Description
Comparison of India and China on various economic Parameters like monetary policy, fiscal policy, labor productivity, FDI, foreign exchange reserves, employment etc
The Tiger and The Dragon A comparative analysis of India and China on various economic and developmental parameters
Contents
Introduction ............................................................................................................................................ 3 Analysis of economic and labour statistics ............................................................................................. 3 Fiscal Situation .................................................................................................................................... 4 Fiscal Policy ......................................................................................................................................... 4 Monetary Policy .................................................................................................................................. 4 Trends in Poverty ................................................................................................................................ 4 Widening Regional Disparity ............................................................................................................... 4 Exports ................................................................................................................................................ 5 Productivity of Labour......................................................................................................................... 5 Foreign Direct Investment .................................................................................................................. 5 Foreign Exchange Reserves ................................................................................................................. 5 Infrastructure ...................................................................................................................................... 5 Sustainability of Growth and Competitiveness....................................................................................... 6 Working Population ............................................................................................................................ 6 Innovation ........................................................................................................................................... 6 Capital Efficiency ................................................................................................................................. 6 Sectors of Growth ............................................................................................................................... 7 Dependence on Exports ...................................................................................................................... 7 Stock markets and Banking System .................................................................................................... 7 The Impact of the Global Economic Turmoil .......................................................................................... 8
Page | 2
Introduction
The economies of the Tiger and the Dragon i.e. India and China are as different as Mumbai and Shanghai, cities that represent the leading edge of commerce in each nation. Shanghai, with its maglev train, extensive highway system, massive redevelopment projects, numerous industrial parks and towering skyscrapers, reflects the centralized, top-down, exportoriented policies of China's authoritarian government. In China, no objective is so ambitious that a demolition crew and a fleet of concrete mixers cannot achieve it. Mumbai, on the other hand, sprawling and chaotic, its crumbling infrastructure groaning beneath the booming business sector, its teeming slums rolling up against gleaming factories and global headquarters, reflecting India's bureaucratic inefficiency, socialistic heritage, ethnic diversity and fractious democratic institutions. India seems to succeed, despite itself, owing to a vibrant entrepreneurial culture.
Analysis of economic and labour statistics
Both India and China rank among the front runners of the global economy. Before we begin an analysis of these 2 countries, it is imperative that we know about the political system and the market structure in brief. India continues to be an open, participatory, multiparty democracy, while China has an authoritarian, one party regime, though it is liberalizing. China began reforming its closed, centrally planned, non-market economy in 1978. India had functioning markets which were subject to rigid state controls until 1991 until the advent of the economic reforms advocating globalization, liberalization and privatization. The following table sheds light on some macroeconomic data for these 2 countries for the year 2008-09: India China GDP around $1.209 trillion around $7.8 trillion GDP growth 6.7% 9.1% Per capital GDP $1016 $6,100 Inflation 7.8 % -1.2 % Labour Force 523.5 million 807.7 million Unemployment 6.8 % 4.3 % Facts
Let us however look at various qualitative and quantitative factors, which would help us understand these 2 economies in a better way. Page | 3
Fiscal Situation
China appears to be in a much better fiscal position as compared to India, with a very modest fiscal deficit of 3.4% of GDP and a debt/GDP ratio of only 17.7% in 2008. In contrast, the central government’s fiscal deficit in India is 11.1% of GDP and a debt/GDP ratio of 81.9%. The IMF projects it to be around 17.9% and 76.8% by 2014 for China and India respectively.
Fiscal Policy
China's superior financial resources are evident in its aggressive fiscal stimulus package of yuan (CNY) 4 trillion ($585bn), or 14% of the country's CNY29 trillion gross domestic product (GDP). Therefore, it can be said that Chinese policy is more impressive; it was able to bring in a large fiscal stimulus package and try to hold up consumption and investment. India has implemented a number of fiscal stimulus packages, but they've been a very small share of GDP.
