1

CURRENT SCENARIO

INDO-CHINESE RELATIONSHIP

S
ervice sector is India is booming. Experts say that

in the of shoring world, India could be the hub and

other asian nations, the spokes. But, china is now

catching up with the Indian of shoring industry… at the same

time,its manufacturing sector in full fledge. China seems to

have realized that any sector, no matter how profitable will

slump into recession once it reaches the peak. However, in

India, the service sector is still being milked dry, while we

actually need to shift our focus toward the manufacturing

sectors.

The point however, to be considered, is that china need not

be a replacement market for Indian talent but a

complementary market for growing business in japan and

servicing the local Chinese businesses. But setting up a

2
development centre in china is not that simple. Now, the exit

options at the moment are not clear. Even though the cost of

a Chinese programmer may be less than that of an Indian

programmer, there are other overhead costs which bring the

cost of development in china almost on par or above India.

20000

15000

10000

5000

0
INDIA CHINA SOUTH AFRICA

On comparision of all the above costs, India is the best

alternative. The Indian firms will have to look at these centres

as strategic resources to de-risk.

As far as the English speaking talent is concerned, India will

continue to be the base. At the moment, the Indian talent

supply looks sufficient. So much so, that there has been no

increase of salaries at the entry level for the last 2-3 years.

3
This is probably an indicator of the soon-to-come recession

in the service sector.

An attempt has been made in this project to identify the

various needs as to why India has to concentrate on

industrial development and propel the manufacturing sector

that is not being exploited to its fullest potential.

4
5
 SERVICE SECTOR IN INDIA

T
he growth of the service sector in both the

developed and developing world has been

phenomenal. As economies become

progressively service driven, greater wealth and

employment is being generated in this sector. Before we

begin, what exactly are the different types of services?

Services can be classified into four categories on the basis

of the service customization and customer contact, and we

would look at the categories as follow.

First of all would be the Service Factory, with such

examples as airlines, hotels/resorts and trucking. This is

the type where there is low customer contact and low

degree of customization. The services offered need to be

warm and exciting, and attention must be paid to

ambience and physical surroundings.

6
Secondly, the Service Shops, where there is high degree

of customization. The management must deal with skilled

labour and the key challenges would be keeping cost

down and quality up. Examples are hospital and auto

repair.

The third type of service would be the Mass Service,

where there is high level of customer contact and low level

of customization. Managing and controlling the workforce

would be the key and examples are retailing, wholesale

trade and school.

Lastly, the Professional Service Firms, with a high degree

of customer contact and customization. The key to this

type of services is the managing and controlling of people,

management's ability to deal with skilled workforce as well

as keeping cost down and quality up. Some examples are

doctors, lawyers, consulting firms and so on. Due to the

growing importance of the service sector, academics and

7
consultants worldwide have make efforts towards

improving the management of service businesses.

Similarly, in India, the service sector has been growing

rapidly over the last decade or so and the trend is likely to

continue. If one describes an economy based on its major

economic sector, then India made the transition from an

agricultural economy to a service economy in 1979. In

1985, the service sector accounted for 47 per cent of

GDP, having expanded at an average annual growth rate

of 7 per cent between 1980 and 1985 The share of

services sector in the real GDP in India has surpassed that

of agriculture and industry at a relatively faster pace as

compared to other industrialized nations.

Service sector has become the main contributor to the

GDP not merely in developed economies like U.S.A.

(71%), Japan(60%) & U.K.(67%) but also in developing

economies like China(33%), Indonesia(41%),

Pakistan(50%) & Brazil(56%).

8
 SHARE OF SERVICE SECTOR IN
THE VARIOUS ECONOMIES

41%
71%
USA
33% JAPAN
U.K
CHINA
INDONESIA
60%
67%

In the Indian context, it can be safely said that the service

sector now accounts for more than half of India's GDP

This sector has gained at the expense of both the

agricultural and industrial sectors through the 1990s. The

rise in the service sector's share in GDP marks a

structural shift in the Indian economy and takes it closer

9
to the fundamentals of a developed economy (in the

developed economies, the industrial and service sectors

contribute a major share in GDP while agriculture

accounts for a relatively lower share).

