India and China: An Economy Comparison

India and China: An Economy Comparison

Date: 08/07/2011 Submitted by:
Ram Sundaresa Kumar (2012MLP011) Anurag Kanoongo (2012MLP015) Prasoon Malviya (2012MLP017) Pradeepan N (2012MLP020) Pratibha Sangwan (2012HRLP012) Monika Sahni (2012HRLP22) Sahiba Sanan (2012HRLP029)

India and China: An Economy Comparison

India and China: An Economy Comparison

Contents

1. Executive summary...3 2. Present Economic status of India and China.4 3. Challenges faced4 3.1. By India..4 3.2. By China5 3.3. Common problems..5 4. Comparison of Indian and Chinese Economies6 4.1. GDP comparison..6 4.2. Comparison of Investment, Gross National Saving & Inflation.7 4.3. Comparison of Import and Export Volumes.8 5. Why does China have higher economic growth than India?..................................................10 6. Key Economic Reforms.12 7. References.15 8. Appendix. 8.1. International Financial Statistics (IFS) 8.2. Key Economic Indicators.. 8.3. Projection of both economies...

India and China: An Economy Comparison

1. Executive Summary
The love of economy is the root of all virtue. George Bernard Shaw
India and China, two of the Asian giants have locked horns against one another to become a world superpower. Historically, inevitable comparison of economies between these two giants has shown that China usually emerges on top. The economists attribute this to the Chinese fast-acting government implementing new policies making Indias political system appear sluggish. Both countries are consistently analyzing their economic strengths and reinforcing their political and financial systems to sustain and establish themselves as a superpower in the global economy. This paper aims to compare the Indian and Chinese economies and analyze the several parameters that govern both the economies. The study report shall include analysis of present economic status of India and China underlying the challenges faced by both the economies. The comparison of various economic parameters such as GDP, Investment, Import/Export volume etc. will be done which will help us understand the reasons behind higher economic growth of China.

2. Present Economic status of India and China

Together accounting for 2.5 billion people, China and India are today the engines of growth in the midst of rapid economic transformation in the global economy. In fact, driven by India and China, the emerging Asian economies are no longer witnessing a slump, as per a report by the UK financial services major Barclays. The economies of India and China are influenced by a number of factors like social, political, economic and other factors. The economy of China is more developed than that of India. In terms of exchange rates, India is the 11 largest economy while China is in the 2
th nd

position surpassing Japan. Today, Indias

GDP is estimated at around USD 1.537 trillion while Chinas average GDP is around USD 5.878 trillion. Chinas GDP growth has been marginally yet consistently ahead of its Indian counterpart. However, India lags far behind China in the case of per capita GDP. Comparing the economic facts of these Asian giants, Chinas labor force, estimated at 813.5 million is almost twice that of Indias labor, estimated at 467 million. The agricultural sectors of both the countries form a major economic sector. However, Chinas use of agricultural techniques is far more developed than India thus yielding better quality and high quantity of crops which significantly contributes to the exports. As a result, China shifted majority of its agricultural labor to the manufacturing sector. India enjoys an upper hand in the IT/BPO industry with the BPO sector alone contributing $49.7 billion while China earned $35.76 billion. Although a socialist country, China began its liberalization, gained
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India and China: An Economy Comparison exposure to the global market and began receiving Foreign Direct Investments since the mid-1980s while Indias liberalization policies were frozen only in 1990s. Unlike India, Chinas investments in manpower and labor development, water management, high quality health care facilities and -services, communication and civic amenities has helped China create a positive impact on its economy. The Chinese capital market lags behind the India capital market in terms of predictability and transparency. Owing to the quality of listed companies and Indias stock markets adhering to the international guidelines, the Indian stock markets establish financial transparency and are more stable. As on date, China lags far behind in the business forefront owing to its lack of management reform and its inability to increase mergers and acquisitions with several organizations across the world. On the other hand, India had rapidly emerged and is still expanding its mergers and acquisitions with several international organizations. With trade and manufacturing being the key sectors driving the Chinese economy ahead, India still strives to strike the perfect balance between its service, manufacturing and trading sectors.

