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A report on

“The Indian economy


vs. the Chinese
economy”

Submitted by:

TABLE OF CONTENTS
1
Acknowledgement …………………………………………
………………. 01
Executive summary…………………………………………
………………. 02
Overview ……………………………………………………
…………………… 03
Globalization …………………………………………………
…………….. 10
Growth Trends: China’s Fast Track vs. India’s
Gradualism Model…………………………………………
………………………………… 11

Consumption - Macro: China Spends Twice As Much


as India 12

Consumption - Micro: Markets for Most Products in


India Are a Third to a Tenth of China’s…………………
……………………………….. 17

Investments: China’s Total Capex is more than Four


Times India’s …………………………………………………
……………………………… 19

External Trade: China’s Share in Global Exports Is


Six Times India’s……………………………………………
……………………………………. 20

2
Summary of Key Reforms in India and China………
……………… 23

ACKNOWLEDGEMENT

I would like to express my gratitude to all


those who gave me the possibility to
complete this project. I want to thank xyz,
which gave me a scope to make this project.
I have furthermore to thank especially abc,
who gave me an opportunity to do this project
and encouraged me to go ahead with my
project.

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Executive Summary
The Asia-Pacific region is experiencing tremendous demographic
changes and
Unprecedented levels of urbanization.

➢ The region’s average food and drinks market growth between


2003 and 2007 was 25.0%, the largest of any other region.
Over the same time, growth in per capita Spend on food and
drinks averaged 18.5%.

➢ The region suffers from a consistently low per capita spend, as


well as low scores for commercial infrastructure and social
structures. However, it boasts very large populations and high
levels of market growth.

➢ China has been ranked first overall, having received a score far
above any other country. The score is a result of high marks for
market size, growth, and intensity, as well as population – all
pointing to the potential for high levels of reward.

➢ However, China ranks lower for per capita spend and social
structures, reflecting the widespread poverty in the country
and some regulatory issues.

➢ Of the four Chinese food and drinks categories examined, the


one exhibiting the most growth is the soft drinks market.

➢ India has been ranked third overall, having received high


scores in market size, growth and intensity, as well as for its
large population.

4
➢ Like China, India ranks low for per capita spends – again a
reflection of widespread poverty – and for commercial
infrastructure, a result of the country’s highly fragmented retail
market.

➢ Of the four Indian food and drinks categories examined, the


bakery and cereals market has exhibited the highest level of
growth, followed by the soft drinks market.

THE INDIAN ECONOMY VERSUS THE


CHINESE ECONOMY: A COMPARATIVE
STUDY

A LOOK INTO THE ECONOMIES OF BOTH THE COUNTRIES

INDIA-A GROWTH STORY:

INDIA is one of the oldest civilizations in the world with a kaleidoscopic


variety and rich cultural heritage. It has achieved all-round socio-economic
progress during the last 60 years of its Independence. To study the economic
history, we divide the economic history into the Pre-colonial period, the
colonial period and the post-independence period.
The PRE-COLONIAL ERA can be said as the age of the Mughal and the
different dynasties that flourished during that era. A brief look into the
economic happenings:
1525AD – 1550AD- India was the second largest economy in the world. The
gross domestic product of India in 1550 was estimated at about 40 per cent
that of China.
1550AD – 1575AD- During this period also India still was the second largest
economy in the world. The gross domestic product of India in 1575 was
estimated at about 50 per cent that of China.
1575AD – 1600AD- During this period, the annual revenue of Emperor
Akbar's treasury in 1600 at £17.5 million. The gross domestic product of
India in 1600 was about 60 per cent that of China.
1600AD – 1625AD- India was still the second largest economy. The gross
domestic product of India in 1625 was estimated at about 70 per cent that of
China.

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1625AD – 1650AD- The gross domestic product of India in 1650 was
estimated at about 80 per cent that of China.
1650AD – 1675AD- The gross domestic product of India in 1675 was
estimated at about 90 per cent that of China.
1675AD – 1700AD- Annual revenue by the Emperor Aurangzeb's exceeded
£100 million in 1700 (twice that of Europe then). Thus, India emerged as the
world's largest economy followed by China and France.
1700AD – 1725AD- During this period however China was the world's
largest economy followed by India and France. Collapse of the Mughal Empire
and the resultant chaos triggered India's long but slow decline on the world
stage. The gross domestic product of India in 1725 was estimated at about
90 per cent that of China.
1725AD – 1750AD-During this period, Mughals were replaced by the
Nawabs in north India, the Marathas in central India and the Nizams in south
India. China was the world's largest economy followed by India and France.
The gross domestic product of India in 1750 was estimated at about 80 per
cent that of China.
1750AD – 1775AD- China was the world's largest economy followed by
India and France. The gross domestic product of India in 1775 was estimated
at about 70 per cent that of China.
COLONIAL PERIOD

The Colonial rule brought along a enormous change in the economic


structure of the country. The whole process of taxation was revised, which
affected farmers a lot, a single currency system with fixed exchange rates,
`standardized` weights and measures, free trade was encouraged and a kind
of capitalist structure in the economy introduced. The raw materials and man
power were exported back to their home country which gradually caused a
setback among the millions of Indian population.
The finished goods were then brought back to India and sold at high rates
among the well to-do people. Other developments were in transport and
communication like introduction of railways, telegraph and so on was made
which in a way affected the economy.
Towards the end of the colonial rule it was seen that development in the
Indian economy was hampered and it was reduced down from its glorious
strong economic background.

1775AD- 1800AD- During this period, the East India Company began tax
administration reforms in a fast expanding empire spread over 250 million
acres (or 35 per cent of Indian domain). China was the world's largest
economy followed by India and France. The gross domestic product of India
in 1800 was estimated at about 60 per cent that of China.
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1800AD – 1825AD- China was the world's largest economy followed by
India and France. The gross domestic product of India in 1825 was estimated
at about 50 per cent that of China.

1825AD – 1850AD- China was the world's largest economy followed by the
UK and India. The gross domestic product of India in 1850 was estimated at
about 40 per cent that of China.

1850AD – 1875AD- China was the world's largest economy followed by the
USA, UK and India. The gross domestic product of India in 1875 was
estimated at about 30 per cent that of China.

1875AD – 1900AD- USA was the world's largest economy followed by


China, UK, Germany and India.

1900AD – 1925AD- USA was the world's largest economy followed by the
UK, China, France, Germany, India and the USSR. The gross domestic product
of India in 1925 was estimated at about 10 per cent that of the USA. During
this period, India became a net importer from net exporter of food grains.