The service sector's share has grown from 43.69 per cent

in 1990-91to 51.16 per cent in 1998-99. In contrast, the

industrial sector's share in GDP has declined from 25.38

per cent to 22.01 per cent in 1990-91 and 1998-99

respectively. The agricultural sector's share has fallen

from 30.93 per cent to 26.83 per cent in the respective

years. It is true that the industrial sector too has grown,

1990s (except in 1998-99). But the service sector has

grown at a higher rate than industry.

Some economists caution that if the service sector

bypasses the industrial sector, economic growth can be

distorted. Service sector growth must be supported by

proportionate growth of the industrial sector; otherwise

10
the service sector grown will not be sustainable. This

project is a comprehensive study of the two important

sectors, namely manufacturing and service of China and

India.

11
PROBLEMS FACED BY CHINA IN
THE SERVICE SECTOR:

I
n China, banks continue to be keen on providing

support to larger players and are playing a relatively

small role in financing the private firms who are

rewriting its history.

While its banking system made good progress in divorcing

itself from interference by government, it still has a long

way to go. There is evidence that the government still

encourages lending to ailing State Enterprises. Again one

gets to see the same moral hazard that is omnipresent.

Banks still don't consider bad loans given to State

Enterprises a serious problem.

12
At the basic level the problems are similar to those faced

by any banking system that grows under the socialist

legacy. Competition is very much limited. Profit motive is

largely absent. The state ownership of banks and private

ownership of business is big mismatch. Unless banks are

also privatized, they are unlikely to develop profit motive.

the banking sector needs to be opened up for foreign

competition and foreign ownership. Deregulation of

interest rates will be another area of big change. The

change is already visible with many banks gearing up for

listing of their shares.

The state-owned banks saddled with about $150 bn of

NPAs are considered technically bankrupt. Though the

bad debts have been transferred to AMCs, it merely

transfers the burden from one to another. The bottom line

is that the system has to bear the cost of these NPAs.

With lack of alternative avenues of investment in the

13
market place, banks are still flush with deposits and the

state guarantee is also construed as risk free investment.

The need of the hour is to totally liberate the banking

system .

14
 CHINA Vs. INDIA

A COMPARITIVE STUDY

C
hina and India each have a population of over

1 billion people. Their collective population

amounts to more than 33% of the world

population. Their countries are geographically large and

their population is composed of a wide range of ethnicity,

each speaking their own language or dialect. Yet, over the

last 20 years, China's GDP growth, GDP per capita growth

and labour productivity have been significantly higher than

that of India. Why is this? What should India do to

compete with China and establish itself as the world's

workshop, factory and supplier of quality goods and

services? Although India has the major human resource, it

has failed to utilise its potential to create a vibrant

manufacturing sector like that of China There was not

15
much difference in the economic performance roughly until

1980, when the per capita incomes were also similar. Over

the last quarter century, both instituted economic reforms

and economic growth accelerated.

As the history goes, in 1947 India achieved independence

and it is in the year 1949 that in China communists

assumed power. Both the economies made modest

beginning toward industrialization. In the early 1950s,

China was better placed than India to extract resources

from agriculture to finance the planned industrialization

program. India didn't pay attention to agriculture until the

food crisis of the 1966-67.

China's current account balance stands at a huge plus, at

nearly $30 billions, while for India it has been a minus

throughout the last four decades.

16
China's FDI strength stands apart. Over 75 percent of FDI

that China received, went to new enterprises. In India,

about 65 percent of the little FDI went into M&A.

Another area where India failed and China achieved

immensely is the area of labor reform. India succeeded in

overprotecting the interests of workmen making the

restructuring of the industry impossible

China embraced globalization and trade enthusiastically,

welcoming foreign direct investment with no inhibitions,

and gradually gaining control of world markets for low-tech

labor-intensive manufactures.