Monetary Policy
India has been cutting interest rates to improve credit access to businesses, and also injecting liquidity into the banking systems. But China has been more aggressive in its monetary policy, especially because it has also directed its banks (which are government controlled) to lend to the private sector. India, trying to maintain private sector independence, cannot influence private banking decisions. For the same reason, the Chinese government has a freer hand to prop up the stock and real estate markets when they are correcting, and also to intervene in the corporate sector. Basically, firms that are in trouble can be taken over by the government and restructured. In India, it is difficult to intervene directly in the private sector. India is therefore trying indirect measures to help the private sector - ease credit access, or ease rules for foreign investment or other regulations.
Trends in Poverty
Poverty has declined significantly in both countries since the 1980s after both experienced substantial acceleration in their growth of per capita GDP. 8% of the Population of China was estimated to be living below the poverty line in 2006 while an estimated 25% lived below the poverty line in India in 2007.
Widening Regional Disparity
In both China and India, there is significant widening of regional disparities in growth and poverty reduction. Rural China and western regions lag far behind urban China and coastal regions. In India Bihar, Orissa and West Bengal are high poverty states where as Punjab and Haryana are low rural poverty states. The national average per capita GDP is $977.7 but Goa is above $1500 while Bihar is closer to $200.
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Exports
India has become the 26th largest exporter in the world in 2007 while China has displaced USA to become the 2nd largest exporter in the world. Value of India's exports was 145.3 billion dollar in 2007 while China is way ahead with exports of 1.2 trillion dollar in 2007. The share of Brazil and India in world exports is still about one per cent, while China's share is approaching 10 percent.
Productivity of Labour
Estimates of labour productivity in manufacturing suggest that except in petroleum products and nonelectrical machinery, the productivity of a Chinese worker is higher than that of an Indian worker by anywhere from 30 percent to 180 percent, depending on the product. China has lower costs of production in many products than India.
Foreign Direct Investment
Foreign Direct Investment (FDI) has the potential of enhancing economic activity and employment in the country by complementing and supplementing domestic investment. FDI also plays a vital role in the up gradation of technology, skills and managerial capabilities. Foreign Direct Investment equity inflow in India increased to US $ 27.31 billion in the financial year 2008-09 where as foreign direct investment (FDI) in China jumped 23.58 percent annually to US$92.4 billion. A relatively better environment for manufacturing in China and bureaucratic obstacles at all levels of government in India explain the huge flow of FDI to China relative to India.
Foreign Exchange Reserves
China's foreign exchange reserves, almost $2 trillion, vastly exceed India's, which are close to $250bn and falling as the government draws upon them to defend the Indian rupee. In the last eight months, India's foreign exchange reserves have dropped by over $50bn, whereas China's continue to grow, if more slowly, given the plunging exports. The rupee's troubles stem from the withdrawal of foreign capital in response to the financial crisis.
Infrastructure
Compared to India, China has a much well developed infrastructure. Some of the important factors that have created a stark difference between the economies of the two countries are: manpower and labour development, water management, health care facilities and services, communication, civic amenities and so on. Although India has become much developed than before, it is still plagued by problems such as poverty, unemployment, lack of civic amenities and so on. In contrast to India's neglect of the basic infrastructure, China is investing its surplus in railroad, power, roads and water management in a concerted way. There is no question that China still lacks adequate infrastructure, but it has understood clearly the importance of modernizing its basic infrastructure to generate employment and adequate utilization of its vast population.
Page | 5
Sustainability of Growth and Competitiveness
The factors discussed thus far shed light on various economic and developmental parameters of the 2 countries, and they point to a clear leader i.e. China. However, a holistic picture could be painted only if we also look at the overall competitiveness and sustainability of growth of these nations. Certainly, democracy in India is not as efficient in allocating and enabling infrastructure projects and initial responses to, particularly, an economic crisis, as is China's more authoritarian and consensusbased political system. However, due to a variety of factors listed below, it seems as if India's long-term potential may be even higher than before.
Working Population
Due to its one-child policy, China's working-age population will peak at 1 billion in 2015 and then shrink steadily. China then will have to provide for a greying population that has limited retirement benefits. India has nearly 500 million people under age 19 and higher fertility rates. By mid-century, India is expected to have 1.6 billion people. That could be a source for instability, but a great advantage for growth if the government can provide education and opportunity for India's masses.