3. Challenges faced
3.1. By India
To lead the economy back to the high GDP growth rate of 9 percent per annum Handling Overpopulation resulting in low per-capita income and increasing poverty. High levels of debt and growth in lending by 30% because of a property boom. Besides the high risk in such loans, if inflation increases further, it may force the RBI to increase interest rates. This will increase interest payments and potentially reduce consumer spending in the future. Sharp and growing regional variations among different states and territories in terms of poverty, availability of infrastructure and socio-economic development Literacy rate of 74% is still lower than the worldwide average and there exists a severe disparity in literacy rates and educational opportunities between males and females, urban and rural areas, and among different social groups Low agricultural productivity due to large number of agricultural subsidies, overregulation of agriculture, governmental intervention in labor, land, and credit markets, inadequate infrastructure, small size of land holdings, partial failure of land reforms, inadequate irrigation facilities, inadequate use and adoption of modern agriculture practices etc. Corruption Unemployment

India and China: An Economy Comparison

3.2. By China
NPL - Chinese bank loans stood at USD 6,500 per capita in 2010 compared to gross domestic product (GDP) per capita of USD 4,400. China`s NPL, currently stands at 1% of total loans as on today. Some analysts estimate that this could increase to 6% of loans, 10% of loans, and even 15% of loans within a few years time. Expansion in economy is bringing inflation. Consumer price inflation, which was -1% a year ago, is expected to cross this threshold in the next few months. Property price inflation has slowed to about 9% following restraints in home financing, but the volume of housing transactions remains undiminished, and prices continue to advance to new highs every month. Property Boom: Very high increase in property prices. Growing concerns over the burst of such a property bubble thereby leading to an economic slowdown. Shortage of power: More power required with growing Chinese economy. Growing Income Inequality: Chinas economic growth has benefited the south and eastern regions more creating a growing disparity between north and south which has led to migration of farmers from north to south. Unemployment: mainly due to many state-owned enterprises which are grossly inefficient. Lot of unemployment prevalent in the agricultural sector. Demographic transition By 2050, China will be older and more age-challenged on every important measure. The absolute numbers of those aged under 25 will decline by about 140 million, while those aged over 65 will rise by 220 million. These changes will lead to lower trend growth, higher labor costs and inadequate social protection. Likely transfer of power to new leaders in 2012 who are no radical reformers which could result in more pronounced differences between those who favor faster economic and some political reforms, and those who are skeptical about reform altogether and will lead to policy procrastination.

3.3. Common Problems

Inflation Unemployment Regional inequality High debt levels Foster expansion of Chinese and Indian companies in Europe and of European companies in India and China. Produce joint programmes for education and training to capitalize on the enormous potential for beneficial cooperation.
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India and China: An Economy Comparison

4. Comparison of Indian and Chinese Economies

The China-India comparison is central to the Asia debate. It is also of great importance to the rest of the world. In the end, it may not be an either/or consideration. While the Chinese economy has outperformed India by a wide margin over the past 15 years, there are no guarantees that past performance is indicative of what lies ahead. Each of these dynamic economies is now at a critical juncture in its development challenge facing the choice of whether to stay the course or alter the strategy. As recently as 1991, China and India stood at similar levels of economic development. Today, the Chinese standard of living is over thrice that of Indias, with Chinas GDP per capita hitting US$ 4,382.14 in 2010 versus US$ 1,264.84 in India. The two nations have approached the development challenge in very different ways. China has pursued a manufacturing-led growth strategy whereas India has chosen a more services-based development model.

Nominal GDP (Current Prices)

7000 6000 U.S. dollars 5000 4000 3000 2000 1000 0 1985 1990 1995 2000 2005 2010

India ($Billion) 229.563 325.928 367.725 479.871 809.723 1,537.97 China ($Billion) 307.017 390.278 727.946 1,198.48 2,256.92 5,878.26

India and China: An Economy Comparison

GDP Per Capita (Current Prices)

5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 India ($)

U.S. dollars

1985

1990

1995

2000

2005

2010

296.296 378.036 385.801 460.269 716.177 1,264.84

China ($) 290.046 341.352 601.007 945.597 1,726.05 4,382.14

Investment
60 50 (% of GDP) 40 30 20 10 0 India (% of GDP) 1985 1990 1995 2000 2005 33.9 2010 37.874