China initiated reforms a decade earlier than India's

reform. China's economy grew at double the rate of India's

during the '80s and early '90s. While successive Indian

governments restricted the import of technology from the

17
West and Japan, the Chinese governments encouraged

them.

As a result, the gap widened considerably. While reforms

in India are supposed to have been initiated in 1991, the

doctrinaire socialist policy had begun to be diluted in the

second innings of Indira Gandhi.

The process of liberalization continued under Rajiv

Gandhi, and more dramatically after 1991. The growth rate

doubled from the previous rate, but still lagged that of

China.

The result has been that starting with more or less the

same per capita incomes 25 years back, Chinese incomes

today are double that of India's -- a result not only of faster

GDP growth, but also of a lower population increase.

Today, apart from higher incomes and lower poverty, the

areas in which China is far ahead of us are literacy, FDI,

18
labor rationalization in the public sector and infrastructure

investments.

Thus, the post-reform China has successfully created

manufacturing conditions that have redefined the concept

of productivity. With interest rates being relatively low at

around 4-6 percent, high productivity of labor, enabling

infrastructure, lower input costs, Chinese private firms

have evolved themselves into mighty price warriors.

19
20
CAUSES OF LIBERALISATION IN

CHINA

I
n the early 1990s was that after Tiananmen Square

in 1989, the conservative economic planners took

control of the country. At that time the State Owned

Enterprises (SOEs) ie. China’s PSUs were virtually

bankrupt because of the tight economic controls that the

central planners imposed on the country.

In the 1980s, there was some private sector activity, but

when these activities became politically and ideologically

problematic for the leadership after Tiananmen, they

cracked down on private firms. So in 1991 there was a

substantial reduction of economic growth and the Chinese

external sector ran into difficulty. It was this difficulty that

21
prompted the leadership to open up the Chinese economy

to FDIs.

LIBERALISATION-ONE STEP AT
A TIME

T
his liberalization strategy of the Chinese government

can be broadly classified into two stages:

Stage one: Restructuring SOEs, rather than privatising

them.

Stage Two: Attracting FDI.

In the first fifteen years of liberalization, China

concentrated on aforesaid two areas.

Then in 1992, they substantially liberalised FDI controls.

This strategy has proved successful FDI came in response

to the weaknesses in the SOEs, as foreign firms didn't

think the SOEs could compete with them and to add to

that, the economic prospects of the country looked good.

22
In 1998, Chinese govt also allowed privatisation,

especially of smaller SOEs. They allowed the banks to

lend capital to private entrepreneurs. They also improved

legal and political treatment of private entrepreneurs. Also,

they began to liberalise the policies toward the domestic

private sector. Reforms focused on bringing an element of

micro autonomy. These efforts set in motion a self-

propelling mechanism that led to the emergence of new

class of private enterprises who changed the economic

scenario considerably.

23
 TTHE TVE PHENOMENON:

he real force behind China's economic achievement

appears to be the country's ability to take the industry to

rural China as against the common model of industry

concentration in urban cities.

Harbingers of this revolution is something called 'Town

and Village Enterprises (TVEs). The TVE phenomenon

that led to worldwide spread of China's standard and

cheap products . By the 1980s the State Enterprises (the

public sector companies) were losing steam. This led to

displacement of many skilled workers. They had the

choice of returning to their native places.

About the same time the Non-Resident Chinese became

wealthy and were willing to play venture capitalists. They

provided funds to the homeland's businesses, which

promised a good return. They found that the rural

24
entrepreneurship coupled with the skilled worker from the

big industry was an ideal combination to unleash a

revolution. They not only funded these businesses but also

acted as buyback agents of the production.

Special thrust was given to light and medium enterprises

where investments required are limited. This strategy

delivered results. Smaller private enterprises emerged as

a force to reckon with. It led to rapid economic growth.

Production of consumer goods increased. A consequent

25
rise in exports and foreign currency earnings led to a

general rise in personal incomes.

