GAUTAM MURTHY PROFESSORCENTRE FOR INDIAN OCEAN STUDIES OSMANIA-UNIVERSITY HYDERABAD INDIA
The Centre for Indian Ocean Studies (CIOS) was established by the U.G.C. in 1983 under the Area Studies Programme. This is the only public- funded research Centre on Indian Ocean in India. The Centre is conceived as a multi-disciplinary research institution representing four subject areas: economics; geography; Political Science and Sociology.
The thrust areas of Centre’s research are geo- politics; urban and regional planning; environment; resource and trade problems of Indian Ocean littoral, island and landlocked states. CIOS regularly conducts research on itsthrust areas by way of major and minor projects, monographs and articles. It also publishes a biannual periodical, Indian Ocean Digest,
which carries articles on issues of relevantconcern to the Indian Ocean and its sub-regions.Seminars and workshops are organised and linkswith other relevant institutions are established topromote interaction and exchange of knowledge on Indian Ocean matters. CIOS has a modest collection of books and periodicals on its thrust areas.
The Press Library of the CIOS maintains a regular collection of clippings from leadingdailies on all the countries of the Indian Ocean region plus related subjects. CIOS is staffed by a Director and faculty members representing the four disciplines.
Address:Centre for Indian Ocean Studies (CIOS)Osmania University, Hyderabad-500 007
INDIA-CHINA RELATIONSIndia has achieved considerable constitutional success in reconciling varied regional, caste and linguistic diversities; she is a triumph of multi-culturalism, with 28 states and 9 union-territories. India has preserved her democratic framework under exceptionally difficult circumstances. Ultimately; democracy is the only way out for the world. The forces of liberalization and globalization will bind the world together, with appropriate safety-nets.
• The emergence of China is the dominant geo-political event of the millennium.• China has emerged as the largest exporter of manufactured goods to the U.S, with a trade surplus of over US $ 200 billion. China is the biggest holder of US currency-over 1000 billion US $.• India may not edge past China, due to institutional reasons, mainly because of her democratic gradualism.
• However India’s strengths vis-à-vis China are- More competent indigenous entrepreneurship in India Sound capital markets, Independent legal system, Respect for private property Grass-roots approach to development.• If we adopt UNDP’s yardstick of $2 a day to provide for basic human needs, 80% of Indians are below the poverty line, and 47% of Chinese are below the poverty line.
• Socio-Economic indices of India are dismal compared to China-Infant Mortality is 65 per thousand in India, while 30 per thousand in China; Life Expectancy is 65 years in India, and 75 years in China; Literacy is 65% in India and 91%in China.• Human Development Index (HDI) is a composite index prepared by UNDP using (a) Longevity (b) Education (c) Income as key components. The HDI Rank of China was 82 in 2009, while India’s was 181.India thus has a poor HDI record, compared to China.
• China’s record and lead over India in electricity is truly astounding. It produces 3 times more electricity than India, and consumes also about 3 times more energy. It also produces ten times more steel and cement than India.• India has a negative trade balance with the U.S of $ 30 billion, while China has a positive trade balance of $ 100 billion, with the U.S.
• A paradigm shift has occurred in the world’s perception of India. However the “Economic Reforms” are viewed as more “fitful” than “fruitful”-Reforms should be better “calibrated”. India’s demographic profile is a key to India’s future.• India is the most competitive producer in the world of steel, automotive components, pharmaceuticals and chemicals, besides traditional strengths in textiles, gems and jewellery.
• India has established itself unequivocally as the back office to the world, playing a key role in business transformation of thousands of global businesses by offering an unbeatable combination of low-cost and high value- emerging as a major manufacturing hub, because of cost-effective production and skilled work-force.• “The great untapped resource of technical and scientific knowledge available to India is the economic equivalent of the untapped continent available to the U.S 150 years ago.”-Milton Friedman, in 1955.
• The Information Technology (IT) Sector in India is not the cause of growth in services. Half of the employment of the services sector is in unorganized retail. Government employs 20 million people; by contrast the IT sector employs about 1 million of the total workforce in the services sector. India cannot rely on the IT sector to create more jobs, which will employ only 0.6% of the total Indian workforce in 2015.
• Sino-Indian ties face a “Deficit of Trust”- although there is a positive outcome from economic engagement.There should be a diversification of the trade basket-50% of exports of India to China is iron-ore. Bilateral trade accounts for 7% of our global trade, but only 1.2% of China’s trade volume.-India should diversify her export portfolio to more value-added products, apart from iron-ore- moving up the value-chain.