Innovation
China has yet to prove it can go beyond forced-march industrialization. China directs massive investment into public works and factories, a wildly successful formula for rapid growth and job creation. But considering its massive manufacturing output, China is surprisingly weak in innovation. A full 57% of exports are from foreign-invested factories, and China underachieves in software, even with 35 software colleges and plans to graduate 200,000 software engineers a year.
Capital Efficiency
China's reluctance to privatize state-owned enterprises (SOEs) diminishes the efficiency of the economy. In 2006, SOEs accounted for 31% of China's industrial output, according to the Organization for Economic Cooperation and Development. China also seems to be hugely wasteful in its allocation of resources. Its 9.5% growth rate in 2004 is little impressive if we consider that half of its GDP was ploughed into already-glutted sectors like crude steel, vehicles, and office buildings. Its factories burn fuel five times less efficiently than in the West, and more than 20% of bank loans are bad. Two-thirds of China's 1,300 listed companies don't earn back their true cost of capital. India, by contrast, has had to develop with scarcity. It gets scant foreign investment, and has no room to waste fuel and materials like China. India also has Western legal institutions, a modern stock market, and private banks and corporations. As a result, it is far more capital-efficient. A Business Page | 6
Week analysis of Standard & Poor's data shows that the average Indian company posted a 16.7% return on capital in 2004, vs. 12.8% in China. India utilises capital much more efficiently while China's failure to deal more aggressively with its state-owned enterprises will be a drag on other sectors.
Sectors of Growth
Amid other sectors, there are 2 sectors in which India clearly stands out:
Information Technology
Information Technology (IT) is a sector in which India has notably outstripped China. In 2002 itself, India’s IT exports were almost $10 billion, compared with $1.5 billion from China and it has been growing since then. India is five to seven years ahead of China in the software sector, primarily because of the lack of facility with the English language among Chinese and the absence of experienced project managers in China.
Pharmaceuticals
India is also ahead of China in pharmaceuticals. United Nations buys more than half of its vaccines from a private Indian company. Much of China’s vaccine production does not meet international standards. Competition from lower priced imports of manufactures from China elicited a defensive response from Indian industrialists to seek protection, and the government granted it through the levy of antidumping duties on China’s imports.
Dependence on Exports
India is less exposed to exports, which account for only about 20% of its GDP. However, China's heavy dependence on exports, which contribute about 40% to its gross domestic product (GDP), will prove to be a difficult handicap to overcome.
Stock markets and Banking System
The Indian stock market is more transparent, better regulated and more predictable than their Chinese counterparts. This same set of facts also applies to the Indian banking and banking regulation system and helps to support Indian development. The Indian banking and economic officials often have much greater and deeper experience than their Chinese counterparts.
Page | 7
The Impact of the Global Economic Turmoil
It may be the differences more than the similarities that determine how well India and China emerge from the turmoil now roiling the global economy. In this scenario, the depth of Indian experience with financial markets, entrepreneurship and economic management will give it an increasing edge. China will have to work harder and perhaps take more chances to develop the further policies needed to deal with a deepening crisis. Though the government will try to cushion the workers and of course the corporations, ultimately China's growth will be determined more by how quickly the global economy recovers. China may have a hard landing by the end of this recession, with a much greater loss in output as well as employment. Therefore, there is a much higher risk of social unrest arising in China compared to India. That being said, both India and China have ample of areas that need attention. It is believed by some that China should reduce its dependence on exports, boost domestic consumption, and channel the country's high rate of savings into its own financial institutions. India needs to address its current account deficit by reducing its dependence on oil imports. It should also encourage more resilient forms of capital inflow. India now must encourage foreign investment with a priority in infrastructure. The Indian private sector finds it very difficult to enter such heavy investment areas. While some progress has been made, India's demands for infrastructure services are still not being met. If the private sector is to play a big role in meeting India's infrastructure demands, then India needs sectoral policies and a regulatory framework that are conducive to private investment. All in all, both India and China have responded well to the crisis so far, but the real test will come as the depth of the problem becomes clearer, and the governments have to take further action.