26
 LIBERALISATION OF INDIAN

ECONOMY

S
ince the start of liberalization of its economy in

1991, India has been going through an epochal

transformation into one of the world’s fastest

growing economies. Its gross domestic product rate was

picked up from 1.3 % in 1191 to 1992 to 7.8 % in 119-1997

and despite a global slowdown, moved up from 4.4% in

2000-01 to 5.6% in 2001-2002. Its GDP for 2002-2007 is

currently targeted at 8%. New investment opportunities for

2002-2007 total sum of $1.5 trillion spread over the various

sectors such as agriculture, bio-technology, communications,

electricity, financial services, manufacturing, mining, trade

and transport.

27
 GDP GROWTH IN INDIA

6
1991
PERCENTAGE 4 1992
2001
2
2002
0
YEARS

Financial liberalization consists of 3 sets of measures:

1. to open up a country to the free flow of international

finance.

2. to remove controls and restrictions on the functioning of

domestic banks and other financial institutions so that

they get properly integrated as participants in the world

financial markets.

3. To provide autonomy from the government to the

central bank so that its supervisory and regulatory role

vis-à-vis the banking sector is associated from the

28
 political process of the country and hence from any

accountability to the people.

4. To ensure that not all these measures are immediately

contemplated or demanded but they represent the

ultimate goal of financial liberalization which may be

ushered in by stages.

The pre-liberalisation period visualized a subordination of the

financial system to the perceived needs of economic

development. To this end, the interest rates were kept low.

Banks and financial institutions were required to hold

government securities upto a certain percent of their total

liabilities, permitting the easy sale and cheap servicing of

public debt, credit was directed to priority sectors , especially

agriculture, the RBI was retained as a part of the government

and hence accountable to the parliament for its actions.

There were problems with this regime arising from the fact

that the economy was experiencing capitalist development

29
and hence the credit needs of vast masses of small

producers and even small capitalist could not be met cheaply

from institutional sources. But within this overall constrain the

logic of the regime was to make the financial sector serve the

needs of development, which, it was believed, necessitated

its four features, namely:

 its being anchored to the national economy

 detatched from world’s financial flows

 Its being obliged to give precedence to production

over speculation for which it also had to observe

control on the price and direction of credit.

 Its being accountable to the people via the

government.

The purpose of financial liberalization is to reverse all these

features

30
  to detatch the infancial sector from its anchorage in the

domestic economy and to make it a part of the

international financial sector

 To make it operate according to the dictates of the

market which means the end of cheap interest rates of

the regime of directed credit and of the distinction

between productive and speculative credit needs.

 To remove it from the ambit of accountability to the

people.

In short, the purpose of financial sector reforms is to make

the financial sector an aliquot part of globalised finance.

An economy that has undertaken financial liberalization also

becomes vulnerable to crisis. When short term funds flow in

they tend to cause an appreciation of the exchange rate, the

consequence of which is to make imports cheaper relative to

home production and hence need to deindustrialization. But if

this is avoided through the central bank intervention that

31
supports the exchange rate by holding foreign exchange

reserves, then that in turn enlarges liquidity in the economy

which is typically used either for an expansion of luxury

consumption or for an expansion of investment in the

domestic non-tradable sector such as real estate, or for

financing speculative booms in asset markets especially the

stock market. When short funds begin to flow out, there is

both a downward pressure on the exchange rate and a

collapse of asset prices, which reinforce one another and

cause an avalance of outflow. Efforts by the central bank to

manage the forex market by raising the interest rate to

induce short term funds to say or to come back, have very

little effect or even have the opposite effect of further

enhancing outflows by aggrevating the asset market to

collapse.

On the other hand,interest rate increases which leads to a

contraction of the real economy. Thus, while the inflow of

short term funds, generally, has little impact by way of

32
increasing the growth rate of the real economy, the

withdrawal of short term funds does affect the real economy

adversely.

Effect of liberalization on the various cross-sections of the

Indian society:

 Trade liberalization led to an increase in the poverty gap

in the rural districts where industries more exposed to

liberalization were concentrated.

 Whatever the India-wide effects, of trade liberalization

were, rural areas with high concentration of industries

that were disproportionately affected by tariff reductions,

experienced slower progress in poverty reduction

 The regionally disparate effects of liberalization are not

consistent with standard trade theory predicting labour

migration in reponse to wage and price shocks,

equalizing the incidents of poverty across regions.