20.382 25.126 25.496 24.293

China (% of GDP) 38.348 36.142 41.896 35.119 42.099 48.774

Gross National Savings

60 50 (% of GDP) 40 30 20 10 0 India (% of GDP) China (% of GDP) 1985 34.6 1990 1995 2000 2005 32.63 2010 34.69

18.221 21.883 23.582 22.905

39.216 42.118 36.831 49.225 53.983

India and China: An Economy Comparison

Inflation, average consumer prices

18 16 14 12 10 8 6 4 2 0 India (% Change) China (% Change)

(% Change)

1985 5.556 9.3

1990 8.971 3.1

1995 10.225 17.1

2000 4.009 0.4

2005 4.246 1.817

2010 13.187 3.326

Import volume of goods and services

70 60 50 40 30 20 10 0 -10 -20 -30 India (% Change)

(% Change)

1985 9.104

1990 5.272

1995 18.915

2000 0.127 24.796

2005 17.994 11.757

2010 11.506 17.747

China (% Change) 57.348 -16.931 14.679

India and China: An Economy Comparison

Export volume of goods and services

40 35 30 25 20 15 10 5 0 -5 India (%) China (%)

Percent change

1985 -1.081 6.889

1990 7.749 12.75

1995 12.972 18.225

2000 10.69 25.224

2005 18.881 23.672

2010 10.229 34.573

Export volume of goods

50 45 40 35 30 25 20 15 10 5 0 China (%) India (%)
th

Percent change

1985 6.5 0.579

1990 12.027 9.734

1995 19.279 12.202

2000 26.637 13.491

2005 23.672 10.814

2010 33.759 13.647

China: 5 Largest exporter of merchandise and primarily exports: o Computers and accessories, videos, household goods, toys and sporting goods.

Indias exports grew by 26.8%. Chinas upper hand: o o o o Vast and cheap labor resources Domestic savings to initiate infrastructure in coastal areas Widespread production and distribution networks Large FDI inflows to facilitate more exports

India and China: An Economy Comparison

General government revenue

30 25 Percent of GDP 20 15 10 5 0 India (%) China (%) 25.322 1985 1990 17.234 19.017 1995 16.951 10.718 2000 16.645 13.782 2005 18.379 17.218 2010 17.486 20.361

General government gross debt

90 80 70 60 50 40 30 20 10 0 India (%) China (%) 3.305 6.948

Percent of GDP

1985

1990

1995 67.393 6.137

2000 71.44 16.445

2005 78.838 17.635

2010 69.17 17.711

5. Why does China have higher economic growth than India?

China began its economic reforms 12 years before India and thus had a head start. Nevertheless, by normalizing, China has still grown faster than India.

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India and China: An Economy Comparison By instituting the one-child policy, China benefited earlier from a "demographic dividend" - effects of which should start to level off and then reverse in the next five to ten years. India's demographic dividend is still to come. Government policy on attracting investments was very focused on upgrading (i) human development index (HDI) factors such as education, literacy and health, and (ii) infrastructure both of these were crucial in attracting foreign investors to tap into this labour pool. Indias low HDI rankings indicates its low labour pool. Similarly, its infrastructure notoriously lags behind, and that is another key component in basic economic development. China has simply done a better job improving HDI and infrastructure. Many years after the initial reforms, many industry sectors in India are still held back by bureaucracy and over-regulation. Sectors that were not burdened by over-regulation, such as business process and IT outsourcing, have thrived and will continue to do so. Still, that provides only 3 million jobs out of a country of 1.2 billion people. India has not been as successful in spurring job creation and drawing people from the non-productive rural areas into the cities. China's development, particularly in the last decade, has been investment-centric. Contrast that with India, which has been consumption-driven. It is easier to control investment-driven growth (e.g. forcing the state-owned banks to lend) - and thus grow very rapidly over a short to mediumterm horizon - than it is to control consumption, which is driven by individual decisions of millions of consumers (and is largely correlated with growth in disposable income). China benefited from its cultural and business ties to its Diaspora - in particular, Hong Kong and Taiwan, which had blazed the trail as two of the original Asian Tigers and provided investment capital, expertise, and trade channels. It was a win-win game as China got the capital and jobs it needed to move up the economic ladder while the Hong Kong and Taiwanese businessmen could massively scale their operations (and profits). China's export-centric development has benefited tremendously from globalization and trade in the post-Cold War era. China's one-party system enables faster decision-making than India's democratic process. When you are playing catch-up to the advanced nations of the world, what needs to get done is often pretty obvious and so the nation that can make decisions more quickly will simply get more done. It remains to be seen what will happen to this advantage when you are no longer playing catchup, and need innovation to move the economy forward. Democracies are better in fostering innovation, but at the lower rungs of development, it's more of a catch-up game, and China has done a good job climbing up the first few rungs.