India is a vibrant democracy, despite vastreligious, caste and economic diversities.China’s per capita income began to exceedIndia’s in the 1990s, though forty years earlier,India’s was above that of China. India hadavoided the pitfalls of the Great Leap Forwardand the Cultural Revolution, though after theReforms of Deng Xiao Ping since 1978, Chinais way ahead of India in all the economic andsocial parameters. In 1991, the Indiangovernment initiated economic reforms. India’smarket-oriented liberalization and
removal of industrial licensing and controlsresulted in acceleration of GDP to about 6% ayear since 1991, among the fastest for anynation, but considerably lower than the Chinesepace of about 9% for the corresponding period.China’s amazing economic success is stunningthe world, and China understands how to movewith the times like no other country. Its aim is tobe a middle-level developed country in the mid-twenty-first century. China is the world’s most
competitive nation, and its seventh largestexporter. China desires to modernize rapidly byattracting more foreign investment. However, itmust be remembered that the share of FDI intotal investment in China is less than 8%,reflecting the extent of capital formation in theeconomy. The entry of China into the WTO willmake China a more transparent and lesssubsidized economy, meaning more marketaccess opportunity in the domestic markets ofChina. India could be described until recently asa traditional “mixed
economy” with a large public sector, but also lotof private entrepreneurship.China by contrast has been for the most part acommand economy, which until recently had asmall private sector, and only recognized thelegal possibility of home-grown capitalists afew years ago. The Chinese economy hasgrown at an average annual rate of 9.8% fortwo-and-half decades, while India’s economyhas grown at around 5-6% per year over thesame period. Chinese growth has beenrelatively volatile
around this trend, reflecting stop-go-cycles ofstate response to inflation through aggregatecredit management. The higher growth in Chinaessentially occurs because of the much higherrate of investment in China. The investmentrate in China (investment as a share of GDP)has fluctuated between 35 to 44 percent overthe past 25 years, compared to 20% to 26% inIndia. In fact, the aggregate incremental capital-output ratios (ICORs) have been around thesame in both economies. Within this, there isthe critical role of infrastructure investment,which has averaged at
19% of GDP in China compared to 2% in Indiaover the 1990s.China has far more impressive achievements inthe social sector than India, as shown in theTable-1 below.
TABLE-1 SOCIAL SECTOR INDICATORS-A COMPARISON OF INDIA AND CHINA
Source: TATA Economic Services and TenthFive Year Plan, Government of India.The mantra of China is sharply focused onbecoming an economic superpower and henceeverything else follows-foreign policy beginsand ends with economic policy.China is creating a national economy, and theresult is a massive and painful restructuring ofindustry and society. Competition acrossprovincial boundaries is becoming a reality. Asa result, the country is experiencing deflation, a
continual decline in prices. As prices fall, theeconomy stagnates.Chinese export growth has been much morerapid, involving aggressive increases on worldmarket shares. This export growth has beenbased on relocative capital that has beenattracted not only by cheap labour but also byexcellent and heavily subsidized infrastructureresulting from the high rate of infrastructureinvestment. In addition, since the Chinese statehas also been keen on provision of basic goodsin terms of housing, food
and cheap transport facilities, this has playedan important role in reducing labour costs foremployers. In India, the cheap labour has beenbecause of low absolute wages rather thanpublic provision and underwriting of labourcosts, and infrastructure development has beenminimal. So it is not surprising that it has notreally been an attractive location for export –oriented investment, its rate of export growthhas been much lower, and exports have notbecome an engine of growth.