 There is little evidence of high levels of free allocation

with districts across industries.

33
  Especially rigid labour markets fostered by labour

market regulations in parts of India prevented the

reallocation of factors in the face of trade liberalization

in many areas.

 As those employed in traded industries were not at the

top of the income distribution before trade reforms, the

reduction in income caused some to cross the poverty

line or fall even deeper into poverty.

 This effect was aggrevated by the slower overall growth

in registered manufacturing employment areas with

inflexible labour laws which retarded the pull out of

poverty of the poorest subsistence farmers.

Liberalization has greatly benifitted the external sector. The

balance of payments, positions is quite comfortable. The

current account deficit is far from significant, and foreign

exchange reserves are growing steadily. The current level is

well above what we need for our developmental purposes.

34
The exchange rate has remained steady equally encouraging

is a decline in the size of external debt and the debt servicing

burden. All these should boost confidence of the foreign

investors in the long term prospect of the economy and one

can expect them to continue investing in India.

The economic reform continues to remain focused on

facilitating foreign investment and liberalization of trade.

Policy liberalization has been significant in this respect. The

domestic market is exposed to external competition.

However, the economic reform still lacks its focus on the

imperative of restructuring and competitiveness building of

the indegenious industry that continues to suffer from

inherent disadvantages of high capital costs, poor

insfrastructure, irrational duty structure, strangulating labour

laws, cumbersome procedures and numerous systematic

inefficiencies.

35
The basic objectives behind liberalization of the FDI policy

namely:

 Access to latest technology

 Management skills

 Exports

Have not been achieved so far. But in many sectors it has

destabilized the indigenous enterprises and in certain hi-tech

sectors, the foreign companies have secured total control of

the markets, even as they have brought little by way of

investment. In other words, foreign companies are gaining

control of the domestic market at a relatively lower cost and

without developing significant stake in the economy.

36
37
 BIRD’S EYE VIEW OF
MANUFACTURING SECTORS
OF
CHINA AND INDIA

C
hina’s emphasis on manufacturing is confirmed

by the fact that among the three sectors in

China, manufacturing takes the largest slice of

the pie, while in India, it is third behind services and

agriculture. Apart from this, the Chinese are so competitive

on a global basis that most nations, including India, find

them as a force to reckon with in textiles, consumer

durables, and so on. An essential offshoot of this is the

huge trade surplus China enjoys. Its exports race ahead

despite global slow down and its foreign investment

figures are much higher than India

38
Most people associate China's economy with over

investment in singular and unprofitable pursuit of export

products, low quality goods and marginal pricing. The truth

is that China's growth is the result of not only significant

investment, foreign and domestic, but by a sharp increase

in labour productivity, a growing export based on foreign

investment, strong domestic demand fed by low prices and

improved quality of products. The price competitiveness of

China's products is unmatched. China's businesses seem

to operate on the principle of sales maximization. The

strategy of sales maximization calls for setting of prices at

very low levels so as to create markets. The focus being

maximization of sales the resultant business model

necessitated concentration on such products that are

amenable to mass production and mass consumption.

With pricing set at rates unimaginable to competitors

abroad, the product offers tremendous value for money.

39
That must explain why Nike produces 40% of its footwear

in China while Galanz has 30% of the global market for

microwave ovens because of quality enhancements in

Chinese factories.

China's lower prices are not just due to cheaper wages -

Indian wages are comparable - but to lower taxes, lower

cost of capital, higher productivity of workers and shorter

delivery time.

• Productivity of Chinese workers can be 10 to 300%

higher than those of Indian workers, depending on the

product.

• Chinese shipments reach the US less than a month

after they leave the factory gate compared to six to 12

weeks for Indian exports. Delays in India are due to

bureaucracy in customs, loading and unloading in ports

and long transit times.

40
• China has attracted £216bn in foreign investment

(1980-2000) compared with £120bn in India.