1925AD – 1950AD- USA was the world's largest economy followed by the
USSR, UK, China, France, Germany and India. The gross domestic product of
India in 1950 was estimated at about 7 per cent that of the USA. About one-
sixth of the national populations were urban by 1950.
1950 – 1975- Socialist Reforms were introduced.USA was the world's
largest economy followed by the USSR, Japan, Germany and China. The gross
domestic product of India in 1975 was estimated at about 5 per cent that of
the USA. Current GDP per capita grew 33% in the Sixties reaching a peak
growth of 142% in the Seventies, decelerating sharply back to 41% in the
Eighties and 20% in the Nineties. From FY 1951 to FY 1979, the economy
grew at an average rate of about 3.1 percent a year in constant prices, or at
an annual rate of 1.0 percent per capita. During this period, industry grew at
an average rate of 4.5 percent a year, compared with an annual average of
3.0 percent for agriculture. Many factors contributed to the slowdown of the
economy after the mid-1960s, the main one was the socialist policies
pursued by Nehru and his cabinet.
The following shows the GDP of India at market price.
Y Gross Domestic US Dollar
ear Product Exchange in Rs.
1
99,340 4.79
950
1
108,730 4.79
955
1 171,670 4.77
7
960
1
276,680 4.78
965
1
456,770 7.56
970
1
832,690 8.39
975
*source: Ministry of Statistics and Programme Implementation
1975 - 2000
Privatization Reforms were introduced.USA was the world's largest economy
followed by Japan, Germany and China. The gross domestic product of India
in 2000 was estimated at about 4 per cent that of the USA. India started
having balance of payments problems since 1985, and by the end of 1990, it
was in a serious economic crisis. The government was close to default, its
central bank had refused new credit and foreign exchange reserves had
reduced to the point that India could barely finance three weeks’ worth of
imports. The government introduced reforms such as the liberalization.
The following shows the GDP of India at market price.
Y Gross Domestic Export Import US Dollar Inflation Index
ear Product s s Exchange in Rs (2000=100)
1
1,380,334 90,290 135,960 7.86 18
980
1
2,729,350 149,510 217,540 12.36 28
985
1
5,542,706 406,350 486,980 17.50 42
990
1 1,307,3 1,449,5
11,571,882 32.42 69
995 30 30
2 2,781,2 2,975,2
20,791,898 44.94 100
000 60 30
* Source: Ministry of Statistics and Programme Implementation
2000 – THE PRESENT SCENARIO
There was the rise of Oligarchy. The gross domestic product of India in 2007
was estimated at about 8 per cent that of the USA. Currently, the economic
activity in India has taken on a dynamic character which is at once, curtailed
by creaky infrastructure, cumbersome justice system, dilapidated roads,
severe shortages of power and electricity yet at the same time accelerated
by the sheer enthusiasm and ambition of the industrialists and the populace.
The following shows the GDP of India at market price.
Y Gross Domestic Export US Dollar Inflation Index
Imports
ear Product s exchange in Rs (2000=100)

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2 2,781,2 2,975,23
20,791,898 44.94 100
000 60 0
2
34,195,278 44.09 121
005
* Source: Ministry of Statistics and Programme Implementation.
THE CHINESE ECONOMY – A HISTORICAL PERSPECTIVE
The history of the china can be studied by dividing into the Qing dynasty
(1625AD-1911AD), the nationalist republic economy (1911-1950), and the
People’s Republic (1950 onwards).
THE QING
DYNASTY
1625 – 1650- China was the world's largest economy followed by India and
France.
1650 – 1675- China was the world's largest economy followed by India and
France. From this time to about the 1800s, the seclusion of China on a world-
scale grew to its peak during the Ming Dynasty after the Yung-lo emperor's
reign in the 1400s.
1675 – 1700- India was the world's largest economy followed by China and
France.
1700 – 1725- China was the world's largest economy followed by India and
France. Collapse of the central authority of the Mughal Empire and the
resultant chaos triggered India's long but slow decline on the world stage.
1725 – 1825- China was the world's largest economy followed by India and
France.
1825 – 1850- China was the world's largest economy followed by the UK
and India. Industrial Revolution in the UK catapulted the nation to the top
league of Europe for the first time ever.
1850 – 1875- China was the world's largest economy followed by the UK,
USA and India.
1875 – 1911- USA was the world's largest economy followed by China, UK,
Germany and India. Collapse of the central authority of the Qing Dynasty and
the resultant chaos triggered China's short but rapid decline on the world
stage.
NATIONALIST REPUBLIC
1911 – 1925- USA was the world's largest economy followed by the UK,
China, France, Germany, India and the USSR. The gross domestic product of
China in 1925 was estimated at about 20 per cent that of the USA.
1925 – 1950- USA was the world's largest economy followed by the USSR,
UK, China, France, Germany, India and Japan. The gross domestic product of
China in 1950 was estimated at about 10 per cent that of the USA.
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PEOPLE'S REPUBLIC
1950 – 1975- USA was the world's largest economy followed by the USSR,
Japan, Germany and China. The gross domestic product of China in 1975 was
estimated at about 10 percent that of the USA.

1975 – 2000-USA was the world's largest economy followed by Japan,


Germany and China. The gross domestic product of China in 2000 was
estimated at about 10 per cent that of the USA.
2000 – Present -The size of China's economy has been rapidly increasing,
though some now question whether the cost has been too great, and
whether the economy has 'overheated', with side effects such as pollution
and a substantial gap between rich and poor worrying many Chinese. In
2008, China's GDP was about 25% that of the USA, and its manufacturing
sector was 80% that of the USA.
The table below shows the year wise GDP of China:
Year Gross domestic Percentage change
product
1980 7.91
1981 4.738 -40.10 %
1982 9.1 92.06 %
1983 10.9 19.78 %
1984 15.2 39.45 %
1985 13.5 -11.18 %
1986 8.8 -34.81 %
1987 11.6 31.82 %
1988 11.3 -2.59 %
1989 4.1 -63.72 %
1990 3.8 -7.32 %
1991 9.2 142.11 %
1992 14.2 54.35 %
1993 14 -1.41 %
1994 13.1 -6.43 %
1995 10.9 -16.79 %
1996 10 -8.26 %
1997 9.3 -7.00 %
1998 7.8 -16.13 %
1999 7.6 -2.56 %
2000 8.4 10.53 %
2001 8.3 -1.19 %
2002 9.1 9.64 %
2003 10 9.89 %
2004 10.1 1.00 %
2005 10.4 2.97 %
2006 11.1 6.73 %

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2007 11.4 2.70 %
2008 9.272 -18.67 %

Now that we have seen the historical economic importance of both the
economies, we now need to see the current trends and the happenings of
both the economies in the present scenario.

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. The outcome
of these choices has profound implications – not just for the 40% of the
world’s population residing in China and India but also for the future of Asia
and the broader global economy. As recently as 1991, China and India stood
at similar levels of economic development. Today, the Chinese standard of
living is over twice that of India’s, with China’s GDP per capita hitting
US$1,700 in 2005 versus a little over US$700 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. While each approach has its
advantages and disadvantages, China’s outstanding performance in the
development sweepstakes over the past 15 years makes it a very tempting
model for the rest of Asia to emulate.

