUDULA AND PRIYA RAJU

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ARTICLE ON FDI IN INDIA AND CHINA -BY PROF. R.SUBRAMANIAN

PROJECT REPORT ON

ANALYSIS ON INDIA & CHINA SUBMITTED BY: ABHISHEK NARAYAN [08BS0000133] AJAY DOGRA [08BS0000183] ANKIT LOHARUKA [08BS0000383] ISHA KHURANA [08BS0001238]

PINKY GORWANI [08BS0002208] [SECTION-A, 2010 ]

IBS CHENNAI, MBA 1st SEM