• China's manufacturing sector in the 1990s expanded at

a rate of 12% per year, double the increase in India.

• Whilst it is true that many Chinese state-owned

companies receive loans from state banks at very low

interest rates with long repayment periods, about 70% of

China's industrial output comes from the private sector,

including multinational companies that have prudent cost

accounting.

Lower taxes, import duties and raw material costs are

important factors but a competitive environment and a

higher level of component manufacturers also help.

41
 PRODUCT SPECIFIC EXAMPLES

1. China produces more than 25% of the world's

televisions and easily surpasses India in both domestic

sales and exports.

2. China is planning to increase its textile exports to $ 50

billion in 2006. It is already preparing for the global textile

market opening up totally. And in India we tax polyester

fibre and other raw materials at the highest possible rate.

3. China produces eight times more ceiling fans than India

and half the price advantage is because of India's high

indirect taxes that affect domestic and export sales.

42
 CAUSES OF STAGNATION OF

INDIA’S MANUFACTURING
SECTOR
1. LACK OF INFRASTRUCTURAL DEVELOPMENT:

The sheer speed with which infrastructure projects get

implemented in China is commendable. Financial Times

rightly commented (January 21, 2004) "if thousands of

villagers have to be moved to make way for roads or

power stations, so be it: investment in infrastructure

underpins China's success."

Eg. The way the giant Three Gorges Dam has come up in

China,in contrast to the Narmada Dam project is an

example of how the infrastructure projects in India are

frustrated by misguided individuals going to court. This is

how democracy has been used in India to hinder growth.

43
 Agitation, endless court cases, environmentalists, and

other manifestations of a democratic, rule-of-law society

have not only delayed implementation perhaps by a

decade, but also added enormously to the costs while

direct cost escalation is perhaps only a small part of the

total cost to the economy. One can only imagine the

output lost because of the delays in the starting of the

project.

2. OUTDATED LAWS: China is ahead of India, in labour-

intensive manufacture. Indian labour laws, which protect

existing employment, but at the cost of creating new jobs,

have created a bias in favour of capital-intensive

investments.

An Ambani prefers a refinery, in which the only comparative

advantage comes out of the duty structure, to manufacturing,

say, toys in billions and exporting them to the world.

44
3. PROTECTIVE TREATMENT TO PUBLIC

SECTOR UNITS: China does not seem to be treating

its PSUs that is the state owned enterprises (SOEs)

protectively . Millions of jobs in state-owned enterprises

have been lost in preparation for world competition. But

new ones keep getting created in larger numbers. In

contrast, India not only condones over-manning, but also

keep thousands employed in factories that haven't

produced anything for decades. As a result, resources are

short for the much-needed investments.

4. STEP MOTHERLY TREATMENT TO

MANUFACTURITNG SECTOR: Wherever there is a tug-

of-war between agriculture and manufacturing, the

government always takes the side of agriculture. The price

45
 of cotton, sugar cane, fertiliser policy are only a few

examples of this short sighted approach.

5. DEPLETION OF RESOURCES: India

consumes almost thrice as much energy as any average

rich developed country produces. Generally, the rich

countries use less oil per unit of output than the

developing countries. This is because of variety of reasons

like better capital stock and modern infrastructure.

For Example, the fact that the rich countries are less

dependent on manufacturing also ahelps them to conserve

energy. This is where india’s energy-inefficient ways stand

out. China, whose economy is powered by manufacturing, is

less energy-intensive than India. India’s energy intensity is

almost 24% higher than china’s despite the fact that both the

countries are at around the same level of development.

46
300
250

200
150
100
50
0
INDIA THAILAND AFRICA CHINA

47
 REMEDIAL STEPS

I
ndia needs to immediately set right this situation and

give primacy to manufacturing as China has done.In

the process, the following steps may have to be

taken:

1. REDUCE INTEREST RATES: At real interest rates of 7

or 8 per cent, manufacturing companies will never be able to

compete globally because these interest costs, as a percentage

of total cost, become high.