The contrast between the two approaches is dramatic. The industry share of
China’s GDP has risen from 42% to 47% over the past 15 years, maintaining
a huge gap over India’s generally stagnant 28% manufacturing portion over
the same period. By contrast, the services share of India’s GDP increased
from 41% in 1990 to 54% in 2005 –well in excess of the lagging performance
in China’s services, where the GDP share went from 31% in 1990 to 40% in
2005.
China’s macro character fits its manufacturing-led growth dynamic to a tee.
Benefiting from a high domestic saving rate, huge inflows of foreign direct
investment (FDI), and major efforts on the infrastructure front, China’s
economic growth has been increasingly fueled by exports and fixed
investment. Collectively, these two sectors now account for over 75% of
China’s GDP – and are still growing at close to a 30% rate today. India’s
macro story is the mirror image of China’s in many key respects. Constrained
by a lower saving rate, limited inflows of FDI and a sorely neglected
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infrastructure, India has turned to a fragmented services sector as the
sustenance of economic growth. The labor-intensive character of services
has provided support to India’s newly emerging middle class – a key building
block for India’s consumption-led recovery. As a result, private consumption
currently accounts for 61% of India’s GDP, far outstripping the 40% share in
China. The growth contribution of India’s export and investment sectors
pales in comparison to that in China.

Retaining the Fruits of Globalization

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Annual GDP growth has averaged 10% in China in the past three years and
8% in India. During the same period, the global economy has enjoyed the
biggest boom in decades, averaging 4.5% growth a year. The unprecedented
economic expansion is due to rising productivity growth from globalization
and information technology. China and India have been at the center of
increasing global integration and have done well in keeping the fruits of
globalization at home
to fuel their economies.
The two economies have used different approaches to retain some of the
globalization benefits. China has pursued the typical East Asian model of
recycling export revenue into fixed investment. As capacity expands in line
with rapid export growth, the domestic economy does not suffer from high
inflation, merely floating upward with the global economy. Indeed, inflation in
China is less than 2% despite 33% annual growth in exports for the past
three years. This reflects the excessive savings and investment bias of the
political system. In addition to the traditional East Asian investment/export
approach, China has taken advantage of its strong government and the
country’s size to achieve unprecedented economies of scale for productivity
gains. In infrastructure, for example, the economies of scale have cut capital
costs in transportation, telecommunications, and electricity to below those of
any other economy. In the production and distribution of consumer goods,
the economies of scale that China has achieved are unmatched elsewhere in
the global economy. The increase in scale economies has also contributed to
low inflation. India has also achieved a breakthrough in trade. Exports grew
25% a year in 2002-05 compared with 10.5% in the ten-year period prior to
this. However, India’s export base at 19.5% of GDP in 2005 is much lower
than that for China (38%) and so its export success is not sufficient to drive
the economy’s strong growth. India has taken advantage of its flexible
financial markets to attract foreign capital to fund its growth. Consumer
credit, funded substantially by foreign capital inflows into its capital markets,
has given the Indian economy a strong consumption anchor in this boom.
India’s credit rose by 25% a year over 2002-05 versus 19% growth in fixed
investment. In contrast, China’s credit increased by 17% and fixed
investment by 27% in the same period; even though the share of China’s
fixed investment in GDP is one third higher than India’s. India’s growth model
bears more resemblance to the Anglo- Saxon than the East Asian model. Its
external accounts have
evolved in a similar fashion. Its current account balance deteriorated to a
deficit equivalent to 1.7% of GDP in 2005 from 1.5% of GDP in surplus in
2003. In contrast, China’s current account surplus improved to 7.2% of GDP
in 2005 from 2.8% in 2003. While China and India have different growth
models, they have both captured the opportunities from the current wave of
globalization. Productivity gains have benefited from a low-base effect. As
the production chain becomes fully integrated across the world in the coming
years, the low-base effect will disappear and the tailwinds from globalization

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for China and India will weaken. How to sustain fast productivity growth
beyond the current boom is a major challenge for both economies.

At present, the two countries appear to favor a muddling-through approach,


i.e., deal with an issue only if it appears to be an imminent threat to growth.
Failure to heed long-term implications in crafting macro policy is a global
phenomenon, however. The best example is the lack of consideration for
balance sheet problems by all major central banks even though economic
history teaches us that the great economic crises have all been due to
overstretching the balance sheet.
In that regard, China and India are just joining the crowd.
… IN INDIA:
The threat to India’s growth over the next two years is its poor infrastructure.
To address the problem, India needs to mobilize capital more effectively and
streamline the process for the implementation of infrastructure development,
objectives that require strong government. Coalition politics, as now
prevailing in India, tend not to produce strong governments. Since India has
been able to achieve high growth in the past three years even with a poor
infrastructure, the hope is for continuation of the same for the next two
years. Another challenge to India’s growth is the potential bursting of its
asset bubble. India has experienced enormous growth in its stock and
property markets, mainly through price appreciation in response to low real
interest rates. In this low interest rate environment, the most important
factors are an increase in foreign capital inflow and a rise in import
competition, which have contributed to low inflation. However, both factors
have limited life-spans.
First, the foreign capital inflow is a component of the financial globalization
that has kept risk appetite high and rising. The increase in globalization has
resulted in low inflation and strong liquidity – the backdrop for the current
euphoria surrounding high-risk assets. As globalization matures, global
liquidity conditions will normalize, and money can no longer be expected to
rush to India in the same quantities under the same terms.
Second, increasing import competition forces local producers to accept
lower prices. Low inflation in India, as in the rest of the world, is due to
globalization benefits from a low base. As
production responds to new prices, imports no longer are as effective in
keeping inflation low.
Buoyant asset markets have had a massive wealth effect on consumption
while the low cost of capital has encouraged more capital investment. This is
probably the reason for India’s growth rate surpassing its historical trend.
The appropriate policy would be to raise interest rates aggressively to
contain the cost when the bubble bursts. However, as politics favor ‘keeping
the party going for as long as possible’, preemptive measures are not being
taken. Increasing scale economies is also a source of productivity growth for
India and should offset any waning in foreign capital inflows to sustain
economic expansion. The modernization of India’s consumer sector, in
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particular, could accelerate productivity growth. To achieve this, India needs
to build a transportation system that supports modern logistics and retool
the regulatory infrastructure to support large-scale production.
We can take these three steps India can take to accelerate growth
beyond the current cyclical boom:
1) Introduce legislation that allows the implementation process for
infrastructure projects to cut through the current maze of regulations and to
acquire land quickly.
2) Set up several special economic zones along the coast in areas without
land title disputes. These SEZs could be cities with their own streamlined
regulatory and bureaucratic infrastructure. (The current SEZs are project-
based tax breaks for export production, which will probably not lead to the
formation of new cities – a must for India to accelerate urbanization.)
3) Sell state-owned assets to jump-start a 100 billion-dollar infrastructure
program as the core of India’s modernization.