In terms of inequality, in both economies therecent pattern of growth has been inequitable.In China, the spatial inequalities across regionshave been the sharpest. In India, verticalinequalities and rural-urban divide havebecome much more marked. In China recently,as a response to this, there have been sometop-down measures to reduce inequality, forexample through changes in tax rates, greaterpublic investment in western and interiorregions and improved social security benefits.In India, it is political change that has
forced greater attention to redressinginequalities, though the process is still veryincipient.In terms of the future prospects, surprisingly,both economies end up with very similar issuesdespite these major differences. There are clearquestions of sustainability of the current patternof economic expansion in China, based on highexport-accumulation model that requiresconstantly increasing shares of world marketsand very high investment rates. Similarly, thehope in some policy quarters in India thatinformation
technology-enabled services can become theengine of growth is one, which raises theproblems of sustainability.The most important problems in the twoeconomies are also similar mainly the agrariancrisis and the need to generate moreemployment. In both economies, the socialsectors have been neglected recently by publicintervention. In both countries, the policymessage appears to be the same, that the mostbasic issues are those that require to beaddressed first, and if so, the other
areas of expansion will probably look afterthemselves. India has individual liberty, political pluralism,and the institutional framework to takeadvantage of globalization. However it isconstrained by mass poverty, lackadaisicalgovernment, growing fiscal problems, and apoor physical infrastructure. China has muchless degrading poverty than India, which hasmore trade and investment links, while Chinesehave a superior physical infrastructure. It israpidly conforming to
global behaviour patterns, and creating aninternationally accepted legal system. Howeverit too has fiscal problems, hidden in the bankingsystem, and political risk.China’s industrial strength and infrastructure,and its vast pool of skilled labour, make it anatural choice for the manufacturing sector.India, on the other hand, with boominginformation technology sector and its hugereserves of English-speaking graduates, is abetter option for outsourced service andtechnology development facilities. China has
been favoured heavily by multinationalcorporations (MNCs) for manufacturing, withonly limited business process outsourcing(BPO) activity coming in from Japanese andKorean firms. As opposed to the concentratedoutsourced services and R&D facilities found inIndia, China is the hub of manufacturing.As the WTO and TRIPS agreements progress,the export orientation of each country maycross into the present domain of the other dueto drops in
garment quota requirements and strengtheningof the IPR culture.The key strategies of Chinese reforms was tofirst effect a massive increase in incomes in therural areas, and then meet the demand forconsumer goods by encouraging the growth ofVTEs (Village and Town Enterprises). TheVTEs met the demand for basic consumergoods in the rural areas itself. There wascontinuous decentralization, and a system ofprofit taking with punishment for default. InIndia, the
agricultural sector still accounts for about 70%of employment, but its share in GDP is down to25% in other words the relative per capitaincome of the agricultural worker must be goingdown.China can assist India in her globalizationefforts, by cheaper imports from China andusing them to produce low cost products inIndia itself, through the joint-venture strategy.By trading with China, India can be a littlemore competitive in global markets. A strategyof engagement with China
and facing up to competition can be India’spolicy for the future.India must emulate China by taking advantageof its cheap, hardworking and skilled workers toleverage better in world markets. To competeeffectively, India needs to expand its primaryand secondary education, and give moreemphasis to vocational education and training.China is infact “many small markets”, ratherthan “the world’s biggest market”. China todayhas
good infrastructure-railways, roads and airports-so there is for the first time substantial inter-cityand inter-provincial commerce, as one city cancompete against “backward manufacturers” inanother. Consequently there is the rise ofnational domestic brands. At the political level, the Communist Party ofChina, eaten underneath by corruption stillsurvives. One day new attitudes will push asidethe corruption of the old, and a new China willemerge. Beijing strikes hard against recalcitrant
elements and dissidents-but dissidents can bemuzzled-not their ideas.Since 1978, when the great modernizer, DengXiao Ping began China’s reforms, and later inthe nineties with former President’s JiangZemin’s vision, China has moved rapidly in itsgrowth rates. However the new Chineseleadership needs to move ahead faster inpolitical reforms. To recall, Chairman Mao’swords “it takes only one spark to start a prairiefire”. The next spark should not cause anydramatic upheavals.
The share of manufacturing in China’s GDP is49%, and Services constitute 33% of GDP.Thebiggest current draw for international investorsis the “Western Development Project”(headquarters in Chonqing), initiating grandioseplans for Xinjiang and Tibet.At the geo-political level, Sino-Indian relationsshould rise above the present border disputes,and past tilts. Relations should be non-hyphenated, and stand-alone, not guided byany third country. India occupies a specialplace, as the land of the
Buddha in China. There is also admiration inIndia for China’s economic achievements. Indiahas an edge over China in terms of intellectualcapital for the future knowledge economy.Some of the general strengths and weaknessesof India and China are enumerated below.
Strengths of China• Confucian ethic of discipline and obedience.• Authoritarian Militarist State, with severe penalties for non-compliance.• Highly disciplined top leadership that implements decisions once agreed, without further argument.• Productivity of Chinese labour is five times that of India.
