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India and China_An Economy Comparison
India and China_An Economy Comparison
India and China_An Economy Comparison
India and China_An Economy Comparison
India and China_An Economy Comparison
India and China_An Economy Comparison
India and China_An Economy Comparison
India and China_An Economy Comparison
India and China_An Economy Comparison
India and China_An Economy Comparison
India and China_An Economy Comparison
India and China_An Economy Comparison
India and China_An Economy Comparison
India and China_An Economy Comparison
India and China_An Economy Comparison
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India and China_An Economy Comparison

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This paper aims to compare the Indian and Chinese economies and analyze the several parameters that govern both the economies.

This paper aims to compare the Indian and Chinese economies and analyze the several parameters that govern both the economies.

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  • 1. India and China: An Economy ComparisonIndia and China: AnEconomy 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
  • 2. India and China: An Economy ComparisonContents1. Executive summary……………………………………………………………………………………...32. Present Economic status of India and China……………………………………………………….43. Challenges faced…………………………………………………………………………………………4 3.1. By India………………………………………………………………………………………………..4 3.2. By China………………………………………………………………………………………………5 3.3. Common problems…………………………………………………………………………………..54. Comparison of Indian and Chinese Economies……………………………………………………6 4.1. GDP comparison……………………………………………………………………………………..6 4.2. Comparison of Investment, Gross National Saving & Inflation………………………………….7 4.3. Comparison of Import and Export Volumes……………………………………………………….85. Why does China have higher economic growth than India?..................................................106. Key Economic Reforms……………………………………………………………………………….127. References……………………………………………………………………………………………….158. Appendix……………………………………………………………………………………………………. 8.1. International Financial Statistics (IFS)……………………………………………………………… 8.2. Key Economic Indicators…………………………………………………………………………….. 8.3. Projection of both economies………………………………………………………………………... 2
  • 3. India and China: An Economy Comparison1. Executive Summary“The love of economy is the root of all virtue.George Bernard ShawIndia and China, two of the Asian giants have locked horns against one another to become a worldsuperpower. Historically, inevitable comparison of economies between these two giants has shown thatChina usually emerges on top. The economists attribute this to the Chinese fast-acting governmentimplementing new policies making India’s political system appear sluggish. Both countries areconsistently analyzing their economic strengths and reinforcing their political and financial systems tosustain 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 thatgovern both the economies. The study report shall include analysis of present economic status of Indiaand China underlying the challenges faced by both the economies. The comparison of various economicparameters such as GDP, Investment, Import/Export volume etc. will be done which will help usunderstand the reasons behind higher economic growth of China.2. Present Economic status of India and ChinaTogether accounting for 2.5 billion people, China and India are today the engines of growth in the midst ofrapid economic transformation in the global economy. In fact, driven by India and China, the emergingAsian economies are no longer witnessing a slump, as per a report by the UK financial services majorBarclays.The economies of India and China are influenced by a number of factors like social, political, economicand other factors. The economy of China is more developed than that of India. In terms of exchange th ndrates, India is the 11 largest economy while China is in the 2 position surpassing Japan. Today, India’sGDP is estimated at around USD 1.537 trillion while China’s average GDP is around USD 5.878 trillion.China’s GDP growth has been marginally yet consistently ahead of its Indian counterpart. However, Indialags far behind China in the case of per capita GDP. Comparing the economic facts of these Asian giants,China’s labor force, estimated at 813.5 million is almost twice that of India’s labor, estimated at 467million. The agricultural sectors of both the countries form a major economic sector. However, China’suse of agricultural techniques is far more developed than India thus yielding better quality and highquantity of crops which significantly contributes to the exports. As a result, China shifted majority of itsagricultural labor to the manufacturing sector.India enjoys an upper hand in the IT/BPO industry with the BPO sector alone contributing $49.7 billionwhile China earned $35.76 billion. Although a socialist country, China began its liberalization, gained 3
  • 4. India and China: An Economy Comparisonexposure to the global market and began receiving Foreign Direct Investments since the mid-1980s whileIndia’s liberalization policies were frozen only in 1990s.Unlike India, China’s investments in manpower and labor development, water management, high qualityhealth care facilities and -services, communication and civic amenities has helped China create a positiveimpact on its economy.The Chinese capital market lags behind the India capital market in terms of predictability andtransparency. Owing to the quality of listed companies and India’s stock markets adhering to theinternational 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 itsinability to increase mergers and acquisitions with several organizations across the world. On the otherhand, India had rapidly emerged and is still expanding its mergers and acquisitions with severalinternational organizations.With trade and manufacturing being the key sectors driving the Chinese economy ahead, India still strivesto 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 4