Page | 8
doc_681271360.docx
Comparison of India and China on various economic Parameters like monetary policy, fiscal policy, labor productivity, FDI, foreign exchange reserves, employment etc
The Tiger and The Dragon A comparative analysis of India and China on various economic and developmental parameters
Contents
Introduction ............................................................................................................................................ 3 Analysis of economic and labour statistics ............................................................................................. 3 Fiscal Situation .................................................................................................................................... 4 Fiscal Policy ......................................................................................................................................... 4 Monetary Policy .................................................................................................................................. 4 Trends in Poverty ................................................................................................................................ 4 Widening Regional Disparity ............................................................................................................... 4 Exports ................................................................................................................................................ 5 Productivity of Labour......................................................................................................................... 5 Foreign Direct Investment .................................................................................................................. 5 Foreign Exchange Reserves ................................................................................................................. 5 Infrastructure ...................................................................................................................................... 5 Sustainability of Growth and Competitiveness....................................................................................... 6 Working Population ............................................................................................................................ 6 Innovation ........................................................................................................................................... 6 Capital Efficiency ................................................................................................................................. 6 Sectors of Growth ............................................................................................................................... 7 Dependence on Exports ...................................................................................................................... 7 Stock markets and Banking System .................................................................................................... 7 The Impact of the Global Economic Turmoil .......................................................................................... 8
Page | 2
Introduction
The economies of the Tiger and the Dragon i.e. India and China are as different as Mumbai and Shanghai, cities that represent the leading edge of commerce in each nation. Shanghai, with its maglev train, extensive highway system, massive redevelopment projects, numerous industrial parks and towering skyscrapers, reflects the centralized, top-down, exportoriented policies of China's authoritarian government. In China, no objective is so ambitious that a demolition crew and a fleet of concrete mixers cannot achieve it. Mumbai, on the other hand, sprawling and chaotic, its crumbling infrastructure groaning beneath the booming business sector, its teeming slums rolling up against gleaming factories and global headquarters, reflecting India's bureaucratic inefficiency, socialistic heritage, ethnic diversity and fractious democratic institutions. India seems to succeed, despite itself, owing to a vibrant entrepreneurial culture.
Analysis of economic and labour statistics
Both India and China rank among the front runners of the global economy. Before we begin an analysis of these 2 countries, it is imperative that we know about the political system and the market structure in brief. India continues to be an open, participatory, multiparty democracy, while China has an authoritarian, one party regime, though it is liberalizing. China began reforming its closed, centrally planned, non-market economy in 1978. India had functioning markets which were subject to rigid state controls until 1991 until the advent of the economic reforms advocating globalization, liberalization and privatization. The following table sheds light on some macroeconomic data for these 2 countries for the year 2008-09: India China GDP around $1.209 trillion around $7.8 trillion GDP growth 6.7% 9.1% Per capital GDP $1016 $6,100 Inflation 7.8 % -1.2 % Labour Force 523.5 million 807.7 million Unemployment 6.8 % 4.3 % Facts
Let us however look at various qualitative and quantitative factors, which would help us understand these 2 economies in a better way. Page | 3
Fiscal Situation
China appears to be in a much better fiscal position as compared to India, with a very modest fiscal deficit of 3.4% of GDP and a debt/GDP ratio of only 17.7% in 2008. In contrast, the central government’s fiscal deficit in India is 11.1% of GDP and a debt/GDP ratio of 81.9%. The IMF projects it to be around 17.9% and 76.8% by 2014 for China and India respectively.
Fiscal Policy
China's superior financial resources are evident in its aggressive fiscal stimulus package of yuan (CNY) 4 trillion ($585bn), or 14% of the country's CNY29 trillion gross domestic product (GDP). Therefore, it can be said that Chinese policy is more impressive; it was able to bring in a large fiscal stimulus package and try to hold up consumption and investment. India has implemented a number of fiscal stimulus packages, but they've been a very small share of GDP.