… AND CHINA:
The challenges to China in sustaining its high growth are quite different. The
fundamental weakness of the economy is low consumption. Household
consumption at 40% of GDP is exceptionally low by any standard. The
excessive dependence on investment and exports makes China vulnerable to
the global economic cycle. The dominant role of the government in the
economy, its bureaucratic bias towards investment, and lack of organized
forces in society to check government excesses have led to macro
vulnerabilities. Excessive liquidity due to low consumption and foreign
speculation on a possible renminbi revaluation has resulted in rapid growth
in the property market in terms of both production and price. The rise in
property prices has become another deterrent to consumption, as Chinese
households hunker down to shelter from escalating living costs. This further
sustains the liquidity boom that feeds the property sector. This sort of
dynamic increases the imbalance in the economy. China’s cyclical risk and
structural imbalance are one and the same. Unless China is able to rebalance
its economy, it could suffer from mounting appreciation pressure on its
currency and deflationary conditions at the same time. The required reforms
in China would not be hard to implement.
China just needs to find ways to give money to households.
To rebalance the economy, China has to address the wealth, income, and
security issues that have caused the household sector to shrink relative to
the overall economy.
1) On wealth, the government owns land, natural resources, and state
monopolies. As these assets are not on the household balance sheet,
consumption remains below what national wealth can support. Government
wealth has to be shifted to the household sector to balance the economy.
2) On income, the labor surplus has kept the rise in wages below that in
labor productivity. This causes labor income to contract relative to the

15
economy and contributes to insufficient consumption, excessive liquidity,
and speculative mania.

Growth Trends: China’s Fast Track vs. India’s


Gradualism Model
➢ Acceleration in growth in the post-reform period:
China’s economic growth has averaged 9.4% a year since 1978. Taking
advantage of a sharp rise in the working population ratio in the early
1970s, the government initiated major structural reforms in 1978, which
allowed the virtuous interplay of labor and capital. India’s economic
growth underwent a structural shift at the start of the 1980s. Over the
decade, the government made an attitude shift in favor of the private
sector. Economic growth averaged 5.7% a year in the 1980s versus 3.5%
in the prior three decades. Since 1991 the government has initiated major
liberalization measures, adopting the open-economy model. India has
achieved average growth of 6% a year since 1991 and in the past five
years, growth has averaged a higher rate of 6.7%.

➢ The emphasis for China remains manufacturing and for India,


services: In terms of segment growth mix, China has followed a model
similar to that of other Asian countries, relying on manufactured
exports as a key anchor for sustainable acceleration in growth and
integration with the global market place. As a result, China’s
manufacturing sector has recorded real growth of 11.5% a year since
1978. Growth in services and agriculture averaged 10.6% and 4.6%,
respectively, over the period. India’s growth mix, however, has been
significantly different from that of China. Over the past 15 years (since
the start of India’s reforms), India’s services sector growth has
averaged 7.9% a year compared with 6.0% for manufacturing and
2.5% for agriculture. In comparison, China’s manufacturing growth has
been about 12.6% a year over this period versus 10.1% for services
and 3.8% for agriculture.

➢ Differing focus on exports and fixed investments as growth


drivers: China has been over-reliant on exports for stimulating growth
compared with India. Its export (goods plus services) to GDP ratio has
increased to 38% from 7% in 1980. India’s exports to GDP ratio has
risen to 19% from 6% in 1980. Similarly, China’s investment-to-GDP
ratio has increased to 49% from 20% in 1980 compared with a rise in
India’s investment share of GDP to 30% from 21% in 1980.

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➢ Accounting for growth differences: A simplistic way to account for
growth in a country would be to consider the contributions from the
three basic drivers:
(1) labor force inputs,
(2) capital inputs and
(3) total factor productivity.

Total factor productivity (TFP) is that part of non-factor inputs that


enables higher growth with less application of factor inputs. It
encompasses the contribution of technology and managerial aspects to
the growth of real output. The two major areas where India’s growth
suffers compared with that of China are capital accumulation and lower
productivity growth. In the past 10 years, on average, more than 4.5
percentage points of China’s GDP growth was accounted for by capital
accumulation, which was supported by its high national savings rate. In
comparison, capital accumulation in India, contributed only about 2.1
percentage points of GDP growth. For India, a large proportion of its
growth is accounted for by total factor productivity although it was
lower than that for China on average in the past ten years.

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Consumption - Macro: China Spends Twice As Much
As India

➢ India’s consumption-to-GDP ratio is higher than China’s:


Although in nominal US dollar terms India’s GDP is 35% of China’s size,
India’s consumption spending is about 45% of China’s. India’s overall
consumption-to-GDP ratio was 72% in 2004 compared with 54% for
China. Not all the difference in consumption-to-GDP ratio is explained
by the demographic position (as defined by the age-dependency ratio)
of the two countries. Indeed, China’s consumption ratio was lower than
India’s even while its demographic position was similar to India’s in
1975. India’s active consumerism culture, populist attitude of the
government and the larger share of household income in GDP are the
key reasons for consumption’s relatively higher share of GDP.

➢ China’s consumption growth rate is higher than India’s:


Although China’s share of consumption in GDP is lower than India’s, its
absolute spending on consumption was US$1,074 billion in 2004
compared with India’s US$498 billion. China’s consumption growth has
also been higher at 7.6% over the past 10 years (compared with India’s
5.8%), driven by its higher per capita income.

➢ Both India and China are witnessing a shift in the consumption


mix: In India and China, rising per capita income, changing
demographics (rising young population), rapidly emerging modern
retail format and increased access to financing are bringing about a
change in the consumption basket. The share of organized sector
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products is increasing while that of primary products is declining. The
Indian consumption basket is still relatively primitive currently and
biased towards such products as food, beverages and tobacco. An
average Indian spends about 49% of his/her expenditure on products
other than food, beverages and tobacco compared with the average for
China of 67%

➢ Reforming the retail distribution network: China has already built


a modern retail distribution system to a large extent while India has
just initiated such a network. The new retail format is beginning to
drive a change on the supply side in India. This is a reverse of the
process in China where the supply chain was relatively modernized for
exports before the shift was initiated in retail distribution. We believe
this change in the retail sector could lead to a significant
transformation in India’s small & medium manufacturing as well as
farming segments. This, in turn, could provide India with the
opportunity to participate in the global export market for low-ticket
manufactured goods.