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India and China: An Economy Comparison

6. Key Economic Reforms

INDIA: CHINA: Chinas reform triggered by the Third Plenum (of the 11th Party Congress Central Committee) held in 1978. The government initiated market oriented reforms with initial experimentation in the rural sector and later in the industrial sector. Rural reform: Massive de-collectivization program initiated, whereby land was distributed or contracted out to households. Big Bang industrialization plan wherein Government initiated gradual liberalization of product pricing and set up new reward systems for local governments that promoted development in various ways.

Indian reform triggered by major macroeconomic crisis in early 1991. Caused by a large fiscal and current account deficit, high inflation, increasing internal and external debt, three changes of government within two years and socio-political upheaval. June-July 1991: Structural reform by the newly elected Congress-led government, led by Mr.P.V.Narasimha Rao: Rupee was devalued by 19% against the US dollar in two quick moves.

PARAMETER

INDIA

CHINA
Current account convertibility of the Renminbi (RMB) implemented in 1996 - followed a fixed exchange rate regime until recently. July 2005: change in currency regime: Renminbi (RMB) revalued by 2.1% against the US dollar Since 2005, fluctuations of 0.3% allowed on either side of the central rate which is announced by the central bank on the previous day Current Exchange Rate: 1USD = 6.5 CNY Dramatically lowered import tariffs. Weighted average import tariffs lowered: 1980s: over 50% Current: 9.9% Reduction to honor WTO commitment to reduce tariffs to 9.8% by 2010.

External Sector Reforms

Exchange Rate

Devaluation of Indian rupee by 19%: US$1 = Rs.26 from Rs21. The rupee was subsequently floated on the current account. Current Exchange Rate: 1USD = INR 44.82240

Weighted average import tariff rate lowered FY1991: 87% FY1994: 47% FY2006: ~15-17% Peak rate on non-agricultural products reduced: FY1992: 355% FY2001: 35% FY2006: 12.5% Initiated liberalization of FDI policy in 1991, which allows 100% FDI in most of its manufacturing sectors, except those pertaining to defense equipment. 100% FDI is allowed in infrastructure sectors except atomic
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Tariffs

Capital Accounts Reforms

1979: Chinese government granted legal status to foreign investment 1980: The establishment of SEZs improved FDI flows. 1986: new provisions introduced which included fee reduction for labor and land use; establishing a

FDI

India and China: An Economy Comparison energy. In services, 100% FDI is allowed for many sectors other than civil aviation, retail trade, satellite TV/FM broadcasting, banking and insurance and professional services. Reforms since 1991: Removal of prior approval condition in case of existing joint ventures/ technical collaborations in the same field Pricing of convertible instrument greater flexibility introduced Liberalization of policy for non-cash capital contributions Hundred Percent FDI in some area of Farm Sector 1992: FII investment in Indian capital markets allowed. Each FII allowed investing up to 10% in a company. Though initial investment ceiling of 24% of paid-up capital; later liberalization allowed FIIs to invest in Indian companies with no limits (subject to certain sector caps). FIIs/SAs free to invest till the total investment reaches USD175 million. The reciprocity condition for domestic mutual funds relaxed in 2006. Individual debt investment limits earlier allocated for 100% FIIs/SubAccounts will be realigned based on the remaining available limit. limited foreign currency market for joint ventures; and extending the maximum duration of a joint-venture agreement beyond 50 years. 1990: China made an attractive destination for FDI by introducing number of provisions like protection from nationalization.

Portfolio Investments

1990: Establishment of Shanghai and Shenzhen stock exchanges. China allowed FIIs to invest in B shares. Qualified FIIs (QFIIs) were allowed to invest in the A share market. The investment limit for any stock: 10% of the total share capital for each QFII; maximum 20% for all QFIIs combined. Restrictions on outbound portfolio investment gradually being relaxed.