• China has a system of incentives and disincentives at Central, State and Town-level for performance.• Small-scale imitator of well-known brands, giving better quality for a lesser price, not the original branded manufacturer. Chinese “under design” products to make them affordable by poorer households. Those who can afford to pay more for superior quality do so. In India, established manufacturers are unlike the Chinese; they are conditioned by MNCs, whose practices evolved in markets that can afford high
• prices for superior products, and that suited an economy where capacities were restricted by license. China dominates export of labour- intensive products world-wide-India does not, except in gems and jewellery. Chinese manufactured goods exports as a % of GDP was 18%-as against 4% for India (1999-2000).• China has a system of incentives and disincentives at central, state and town level- for performance and non-performance.• Foreign investment in China is in land, buildings, plant and machinery. Of the
• comparatively small foreign investment in India, a high proportion is in portfolio investment, and in buying existing capacities.Weaknesses of China• Communist Party of China still dominating, with no democratic dissent tolerated.• The Chinese legal system has still many weaknesses for corporate grievance redressal.• China has yet to adapt fully to rules and regulations of a free market economy.
• China has lax labour regulations, and workers in many industries have to toil for longer hours.• Working conditions are tough, as workers stay in crammed dormitories inside industrial zones to work from 8 A.M to 8 P.M.They are not allowed to form their own associations at national or regional level. This advantage may not last long, as workers become conscious of their rights. Even though labour issues are not raised at WTO, such unsound procedures and practices could come under attack.
• China’s entry into WTO will call for a “fresh look” at its global interaction and domestic re- structuring.• Corporate governance too is not of a high quality, as transactions are not wholly transparent. Managers of State Enterprises indulge in various irregularities-like siphoning of funds offshore, which in many cases comes back disguised as FDI.• Chinese capital markets too are underdeveloped-regulations are not in tune with free-market earnings. Foreign investors can invest in B-
• group shares-only at Shanghai and Shenzhen-and cannot indulge in A-group shares-meant strictly for locals.Strengths of India• A stable and vibrant democracy. India’s greatest achievement is sustaining a democracy in exceptionally difficult circumstances.• Wide use of the English Language.• Availability of world-class scientific, technical, managerial and professional manpower.
• Established Western style corporate democracy and a functioning legal system for grievance redressal and contract enforcement.• A growing and sizable middle-class estimated at 200 million.• Our culture encourages risk without reward, and as our defence forces have shown, we can be extremely disciplined and productive.
Weaknesses of India• Hypocrisy of our political leadership.• Poor implementation capacity of our administration.• Speculative mentality of our industry.• Rampant corruption, stifling the delivery system of any constructive programme.• “Vested Interests” and “Entrenched Rural Hierarchies” hampering any societal changes.• Our bureaucrats and politicians have yet to develop awareness that more trade and
intensified economic relations enhances India’ssecurity, power and influence.The similarities are striking. China and India areamongst the five biggest countries in the worldin terms of area, geographical diversity,population, market-size and economymeasured in terms of purchasing power parity.Both countries were colonized by westernpowers, and attained independence within afew years of each other in the mid twentiethcentury. They both pursued socialist models ofdevelopment before opening
up gradually, China from 1978, and India from1991.China and India are presently the fastestgrowing major economies of the world, althoughthe majority of the population continues to bedependent on agriculture. The state sectorcontinues to dominate economic activity in bothcountries, with the role of private enterpriseexpanding fast. In both China and India rapideconomic growth has widened regionaleconomic disparities.
Both China and India face serious fiscalproblems and ballooning domestic debt andcontingent liabilities, needing major publicsector adjustments in the foreseeable future.However, much of India’s public sector deficithas been absorbed directly by the government,whereas China has relied more heavily on thebanking system to fund the deficit. Therefore,while India has higher fiscal deficits, China’sbanking system has more non-performingassets.
Corruption is endemic in both China and India.However, in China it is more centralized aroundthe entrenched communist party, whichpractically guarantees quick action. In Indiacorruption is more dispersed, and outcomesless certain. Because corruption in India issubject to legislative, media and judicialoversight, it is less of a systemic risk than inChina.China has shown far grater urgency inprivatizing and closing a large number of stateenterprises, while India’s privatizationprogamme has
floundered. While China has effectively loweredtrade barriers, with customs tariff collectionscomprising only about 3% ad valorem, Indiantariffs are still amongst the world’s highest.Economic decentralization has proceeded at amuch faster pace in China, with localgovernments in China having effectiveeconomic strengths and decision-makingpowers; where as India’s centralized economiccontrol is loosening only gradually.