19
Consumption - Micro: Markets for Most Products in
India Are a Third to a Tenth of China’s

➢ Consumer product penetration rates higher in China: Penetration


rates and per capita consumption are higher in China than in India for
most broad-based manufactured consumption items because China’s
per capita income is 2.4 times that of India. In fact, real per capita
private consumption expenditure in China has increased by an average
of 7.3% a year over the past 10 years compared with 5.3% in India.
➢ China’s consumer product market is significantly larger than
India’s: Not only is China well ahead of India in terms of exports, its
domestic market for consumer products is also much bigger. For
consumer non-durables as well as durables China’s market (annual
sales) is about three to ten times that of India. Among durables, annual
sales in China for products like cell phones are about double those in
India whereas at the other extreme are items such as televisions where
annual sales in China are about seven times those in India For non-
durables, India’s market is of similar size to China’s in basic products
like soaps but lags in products such as detergents, skin care products
and bottled water.

➢ India lags China in per capita consumption of key items by a


range of 4 to 11 years, depending on the product: Even if it
manages a big shift in growth rates and follows China’s trend, India is
likely to remain 4 to 11 years behind China across different products.
To approximate the amount of time the market size for the various
consumer products in India will take to reach China’s current market
size, we performed a regression analysis with China’s and India’s per
capita consumption of various products being dependent on their
respective per capita income levels. Based on this regression analysis,
20
we arrived at India’s and China’s respective per capita consumption to
income slope levels, which explain the penetration trend to per capita
trend relationship, as shown in. These slopes help explain the
relationship between past growth in per capita consumption and the
increase in per capita income levels. We have projected per capita
consumption and, in turn, the market size in India based on two
scenarios: 1) India will continue to follow its own past slope i.e., it
follows its past penetration to per capita income trend; we call this
Type I; and 2) India will shift to China’s slope i.e., it follows China’s
penetration to per capita income trend; we call this Type II. We have
also provided alternative calculations, assuming two real GDP growth
scenarios, 7% and 8% a year. We have forecast the number of years
India will take to reach China’s market size
Under these growth scenarios and under the two slope functions – one using
India’s past trend and the other using a shift to China’s past trend. Our
nominal GDP growth forecasts for India assume constant real GDP growth of
7-8% a year. For per capita calculations, we have used the population growth
projections of the United Nations.

21
Investments: China’s Total Capex is more than Four
Times India’s
➢ China’s investment-to-GDP ratio is 1.6 times that of India: In
2005, China’s investment was 49% of GDP (US$1,082 billion) while
India’s was an estimated 30% of GDP (US$240 billion). The key driver
for China’s high investment rate is a higher domestic savings rate. FDI
accounts for about 5.5% of total investment in China versus 2.7% for
India. Indeed, China’s capex to GDP is now 2.7 times that of the US and
it accounts for about 11% of global investment.

➢ Rising share in global capex: While the world investment to GDP


ratio has been constant over the past 10 years, the ratios for India and
China have increased; hence, the combined share for the two in global
investment rose significantly to 13.4% in 2005 from 7.2% in 2000 and
3.0% in 1990.

➢ China’s huge infrastructure bias: One of the major areas of


difference in the capex of the two countries is in investment for
infrastructure. In 2005, China infrastructure investments were an
estimated US$201 billion (9.0% of GDP) compared with US$28 billion
(3.6%) for India. Another key variation is in investment in property. In
2005, China’s investment in housing construction was US$224 billion
(10.1% of GDP) versus an estimated US$33 billion (4.1%) in India.
➢ Manufacturing, services and agriculture mix: Not surprisingly,
while China’s investments are biased towards manufacturing, India’s
investments are evenly spread between manufacturing and services.
Both countries have cut the share of agriculture in
total investment.
22
➢ India’s poor penetration in fixed investment-dependent
products: Steel and cement demand reflects the differences in
spending on capex. China’s steel and cement demand is about 10.5
and 7.5 times that for India, respectively. However, the growth in
demand for these products in India should accelerate as its
investment-to-GDP ratio rises further, reflecting an improvement in
savings to GDP.

External Trade: China’s Share in Global Exports Is


Six Times India’s

➢ India lags China substantially despite an improvement in the


trend over the past few years: While India had a 2.2% share of
global goods exports in 1948, this position has been steadily eroded,
reaching a low of 0.4% in 1981 and around 0.9% currently. Even if we
consider services, India’s combined share in goods and services was
1.1% in 2005 versus 0.4% in 1990 and 1980. In contrast, China’s

23
combined share in goods and services rose sharply to 6.6% in 2005
from 1.6% in 1990 and 0.9% in 1980.

➢ India takes the lead in high-end commercial services: On an


aggregate basis, China’s share in world commercial services exports is
3.3% versus India’s 2.3%. However, this includes tourism and transport
revenues. China’s total services exports are about US$81 billion
compared with US$57 billion for India. The mix, however, is very
different. India has a bias toward scaleable IT software services and IT-
enabled business process services (IT and ITES). IT and ITES currently
account for 37% of India’s total services exports. We expect IT and
ITES exports to rise to US$60 billion by 2010 from US$21 billion in
2005. Due to strong growth in IT and ITES, India’s commercial services
exports have grown 29% a year in the past five years compared with
21% for China. We believe that India’s aggregate share in the global
commercial services trade will start to outpace China’s share in the
next five to six years.

➢ Relatively less supportive business environment constrains


India’s manufacturing: China’s success in manufacturing is well
demonstrated by its 7.3% share of global goods exports compared with
0.9% for India in 2005. China’s goods exports recorded a CAGR of 18%
from 1990 to 2005 versus India’s 11%. We believe that India needs a
further overhaul of its manufacturing business environment to follow
China’s lead in manufacturing. The key factors constraining
manufacturing so far are lack of world-class infrastructure, rigid labor
laws, inefficient tax laws and government interference.

➢ With gradual implementation of reforms and a rise in its


savings rate, India is beginning to make inroads into
manufactured exports. India’s top ten exports are currently biased
towards products that are high in labor intensity and natural resources.
However, incrementally, India’s exports will move towards high
capital/infrastructure intensity sectors. India is already beginning to
compete well in complex manufacturing such as chemicals,
engineering goods and machinery, automobiles and auto components.

24
25
SUMMARY OF KEY REFORMS IN INDIA AND CHINA
India China
How did the reform process begin?