Internal Sector Reforms

Post-independence, land reforms were initiated by dividing land among the tenants and green revolution was introduced. Increased agricultural output in 1960s. No major reforms in agriculture since then. Removal of licensing regime: 1991: De-Licensing industries. for several The first sets of reforms in China were in the agriculture sector. Agriculture collectivized in the 1950s, by establishment of the commune system. Late 1970s: Household responsibility system developed - the communes land was divided among households. 1979: state-owned enterprises allowed retaining of profits. SOE labor reforms adopted. Deregulation of product prices: SME reforms since 1978:

Agriculture Reforms

Industrial Reforms

199899: Further de-licensing Licenses now only for alcohol, tobacco and defense equipment
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India and China: An Economy Comparison related industries. 1991: Removal of undue control of trade and business: Deregulation of product prices: Market forces driven pricing of manufactured product prices. Reduction of protection to SME sector Privatization of SOEs Lagging Labor reform Tax Structure: major tax reforms in the early 1990s. Reduced personal tax marginal rate to 30% currently Lowered corporate tax rate to 30% Peak excise and non-agriculture import tariff cut to 24% and 12.5%, respectively. Service tax levied. Fiscal Prudence Improved regulatory framework Private sector entry allowed since mid-1990s. Foreclosure act: Power to forfeit assets Roads: Low investments in India over 10 years, averaging USD 2.5-3 billion Telecom: Cellular and pager services Recent foreign investment limit: 74% SEZs: 2000: establishing SEZs. Initiation in Encouraging sectors private and joint

Privatization of SOEs Successful flexible Labor reforms

Fiscal Reforms

Tax Structure: Total import tariff less than 2.5%, compared with 10% in India. Value-Added tax system increased efficiency Good fiscal prudence

Banking Sector Reforms

China lags India in banking sector reforms.

Roads: large investments.

government

Infrastructure Reforms

Telecoms: Last 10 years: Chinas telecom subscriber base increased 17-fold to 744 million. SEZs: 4 SEZs In 1980

In May 2005, the government approved a new SEZ legislation which is more comprehensive and provides for a larger tax incentive package.

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India and China: An Economy Comparison

7. References
http://www.ibef.org/india/indiachina.aspx http://business.mapsofindia.com/india-economy/india-vs-china.html http://www.imf.org/external/pubs/ft/weo/2011/01/weodata/weorept.aspx?sy=1985&ey=2011 &scsm=1&ssd=1&sort=country&ds=.&br=1&c=924%2C534&s=NGDP_R%2CNGDP_RPCH %2CNGDP%2CNGDPD%2CNGDP_D%2CNGDPRPC%2CNGDPPC%2CNGDPDPC%2CP PPGDP%2CPPPPC%2CPPPSH%2CPPPEX%2CNID_NGDP%2CNGSD_NGDP%2CPCPI %2CPCPIPCH%2CPCPIE%2CPCPIEPCH%2CTM_RPCH%2CTMG_RPCH%2CTX_RPCH %2CTXG_RPCH%2CTXGO%2CTMGO%2CLUR%2CLP%2CGGR%2CGGR_NGDP%2CG GX%2CGGX_NGDP%2CGGXCNL%2CGGXCNL_NGDP%2CGGSB%2CGGSB_NPGDP% 2CGGXWDG%2CGGXWDG_NGDP%2CNGDP_FY%2CBCA%2CBCA_NGDPD&grp=0&a= &pr1.x=63&pr1.y=13

http://www.moneycontrol.com/news/world-news/china39s-debt-situation-not-far-offgreeceanalyst-_560660.html http://www.minyanville.com/businessmarkets/articles/china-emerging-markets-politicalreform- economic/12/28/2010/id/31910 http://ibnlive.in.com/news/three-challenges-before-indian-economy/96464-7.html http://en.wikipedia.org/wiki/Economy_of_India#Economic_trends_and_issues http://www.quora.com/Why-is-Indias-economic-growth-rate-lower-than-Chinas China and India: A comparison of two trade integration approaches [Article] by Przemyslaw Kowalski at Organization for Economic Co-operation and development. China and India: Economic Performance, competition and co-operation an update by T.N.Srinivasan China and India: A comparison of trade, investment and expansion strategies by Renfeng Zhao, Chatham House.

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