Monetary Policy
India has been cutting interest rates to improve credit access to businesses, and also injecting liquidity into the banking systems. But China has been more aggressive in its monetary policy, especially because it has also directed its banks (which are government controlled) to lend to the private sector. India, trying to maintain private sector independence, cannot influence private banking decisions. For the same reason, the Chinese government has a freer hand to prop up the stock and real estate markets when they are correcting, and also to intervene in the corporate sector. Basically, firms that are in trouble can be taken over by the government and restructured. In India, it is difficult to intervene directly in the private sector. India is therefore trying indirect measures to help the private sector - ease credit access, or ease rules for foreign investment or other regulations.
Trends in Poverty
Poverty has declined significantly in both countries since the 1980s after both experienced substantial acceleration in their growth of per capita GDP. 8% of the Population of China was estimated to be living below the poverty line in 2006 while an estimated 25% lived below the poverty line in India in 2007.
Widening Regional Disparity
In both China and India, there is significant widening of regional disparities in growth and poverty reduction. Rural China and western regions lag far behind urban China and coastal regions. In India Bihar, Orissa and West Bengal are high poverty states where as Punjab and Haryana are low rural poverty states. The national average per capita GDP is $977.7 but Goa is above $1500 while Bihar is closer to $200.
Page | 4
Exports
India has become the 26th largest exporter in the world in 2007 while China has displaced USA to become the 2nd largest exporter in the world. Value of India's exports was 145.3 billion dollar in 2007 while China is way ahead with exports of 1.2 trillion dollar in 2007. The share of Brazil and India in world exports is still about one per cent, while China's share is approaching 10 percent.
Productivity of Labour
Estimates of labour productivity in manufacturing suggest that except in petroleum products and nonelectrical machinery, the productivity of a Chinese worker is higher than that of an Indian worker by anywhere from 30 percent to 180 percent, depending on the product. China has lower costs of production in many products than India.
Foreign Direct Investment
Foreign Direct Investment (FDI) has the potential of enhancing economic activity and employment in the country by complementing and supplementing domestic investment. FDI also plays a vital role in the up gradation of technology, skills and managerial capabilities. Foreign Direct Investment equity inflow in India increased to US $ 27.31 billion in the financial year 2008-09 where as foreign direct investment (FDI) in China jumped 23.58 percent annually to US$92.4 billion. A relatively better environment for manufacturing in China and bureaucratic obstacles at all levels of government in India explain the huge flow of FDI to China relative to India.
Foreign Exchange Reserves
China's foreign exchange reserves, almost $2 trillion, vastly exceed India's, which are close to $250bn and falling as the government draws upon them to defend the Indian rupee. In the last eight months, India's foreign exchange reserves have dropped by over $50bn, whereas China's continue to grow, if more slowly, given the plunging exports. The rupee's troubles stem from the withdrawal of foreign capital in response to the financial crisis.
Infrastructure
Compared to India, China has a much well developed infrastructure. Some of the important factors that have created a stark difference between the economies of the two countries are: manpower and labour development, water management, health care facilities and services, communication, civic amenities and so on. Although India has become much developed than before, it is still plagued by problems such as poverty, unemployment, lack of civic amenities and so on. In contrast to India's neglect of the basic infrastructure, China is investing its surplus in railroad, power, roads and water management in a concerted way. There is no question that China still lacks adequate infrastructure, but it has understood clearly the importance of modernizing its basic infrastructure to generate employment and adequate utilization of its vast population.
Page | 5
Sustainability of Growth and Competitiveness
The factors discussed thus far shed light on various economic and developmental parameters of the 2 countries, and they point to a clear leader i.e. China. However, a holistic picture could be painted only if we also look at the overall competitiveness and sustainability of growth of these nations. Certainly, democracy in India is not as efficient in allocating and enabling infrastructure projects and initial responses to, particularly, an economic crisis, as is China's more authoritarian and consensusbased political system. However, due to a variety of factors listed below, it seems as if India's long-term potential may be even higher than before.
Working Population
Due to its one-child policy, China's working-age population will peak at 1 billion in 2015 and then shrink steadily. China then will have to provide for a greying population that has limited retirement benefits. India has nearly 500 million people under age 19 and higher fertility rates. By mid-century, India is expected to have 1.6 billion people. That could be a source for instability, but a great advantage for growth if the government can provide education and opportunity for India's masses.