While China is a closed society run by a tightlyknit communist party, India is an open,democratic society, with an independentjudiciary and press. With political dissent notaired in the public domain, China has overtpolitical stability, arguably difficult to sustainduring a severe economic downswing.Both China and India face major futuredevelopmental threats: for India these centre onpolicies to enhance savings and growth rates toremove poverty within a targeted time frame; for
China the threats are more institutional, withinstitutions, especially financial, legal andpolitical, not in sync with the needs of a marketeconomy.The areas of convergence of interest betweenChina and India and the time-frame in whichthey start influencing decision making is givenin the Table-2 below-
TABLE 2 -AREAS OF CONVERGENCE OF INTEREST BETWEEN CHINA AND INDIA
Source-“Dealing with China in the 21stCentury” in Restructuring South Asian Security by Vinod Saighal (cited in References)China could overtake India as the nextInformation Technology (IT) power andbusiness-outsourcing hub for countries like theUS, despite its lack of experience. China’soffshore services will mature within the next fiveyears, and companies should begin looking atthe country as a potential source for IT-enabledservices. Lower costs (roughly 1/6th of UScounterparts), political
stability, strong GDP growth (7.9% in 2001)-thecountry offers the kind of environment neededby interested global companies.India-China bilateral trade has now crossed the$12 billion mark. However, the top five exportsto China comprise mainly primary or low value–addition products -iron- ore, plastic andlinoleum, ores and minerals, marine productsand drugs and pharmaceuticals. Her importsfrom China are electronic goods, coal, coke,and organic chemicals, silk, medicinal andpharmaceutical
products. India should move up the value chain,and export more IT-related products andpharmaceuticals, as it is doing recently.However, despite China’s better image abroad,the image of Indians abroad is very high incomplete contrast the image of India is poor-butimproving. The Indian diaspora has gainedconsiderable salience abroad, a number ofIndian $ billionaires live in the US and arehighlyrated. Despite loud proclamations, foreigninvestors consider everything unfriendly about
India-the government, the bureaucracy and theinfrastructure. We have to change the mind-setand working of Indian institutions.India’s trade with China is set to grow to $20billion by 2007.During 2005-06, trade betweenthe two countries is expected to be around $15billion. Trade and economic co-operation holdthe key to strengthening overall bilateralrelationship. During 2000-01, India-China tradevolume was just $2 billion, but rose sharply to$11.3 billion in 2004-05.However, the tradebasket needs
diversification, from raw materials and productsof natural resource-based industries. If thetrade and economic linkages is to expandexponentially, it is imperative that diversificationtakes place in the commodity-mix. China andIndia between themselves produce practicallyeverything, cheaply and with high quality. Withhigh export growth rates-India and China isgalloping, but they must also gallop in tandemwith each other.
A recent study by Goldman Sachs shows thatIndia will take a long time to catch up withChina-may not catch up even by 2050.This isbecause China has a much larger base in GDPthan India; therefore, even smaller relativeincreases in income for China would mean ahigher absolute increase than India. This isshown from Table-2 below.
TABLE-3 what will it take for India to catch up with China?
Source: Will India Catch-up with China? Mohan Guruswamy et al, Centre for Policy Alternatives, New Delhi.China is today the world’s manufacturing hub.India should emerge as the world’s technologyand IT (Information Technology) hub, if itfollows pro-active policies. India and China thushave a lot to learn from each other’sexperience, and can be dynamic partners,rather than competitors in the globalised world.
REFERENCES• Chang, Gordon G The Coming Collapse of China, Random House, New York, 2001.• Gary S.Baker, Chug Along with China, ET, 2003.• Jayati Ghosh, Divergent Development Models, Frontline, September 9, 2005.• Tony Nash, China or India? -It’s China & India, Economic Times, May 11, 2005.
5.Shroff, Minoo R, China’s Remarkable Economic Growth-Some Lessons, Forum of Free Enterprise, Mumbai, 2000.6. Wadhva, Charan D, Geo-Economic Positioning of India’s Trade and Allied Relations: Perspectives on India’s Experience with Regional Integration in V. A Pai Panandiker and Ashis Nandy, Contemporary India, Tata McGraw Hill Publishing Company Ltd. New Delhi.
7. Saighal, Vinod, Re-structuring South Asian Security, Manas Publications, New Delhi, 2000.8. Mohan Guruswamy et al, Will India Catch-up with China?, Centre for Policy Alternatives, New Delhi, 2005.9. Yasheng huang and Tarun Khanna, Can India Overtake China? Foreign Policy, July- August, 2003.