The reform process in India The Third Plenum (of the 11th
was triggered by a major Party Congress Central
macroeconomic crisis in Committee) held in 1978 is
early 1991. This was caused widely regarded as the starting
by a large fiscal and current point of China's reform
account deficit, high process. The government
inflation, increasing internal initiated market oriented
and external debt, three reforms with the gradual
changes of government in a experimentation approach in
span of two years and socio-
the rural sector and later
political upheaval. In June
followed it up in the industrial
1991,the new government
sector. On the rural front,
(led by Mr. PV Narsimha Rao
China initiated a massive de-
from the
collectivization program
Congress Party, with Dr. whereby the land was
Manmohan Singh as the distributed or contracted out
Finance Minister) to households. This program
immediately made a was accompanied by a sharp
commitment to structural increase in agricultural
reform. The rupee was procurement prices and a
devalued by 19% against the decrease in agricultural input
26
US dollar in two quick moves prices.
in July 1991.Various external
The government later initiated
as well as internal reform
a “big bang” industrialization
measures have been
plan with gradual liberalization
implemented subsequently. of product pricing, the setting
The government cut tariffs up of new systems that
on imports, reduced rewarded local government for
quantitative restrictions on promoting development,
trade, liberalized the foreign allowing greater autonomy of
investment policy and management to
encouraged exports through
SOEs, encouraging external
tax exemptions. On the
trade through deregulation,
internal front, licensing
implementing labor reforms,
requirements were removed
setting up special economic
for most major sectors,
zones, attracting FDI,
undue control on trade &
establishing township & village
business was reduced,
enterprises and transferring
banking reforms were
commercial banking
initiated and the process of
operations from just one bank
fiscal consolidation was
(People's Bank of China) to
initiated.
four banks.

External Sector Reforms


Trade
reforms
Exchange The macro economic reforms China implemented current
Rate commenced with the account convertibility of the
devaluation renminbi (RMB) in 1996 but it
followed a fixed exchange rate
of the rupee by 19% to
regime until recently. On July
Rs26:US$1 from Rs21 in July
21, 2005, China decided to
1991. The rupee was
change its currency regime.
subsequently floated on the
27
current account. Over the The renminbi was revalued by
years, the Reserve Bank of 2.1% against the US dollar and
India has allowed market from that day fluctuations of
oriented movements in the 0.3% have been allowed on
currency. Its interventions either side of the central rate,
have usually been with the announced by the central bank
aim of checking volatility on the previous day (i.e., the
rather than setting the currency is able to crawl by
direction. 0.3% a day against the US
dollar at a maximum although,
in practice, the government
still does not allow a 0.3%
movement in a day).
Tariffs India lowered its weighted China has lowered import
average import tariff rate tariffs dramatically. Weighted
from 87% in F1991 to 47% in average import tariffs were
F1994 to around 15-17% well over 50% in the early
currently. The peak rate on 1980s, but have been reduced
non-agricultural products to just 9.9% currently – close
was reduced from 355% in to honoring the WTO
F1992 to 35% in F2001 and commitment to reduce tariffs
12.5% in F2006. to 9.8% by 2010.
Capital account reforms
FDI In 1979, the Chinese
government granted legal
status to foreign investment.
The establishment of SEZs in
1980 also improved the
climate for FDI flows. In 1986,
new provisions were passed,
which included reducing fees
for labor and land use;
establishing a limited foreign
currency market for joint
ventures; and extending the
maximum duration of a joint-
venture agreement beyond 50
years. The FDI climate further
improved in 1990, when a
number of provisions were
28
adopted to make China an
attractive destination for FDI
(e.g., protection from
nationalization). Hong Kong
played an instrumental role in
the takeoff in FDI in the mid-
1980s to early 1990s amid the
migration of the
manufacturing base and the
subsequent expansion.
Overseas Chinese and Hong
Kong enterprises had already
established robust track
records in China before WTO
accession in 2002, which has
further helped increase FDI
Inflows into the country.
Portfolio In September 1992, the The Shanghai and Shenzhen
investment government allowed FIIs to stock exchanges were
s invest in Indian capital established in 1990. China
markets. A single FII is allowed FIIs to invest in B
allowed to invest up to 10% shares. Subsequently, China
in a company. Initially, the allowed Qualified FIIs (QFIIs) to
government limited the invest in the A share market.
investment by FIIs to a The investment limit for any
ceiling of 24% of paid-up stock is 10% of the total share
capital; however, this has capital for each QFII, with a
since been liberalized and 20% maximum for all QFIIs
FIIs are now allowed to invest combined. Restrictions on
in Indian companies with no outbound portfolio investment
limits (subject to certain are gradually being relaxed.
sector caps). In 2003, Formal announcement was
domestic mutual made in mid-April 2006 for the
funds/resident individuals QDII (qualified domestic
were allowed to invest in institutional investor) scheme.
companies abroad that have Under this scheme, Chinese
a reciprocal 10% holding in a institutional investors are
listed Indian company allowed to invest abroad.
(subject to specified Domestic banks, insurers and
conditions). The reciprocity fund management companies
29
condition for domestic will be the first institutions to
mutual funds was relaxed in do so.
2006.
Internal Sector Reforms
Agricultural After independence India The first sets of reforms in
reforms initiated some land reforms China were in the agriculture
by dividing land among the sector. China collectivized
tenants and introduced the agriculture in the 1950s, with
green revolution, which the establishment of the
increased agricultural output commune system. However, in
in the 1960s. There have not the late 1970s a household
been any major reforms in responsibility system was
agriculture since the broader developed, under which the
macro reform process began communes’ land was divided
in 1991. The government’s among households. This gave
spending on infrastructure a big impetus to the rural
for agriculture has been very economy, with incomes
low. Total public spending on increasing by up to 50% over
agriculture dropped to 0.4% 1978-84. Recently, the
of GDP in F2004 from 0.6% in government has decided to
F1991. Only about 40% of increase its rural spending
the land is irrigated, leaving plan. In March 2006, Premier
farmers exposed to the Wen Jiabao announced that
vagaries of monsoons. Over the government would make a
the past few years, the concerted effort to build “a
government has launched new socialist countryside”
some initiatives to accelerate over the next five years. The
agriculture growth, including government announced a 14%
allowing exchange-trading of increase in its 2006 rural
commodities; encouraging budget to Rmb340 billion
states to reform laws to (US$42 billion, 1.7% of GDP). It
liberalize marketing of also abolished the tax on
agricultural produce; and agricultural income and plans
encouraging banks to to invest US$148 billion on
increase lending to the rural roads over the next five
agriculture sector. years.
Industrial Key industrial reforms Key industrial reforms
reforms implemented in India are: implemented in China are:

Removal of licensing Reforming SOEs: In 1979 the


regime: The government government allowed state-
30
abolished licensing owned enterprises to retain
requirements for setting up profits. Gradually, the
all but 18 industries in 1991. government is trying to build
In 1998-99, further de- professional management
licensing took place and now within SOEs. It has also
licenses are required only in adopted SOE labor reforms,
industries such as alcohol, such as the contracting of
tobacco products and those labor, retrenchment and
pertaining to defense performance-linked pay. The
equipment. reform process picked up in
1995 when the central
Removal of undue control
government adopted the idea
of trade and business: In
of ‘grasping the large and
1991, the government
letting go the small’, wherein it
abolished the Monopolies
intended to keep about 1,000
and Restrictive Trade
enterprises as state-owned
Practices Act, which
and privatize the rest.
constrained corporate
acquisitions and over- Deregulation of product
regulated business practices. prices: Initially, China adopted
Deregulation of product a dual track
prices: The prices of various
approach to price liberalization
goods, such as steel,
wherein price determination
cement, paper and pulp,
was through both planned and
have been deregulated since
market forces. By the mid-
the reform process began.
1990s, prices of most products
Now most manufactured
in China were liberalized.
product prices are
determined by market forces SME reforms: Since 1978,
except for a select few the importance of Township
products like oil & coal. and Village Enterprises (TVEs)
in China has increased
Reduction of protection
manifold. The TVEs are hybrid
to SME sector: The
institutions – alliances
government has over the
between TVE entrepreneurs
years been reducing
and local government officials
reservations for small-scale
(acting in the capacity of
industries (SSI). The number
‘owners’). TVEs have emerged
of items reserved was
as one of the key growth
reduced from a peak of 873
drivers of industrial output in
in 1984 to 506 in 2005.
31
Privatization of SOEs: In China.
India, the disinvestment
Encouraging private and
process initially focused on
joint sectors: The
the transfer of minority
government has allowed non-
rights to public and financial
state-owned enterprises to
institutions. However, no
operate in China and they
controlling right was sold to
have proven to be a primary
the private sector. In 2003-
driver of economic growth
04, the government
since the 1980s. Non-state-
privatized a few public sector
owned enterprises accounted
enterprises, where it passed
for 61% of total value-added
the controlling interest to
industrial output in 2005, up
strategic investors. However,
from 43% in 1998.
the sale of controlling stakes
is unlikely to take place in Privatization of SOEs: China
India in the near term, with a has pursued a limited form of
clear change in government privatization by way of the
policy in this area. The public sale of stakes in state-owned
sector accounts for about companies to public and
20% of industrial output. foreign institutional
shareholders. The government
Labor reforms: India still
has used this as an
lags on labor reforms.
opportunity to strengthen
Current regulations require
state-owned enterprises. The
enterprises employing more
amount collected in China
than 100 people to undergo
from the sale of stakes in SOEs
a complex approval process
is many times that in India.
before retrenching
employees. Labor reforms: China has
been successful in introducing
a flexible labor system. China
has over the years shifted to a
more flexible policy on labor in
terms of both hiring and firing.
Geographical mobility of labor
is still limited, nevertheless.
Unfavorable conditions for
migrant workers in urban
areas have limited the pace of
migration; hence, the apparent

32
labor shortage in recent years
in the coastal cities.
Fiscal Tax Structure: India Tax Structure: China has
Reforms initiated major tax reforms in implemented major changes in
the early 1990s. It has its tax structure over the past
reduced the marginal rate of 20 years. It has already cut its
personal tax from 56% in import tariff such that the total
F1992 to 30% currently, import tariff as a proportion of
lowered the corporate tax the value of imports is less
rate from 50% in F1992 to than 2.5%, compared with
30%, and cut the peak excise 10% in India. China adopted
and non-agriculture import the value-added tax system in
tariff from over 100% and the mid-1990s, which further
150% in F1992 to 24% and improved the efficiency of the
12.5%, respectively. Since tax system. Tax incentives
the mid-1990s, the have been widely used to
government has expanded attract foreign capital, but the
the tax net by levying taxes upcoming reform on unifying
on services. In 2005-06, the tax rates on local vs. foreign
government replaced the enterprises will be a landmark
multiple-rate sales tax (ST) change towards a more level
system, which was playing-field in China.
independently managed by
Fiscal Prudence: China has
various states, with a
initiated several measures for
synchronized single-rate
better management of
system. The new system
government finances.
leaves the central tax
Previously, all government
collection system
revenue and expenditure had
independent. The
to go through the central
government has since
government. However, in the
announced its intentions to
1980s, the process was
shift to a country-wide
decentralized, with the local
common goods and services
government transferring a
tax (GST) by 2010-11.
negotiated amount to the
Fiscal Prudence: India central government and
pursued some public finance keeping the rest. This gave
reforms from the early 1990s increased incentives to the
to the mid-1990s by reining local governments to improve
in expenditure and revenue collection and tax

33
augmenting revenues. This efficiency. Government
helped reduce the accounts in China are
consolidated fiscal deficit to relatively well placed. The
6.4% of GDP in F1997 from aggregate
9.4% in F1991. However, the
fiscal deficit in China has
emergence of coalition
remained under 3% of GDP
government at the center
over the past 10 years.
resulted in major slippage in
government finances and
pushed the fiscal deficit to a
new high of 9.9% of GDP in
F2002. Although the headline
fiscal deficit has since
dropped to 7.8% of GDP in
F2006, the off-budget oil and
electricity subsidy burden
remains high at 1.9%. We
believe the government
needs to initiate major
expenditure reforms and
move effectively to outcome-
based expenditure
management from the
current outlay-based system
to cut non-interest revenue
expenditure.
Banking India has steadily Although China has initiated
sector strengthened its banking reforms for the banking sector,
system, improving the its progress pales when
reforms
regulatory framework, compared with India. Until
imposing strict prudential 1980, there was hardly any
norms and encouraging competition. The government
greater competition. The then created four large banks.
government has allowed Subsequently, joint stock
private sector entry since the banks were formed and foreign
mid-1990s. Private players banks were also allowed to
have already built a 27% open branches. By 2007,
share of loan assets in the foreign banks will receive
banking system. The national treatment in China
prudential norms in terms of under the WTO agreement. Of
34
capital adequacy a total of around 115 banks in
requirements have gradually China, 53 do not yet comply
tightened, and currently with the Basel I requirement of
banks are required to capital
maintain a CAR of 9%. Most
adequacy ratio of 8%.
banks already comply with
However, over the past few
the norm of 9% CAR and will
years the government has
move to meeting Basel II
taken steps to reduce NPLs
requirements by March 2007.
and has recapitalized the
In 2002, the government
weaker banks. China has also
enacted the Foreclosure Act,
announced that certain banks
which gave lenders powers
with a large number of
to forfeit assets of defaulting
overseas branches will adopt
borrowers, enabling quick
Basel II norms from 2010 to
recovery of NPAs. One area
2012. On balance, China lags
where the Indian banking
India in banking sector
system lags is in the
reforms.
relatively restricted access to
foreign capital, which is
capped at 20% for the SOE
banks and 74% for private
banks.
Infrastruct Except for telecoms, overall While the overall regulatory
ure progress in infrastructure has system in China is still fairly
historically been slow in weak, the government has
Reforms
India. However, over the past undertaken major initiatives to
two years, infrastructure has encourage adequate
gained the attention of investments in infrastructure.
policymakers.
Roads: China has largely relied
Roads: Investments in this on government investments in
long-gestation sector have this area. Investments have
been low, averaging just US$ averaged US$34 billion p.a.
2.5-3 billion over the past 10 over the past 10 years.
years. The government has Indeed, in 2005 China spent
now initiated a US$38 billion US$67 billion on road
seven-phase national development. The government
highway development, plans a major push on building
covering 65,000 kms of rural roads over the next the
national highways to few years.