  • 5. India and China: An Economy Comparison3.2. 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: China’s 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. 5
  • 6. India and China: An Economy Comparison4. Comparison of Indian and Chinese EconomiesThe China-India comparison is central to the Asia debate. It is also of great importance to the rest of theworld. In the end, it may not be an either/or consideration. While the Chinese economy has outperformedIndia by a wide margin over the past 15 years, there are no guarantees that past performance isindicative of what lies ahead. Each of these dynamic economies is now at a critical juncture in itsdevelopment 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, theChinese standard of living is over thrice that of India’s, with China’s GDP per capita hitting US$ 4,382.14in 2010 versus US$ 1,264.84 in India. The two nations have approached the development challenge invery different ways. China has pursued a manufacturing-led growth strategy whereas India has chosen amore services-based development model. Nominal GDP (Current Prices) 7000 6000 5000 U.S. dollars 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 6
  • 7. India and China: An Economy Comparison GDP Per Capita (Current Prices) 5000 4500 4000 3500U.S. dollars 3000 2500 2000 1500 1000 500 0 1985 1990 1995 2000 2005 2010 India ($) 296.296 378.036 385.801 460.269 716.177 1,264.84 China ($) 290.046 341.352 601.007 945.597 1,726.05 4,382.14 Investment 60 50(% of GDP) 40 30 20 10 0 1985 1990 1995 2000 2005 2010 India (% of GDP) 20.382 25.126 25.496 24.293 33.9 37.874 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 1985 1990 1995 2000 2005 2010 India (% of GDP) 18.221 21.883 23.582 22.905 32.63 34.69 China (% of GDP) 34.6 39.216 42.118 36.831 49.225 53.983 7
  • 8. India and China: An Economy Comparison Inflation, average consumer prices 18 16 14 12(% Change) 10 8 6 4 2 0 1985 1990 1995 2000 2005 2010 India (% Change) 5.556 8.971 10.225 4.009 4.246 13.187 China (% Change) 9.3 3.1 17.1 0.4 1.817 3.326 Import volume of goods and services 70 60 50 40(% Change) 30 20 10 0 -10 -20 -30 1985 1990 1995 2000 2005 2010 India (% Change) 9.104 5.272 18.915 0.127 17.994 11.506 China (% Change) 57.348 -16.931 14.679 24.796 11.757 17.747 8
  • 9. India and China: An Economy Comparison Export volume of goods and services 40 35 30Percent change 25 20 15 10 5 0 -5 1985 1990 1995 2000 2005 2010 India (%) -1.081 7.749 12.972 10.69 18.881 10.229 China (%) 6.889 12.75 18.225 25.224 23.672 34.573 Export volume of goods 50 45 40Percent change 35 30 25 20 15 10 5 0 1985 1990 1995 2000 2005 2010 China (%) 6.5 12.027 19.279 26.637 23.672 33.759 India (%) 0.579 9.734 12.202 13.491 10.814 13.647  th China: 5 Largest exporter of merchandise and primarily exports: o Computers and accessories, videos, household goods, toys and sporting goods.  India’s exports grew by 26.8%.  China’s upper hand: o Vast and cheap labor resources o Domestic savings to initiate infrastructure in coastal areas o Widespread production and distribution networks o Large FDI inflows to facilitate more exports 9
  • 10. India and China: An Economy Comparison General government revenue 30 25 Percent of GDP 20 15 10 5 0 1985 1990 1995 2000 2005 2010 India (%) 17.234 16.951 16.645 18.379 17.486 China (%) 25.322 19.017 10.718 13.782 17.218 20.361 General government gross debt 90 80 70 Percent of GDP 60 50 40 30 20 10 0 1985 1990 1995 2000 2005 2010 India (%) 67.393 71.44 78.838 69.17 China (%) 3.305 6.948 6.137 16.445 17.635 17.7115. 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. 10
  • 11. 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. Indias 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. India’s 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. Chinas 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 medium- term 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). Chinas export-centric development has benefited tremendously from globalization and trade in the post-Cold War era. Chinas one-party system enables faster decision-making than Indias 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 catch- up, and need innovation to move the economy forward. Democracies are better in fostering innovation, but at the lower rungs of development, its more of a catch-up game, and China has done a good job climbing up the first few rungs. 11