Innovation
China has yet to prove it can go beyond forced-march industrialization. China directs massive investment into public works and factories, a wildly successful formula for rapid growth and job creation. But considering its massive manufacturing output, China is surprisingly weak in innovation. A full 57% of exports are from foreign-invested factories, and China underachieves in software, even with 35 software colleges and plans to graduate 200,000 software engineers a year.
Capital Efficiency
China's reluctance to privatize state-owned enterprises (SOEs) diminishes the efficiency of the economy. In 2006, SOEs accounted for 31% of China's industrial output, according to the Organization for Economic Cooperation and Development. China also seems to be hugely wasteful in its allocation of resources. Its 9.5% growth rate in 2004 is little impressive if we consider that half of its GDP was ploughed into already-glutted sectors like crude steel, vehicles, and office buildings. Its factories burn fuel five times less efficiently than in the West, and more than 20% of bank loans are bad. Two-thirds of China's 1,300 listed companies don't earn back their true cost of capital. India, by contrast, has had to develop with scarcity. It gets scant foreign investment, and has no room to waste fuel and materials like China. India also has Western legal institutions, a modern stock market, and private banks and corporations. As a result, it is far more capital-efficient. A Business Page | 6
Week analysis of Standard & Poor's data shows that the average Indian company posted a 16.7% return on capital in 2004, vs. 12.8% in China. India utilises capital much more efficiently while China's failure to deal more aggressively with its state-owned enterprises will be a drag on other sectors.
Sectors of Growth
Amid other sectors, there are 2 sectors in which India clearly stands out:
Information Technology
Information Technology (IT) is a sector in which India has notably outstripped China. In 2002 itself, India’s IT exports were almost $10 billion, compared with $1.5 billion from China and it has been growing since then. India is five to seven years ahead of China in the software sector, primarily because of the lack of facility with the English language among Chinese and the absence of experienced project managers in China.
Pharmaceuticals
India is also ahead of China in pharmaceuticals. United Nations buys more than half of its vaccines from a private Indian company. Much of China’s vaccine production does not meet international standards. Competition from lower priced imports of manufactures from China elicited a defensive response from Indian industrialists to seek protection, and the government granted it through the levy of antidumping duties on China’s imports.
Dependence on Exports
India is less exposed to exports, which account for only about 20% of its GDP. However, China's heavy dependence on exports, which contribute about 40% to its gross domestic product (GDP), will prove to be a difficult handicap to overcome.
Stock markets and Banking System
The Indian stock market is more transparent, better regulated and more predictable than their Chinese counterparts. This same set of facts also applies to the Indian banking and banking regulation system and helps to support Indian development. The Indian banking and economic officials often have much greater and deeper experience than their Chinese counterparts.
Page | 7
The Impact of the Global Economic Turmoil
It may be the differences more than the similarities that determine how well India and China emerge from the turmoil now roiling the global economy. In this scenario, the depth of Indian experience with financial markets, entrepreneurship and economic management will give it an increasing edge. China will have to work harder and perhaps take more chances to develop the further policies needed to deal with a deepening crisis. Though the government will try to cushion the workers and of course the corporations, ultimately China's growth will be determined more by how quickly the global economy recovers. China may have a hard landing by the end of this recession, with a much greater loss in output as well as employment. Therefore, there is a much higher risk of social unrest arising in China compared to India. That being said, both India and China have ample of areas that need attention. It is believed by some that China should reduce its dependence on exports, boost domestic consumption, and channel the country's high rate of savings into its own financial institutions. India needs to address its current account deficit by reducing its dependence on oil imports. It should also encourage more resilient forms of capital inflow. India now must encourage foreign investment with a priority in infrastructure. The Indian private sector finds it very difficult to enter such heavy investment areas. While some progress has been made, India's demands for infrastructure services are still not being met. If the private sector is to play a big role in meeting India's infrastructure demands, then India needs sectoral policies and a regulatory framework that are conducive to private investment. All in all, both India and China have responded well to the crisis so far, but the real test will come as the depth of the problem becomes clearer, and the governments have to take further action.
Page | 8
doc_681271360.docx