35
increase road spending. Seaports: China has built
world-class port infrastructure.
Seaports: Over the past few
A large part of this is owned
years, the government has
and developed by the
introduced several measures
government. Hong Kong
to augment private
enterprises have played a big
investment in the sector. The
role in the development of
average turnaround time at
China’s ports, but they have
Indian ports improved to
also done so in partnership
about 3.4 days in F2005 from
with local governments.
8.5 days in F1996. Although
a good beginning has been Telecoms: Prior to 1994, the
made, progress is still slow, Ministry of Post and
leaving the overall cost- Telecommunications (MPT) was
efficiency at Indian ports the regulator as well as the
relatively low compared with
biggest player in the Chinese
world averages.
market through its arm, China
Telecom: The government Telecom. Subsequently, the
opened up services like entity was split into two parts:
cellular, radio paging, and the Ministry of Information
data services to the private Industry (MII), the operational
sector in F1993 and followed arm, and China Telecom. Later
it up with the opening up of China Telecom was further
basic telephony to private divided on the basis of
participation and foreign geography and business. In
equity (up to 49%) in F1995. recent years, China's telecom
It also fixed a 49% foreign sector has become more open
investment limit for cellular to foreign investment. The
telephony, which has government has encouraged
recently been increased to foreign companies to establish
74%. The favorable policy telecom companies by
environment has encouraged acquiring domestic companies
the private sector to and has also allowed
participate aggressively, and established joint ventures to
private investment has apply to operate telecom
contributed significantly to services. Over the last ten
growth in the sector. years, China’s telecom
Significant technological subscriber base has increased
change has resulted in a 17-fold to 744 million from 44
90% decline in the cost of million.
36
accessing telecom services Airports: Over the past 15
over the past seven years. years, China has spent
Overall progress in this approximately US$14.8 billion
sector is commendable with on upgrading its airport
the subscriber base having infrastructure. Recently, the
risen to 130 million as of Civil Aviation Administration of
2005 from 12 million over China (CAAC) announced plans
the past 10 years. to invest a further US$17.4
billion over the next five years
Airports: After neglecting
on airport infrastructure.
airport infrastructure for
years, over the past three Electricity: The Electricity Law
years, the government has was promulgated in 1995 and
initiated a number of policy was the first comprehensive
measures to attract the legislation for the electricity
private sector and improve sector. In 1997, the State
efficiency. Some of the major Power Corporation (SPC) was
initiatives taken by the formed. In 2002-2003, the
government in this context government split the SPC into
are an open-skies policy for 11 separate companies, which
passenger traffic, included two grid corporations,
restructuring and five power generating groups
privatization of Mumbai and and five other companies. The
Delhi airports, announcing government also established
construction of Greenfield the State Electricity Regulatory
airports in select cities and Commission (SERC) to be
undertaking the responsible for supervising
modernization of other and regulating market
domestic airports. competition in the electricity
industry. However, the SERC
Electricity: The electricity
shares power with regards to
sector is one area in need of
pricing and electricity sector
serious and immediate
investments and as a result
overhaul. The most
the government continues to
important investment
control the sector. Despite
deterrent in the power sector
this, the operations are far
is the poor financial condition
more efficient than those in
of the state electricity boards
India. The government has
(which own more than 90%
taken the lead in boosting
of the distribution in the
investments in the sector.
country). The electricity
37
operations of the public China has increased its
sector incur annual losses of electricity generation capacity
US$4-5 billion due to the to 508 GW currently from 217
large burden of subsidies and GW in 1995.
theft in electricity
SEZs: In 1980 China created
distribution. While the
four Special Economic Zones,
government has initiated
which enjoyed special policy
several measures over the
benefits like lower tax rates in
past few years, the effective
addition to good infrastructure
implementation of reforms in
facilities. The success of these
this area is far slower than
SEZs led to the creation of
required. This constrains
more such zones, and this has
investments in the sector
been a cornerstone of China’s
with peak electricity
reform success.
shortages at 12%.

SEZs: The government


initiated the first major
change in April 2000 for the
establishment of Special
Economic Zones. However,
the response from investors
has been poor. In May 2005,
the government approved a
new SEZ legislation which is
more comprehensive and
provides for a larger tax
incentive package. Since the
new legislation was passed,
various private investors
have announced their
intentions to set-up SEZs.
However, the response from
the private sector is largely
for investing in small SEZs
where tax benefits are a key
attraction.

CONCLUSION
38
China and India represent the future of Asia – and quite possibly the future
for the global economy. Yet both economies now need to fine-tune their
development strategies by expanding their economic power bases. If these
mid-course corrections are well executed – and there is good reason to
believe that will be the case – China and India should play an increasingly
powerful role in driving the global growth dynamic for years to come. With
that role, however, come equally important consequences. IT-enabled
globalization has introduced an unexpected complication into the process – a
time compression of economic development that has caught the rich
industrial world by surprise. The resulting heightened sense of economic
insecurity that has stoked an increasingly dangerous protectionist backlash
could well pose yet another major challenge to China and India – learning
how to live with the consequences of their successes. The Indian government
has recently signaled its intention to lift the economy to a higher growth
path, whereby GDP would expand at an annual rate of 10 per cent. High
growth, according to the government, provides the best antidote to
poverty.29 The economic expansion that started in 2003/04 provides
evidence that India’s growth rates in favorable circumstances are
comparable to Asia’s powerhouse, China. Whereas high domestic demand
has increased inflationary pressures in the Indian economy and dragged the
current account into deficit, China’s economy has experienced deflationary
tendencies that seem to reflect excess supply in the economy. In this regard,
investment in infrastructure is imperative to increase the supply-side
potential of the Indian economy. It is equally critical to push forward with the
economic reforms that have progressed slowly of late, especially in terms of
privatization and labor laws. The recent growth in industry is a positive sign
of the economic expansion reaching beyond the services sector – a
necessary evolution for employment growth and further progress in poverty
reduction. An increase in fiscal revenues would provide resources for
spending in education, health and infrastructure, without further worsening
the delicate state of fiscal balances. A gradual phasing-out of budget
subsidies, replaced by direct cash transfers, could also form an important
part of fiscal reform.

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