  • 12. India and China: An Economy Comparison6. Key Economic ReformsINDIA: CHINA:  China’s reform triggered by the Third Plenum (of the 11th Party Congress Central Indian reform triggered by major Committee) held in 1978. macroeconomic crisis in early 1991.  The government initiated market oriented Caused by a large fiscal and current account reforms with initial experimentation in the rural deficit, high inflation, increasing internal and sector and later in the industrial sector. external debt, three changes of government  Rural reform: Massive de-collectivization within two years and socio-political upheaval. program initiated, whereby land was June-July 1991: Structural reform by the distributed or contracted out to households. newly elected Congress-led government, led  “Big Bang” industrialization plan wherein by Mr.P.V.Narasimha Rao: Rupee was Government initiated gradual liberalization of devalued by 19% against the US dollar in two product pricing and set up new reward quick moves. systems for local governments that promoted development in various ways.PARAMETER INDIA CHINAExternal Sector Reforms  Current account convertibility of the Renminbi (RMB) implemented in 1996 - followed a fixed exchange rate regime until recently.  Devaluation of Indian rupee by  July 2005: change in currency 19%: US$1 = Rs.26 from Rs21. regime: Renminbi (RMB) revalued byExchange  The rupee was subsequently floated 2.1% against the US dollarRate on the current account.  Since 2005, fluctuations of 0.3%  Current Exchange Rate: allowed on either side of the central 1USD = INR 44.82240 rate which is announced by the central bank on the previous day  Current Exchange Rate: 1USD = 6.5 CNY  Weighted average import tariff rate  Dramatically lowered import tariffs. lowered FY1991: 87%  Weighted average import tariffs FY1994: 47% lowered: FY2006: ~15-17% 1980s: over 50%Tariffs Current: 9.9%  Peak rate on non-agricultural products reduced:  Reduction to honor WTO FY1992: 355% commitment to reduce tariffs to 9.8% FY2001: 35% by 2010. FY2006: 12.5%Capital Accounts Reforms  Initiated liberalization of FDI policy  1979: Chinese government granted in 1991, which allows 100% FDI in legal status to foreign investment most of its manufacturing sectors,  1980: The establishment of SEZsFDI except those pertaining to defense improved FDI flows. equipment.  1986: new provisions introduced  100% FDI is allowed in which included fee reduction for infrastructure sectors except atomic labor and land use; establishing a 12
  • 13. India and China: An Economy Comparison energy. limited foreign currency market for  In services, 100% FDI is allowed for joint ventures; and extending the many sectors other than civil maximum duration of a joint-venture aviation, retail trade, satellite TV/FM agreement beyond 50 years. broadcasting, banking and  1990: China made an attractive insurance and professional destination for FDI by introducing services. number of provisions like protection  Reforms since 1991: from nationalization.  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.  1990: Establishment of Shanghai  Though initial investment ceiling of and Shenzhen stock exchanges. 24% of paid-up capital; later  China allowed FIIs to invest in B liberalization allowed FIIs to invest shares. Qualified FIIs (QFIIs) were in Indian companies with no limits allowed to invest in the A share (subject to certain sector caps). market.Portfolio FIIs/SAs free to invest till the total  The investment limit for any stock:Investments investment reaches USD175 10% of the total share capital for million. each QFII; maximum 20% for all  The reciprocity condition for QFIIs combined. domestic mutual funds relaxed in  Restrictions on outbound portfolio 2006. investment gradually being relaxed.  Individual debt investment limits earlier allocated for 100% FIIs/Sub- Accounts will be realigned based on the remaining available limit.Internal Sector Reforms  The first sets of reforms in China  Post-independence, land reforms were in the agriculture sector. were initiated by dividing land  Agriculture collectivized in the 1950s, among the tenants and green by establishment of the communeAgriculture revolution was introduced. system.Reforms  Increased agricultural output in  Late 1970s: Household responsibility 1960s. No major reforms in system developed - the communes’ agriculture since then. land was divided among households.  Removal of licensing regime:  1979: state-owned enterprises allowed retaining of profits. SOE 1991: De-Licensing for several labor reforms adopted.Industrial industries.Reforms  Deregulation of product prices: 1998–99: Further de-licensing – Licenses now only for alcohol,  SME reforms since 1978: tobacco and defense equipment 13
  • 14. India and China: An Economy Comparison related industries.  Encouraging private and joint sectors  1991: Removal of undue control of trade and business:  Privatization of SOEs  Deregulation of product prices:  Successful flexible Labor reforms 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  Tax Structure: Total import tariff to 30% currently less than 2.5%, compared with 10% in India.Fiscal  Lowered corporate tax rate to 30%  Value-Added tax system increasedReforms  Peak excise and non-agriculture efficiency import tariff cut to 24% and 12.5%, respectively.  Good fiscal prudence  Service tax levied.  Fiscal Prudence  Improved regulatory frameworkBanking  Private sector entry allowed since  China lags India in banking sectorSector mid-1990s. reforms.Reforms  Foreclosure act: Power to forfeit assets  Roads: Low investments in India over 10 years, averaging USD 2.5-3 billion  Telecom: Cellular and pager  Roads: large government services –Recent foreign investments. investment limit: 74%Infrastructure  Telecoms: Last 10 years: China’sReforms  SEZs: 2000: Initiation in telecom subscriber base increased establishing SEZs. 17-fold to 744 million.  In May 2005, the government  SEZs: 4 SEZs In 1980 approved a new SEZ legislation which is more comprehensive and provides for a larger tax incentive package. 14
  • 15. India and China: An Economy Comparison7. 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-offgreece- analyst-_560660.html http://www.minyanville.com/businessmarkets/articles/china-emerging-markets-political- reform- 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. 15

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