2. ENSURE MOBILITY OF LABOUR. There has to be

the will to put through a modern labour policy, which will ensure

that industry has the right to move labour in and out. The only

way employment will increase in the manufacturing sector is if

we give the comfort to the owner that his labour is a variable

cost.

48
3. TAX CUTS:. The indirect taxes are way too high and need
to be brought down to international levels. By having high

excise duties, we are killing domestic demand, the key

component of our growth.

4. REDUCE RED TAPE: Indian Government must free the

Indian entrepreneur from the shackles of state and federal

bureaucracy and release the savings through lower direct and

indirect taxes.

5. ENCOURAGE COMPETITION: The government must

make "competition" India's national password and allow the

Indian flair for invention and application to take root.

6. SECTOR REGULATOR: Develop infrastructure

regulatory bodies funded from outside the government

49
 budget. Establish multi-sector regulatory agencies at

the state level.

7. DEVELOP LONG TERM DEBT MARKET: Mobilise

long term insurance money in the sector andInstitute

pension reforms. Establish a fully funded pension

scheme to increase national savings and the demand

for long term debt, making more funds available for

infrastructure.

8. CONTRACTING PROJECTS TO PRIVATE

SECTOR: Establish a single body for contracting,

clearances and interacting with private developers and

investors. India should have one public sector agency

undertake the project design and contracting,

50
 negotiation and documentation on the reasons why

award decisions were made.

9. PORTS: Develop a new institutional structure for the

sector by separating policy, regulatory and commercial

functions.

10. AIRPORTS: The focus of the airport authority of India

has to be shifted from operations to policy planning and

statutory functions. A separate independent authority

needs to be created to handle economic regulation for

the sector such as the leases and concessions.

51
11. ROADS: The money collected from petrol and diesel

must be used only for road development. Monitor and

gradually reduce public support for private road projects.

12. RAILWAYS: Corporatise Indian railways into indian

railways corporation and focus on the core business and

spin off the rest. Railways must get separate instituions for

policy regulation and management.

52
 COMPLICATIONS FACED BY
CHINA DUE TO INCREASED FDI

O
n the competitiveness side, it is seen that

increasingly, the gains of Chinese economic

growth have gone to foreign firms. the

Chinese balance of payments statistics indicates that in

the mid-1990s, the foreign income repatriations were only

about $6 billion. Today, they are about $30 billion. This is

a capital outflow from the current account. Some of that

money comes back in the capital account through

reinvestment, but, over the long run, the trend of

increasing capital repatriations has been dramatic. A lot of

the gains from economic growth have gone to foreigners

rather than Chinese entrepreneurs.

53
Today, with the FDIs on a constant rise, India is not too far

away from facing a similar problem as China in this

regards.

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T
he achievements of China's two decades of

reforms are regarded as an economic miracle.

Its reforms have made it the fastest growing

economy in the world. What is remarkable is the rapidity

with which it all happened. China’s success story shows

how a war-ravaged, communist country with scarce

resources could make a miracle happen. The

transformation was possible because china rightly

employed its major resource ie the human resource in the

productive, manufacturing sector. The Chinese experience

clearly demonstrates that the competitiveness does not

emanate from mere availability of resources. It emanates

when they are put to their best use.

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For quality of life to improve, even India we needs to put

the emphasis on manufacturing.for agriculture and

services to grow, we need more manufacturing. If the

domestic industry stops spending, the service industry will

find itself in throes of massive overcapacity. Our efforts to

help the service sector are laudable but the manufacturing

sector should not be ignored China did have a head start

compared to India in reforming its economy but they went

about it with great deal of planning. They invested heavily

in the manufacturing sector and created impressive

capacities in almost every sector of the economy. True,

they had a huge domestic market. But so do we. They

were looking at the global market when they created these

capacities. They also took their time to get into WTO so

that they could practice some amount of protectionism in

the intermediate period.

It is more difficult for Indian domestic private firms to grow

because they have missed the window of opportunity in

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the last 15 years. And now they have to compete with

Multi National Companies. That India would have to now

develop its manufacturing sector is certain. However, the

issue now is whether domestic firms can compete with

foreign firms.

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