india and china_an economy comparison

India and China: An Economy Comparison


Date: 08/07/2011

Submitted by:

Ram Sundaresa Kumar (2012MLP011)

Anurag Kanoongo (2012MLP015)

Prasoon Malviya (2012MLP017)

Pradeepan N (2012MLP020)

Pratibha Sangwan (2012HRLP012)

Monika Sahni (2012HRLP22)

Sahiba Sanan (2012HRLP029)



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Contents

1. Executive summary……………………………………………………………………………………...3

2. Present Economic status of India and China……………………………………………………….4

3. Challenges faced…………………………………………………………………………………………4

3.1. By India………………………………………………………………………………………………..4

3.2. By China………………………………………………………………………………………………5

3.3. Common problems…………………………………………………………………………………..5

4. Comparison of Indian and Chinese Economies……………………………………………………6

4.1. GDP comparison……………………………………………………………………………………..6

4.2. Comparison of Investment, Gross National Saving & Inflation………………………………….7

4.3. Comparison of Import and Export Volumes……………………………………………………….8

5. Why does China have higher economic growth than India?..................................................10

6. Key Economic Reforms……………………………………………………………………………….12

7. References……………………………………………………………………………………………….15

8. Appendix…………………………………………………………………………………………………….

8.1. International Financial Statistics (IFS)………………………………………………………………

8.2. Key Economic Indicators……………………………………………………………………………..

8.3. Projection of both economies………………………………………………………………………...


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1. Executive Summary

“The love of economy is the root of all virtue.

George Bernard Shaw

India and China, two of the Asian giants have locked horns against one another to become a world

superpower. Historically, inevitable comparison of economies between these two giants has shown that

China usually emerges on top. The economists attribute this to the Chinese fast-acting government

implementing new policies making India’s political system appear sluggish. Both countries are

consistently analyzing their economic strengths and reinforcing their political and financial systems to

sustain and establish themselves as a superpower in the global economy.

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

govern both the economies. The study report shall include analysis of present economic status of India

and China underlying the challenges faced by both the economies. The comparison of various economic

parameters such as GDP, Investment, Import/Export volume etc. will be done which will help us

understand the reasons behind higher economic growth of China.

2. Present Economic status of India and China

Together accounting for 2.5 billion people, China and India are today the engines of growth in the midst of

rapid economic transformation in the global economy. In fact, driven by India and China, the emerging

Asian economies are no longer witnessing a slump, as per a report by the UK financial services major

Barclays.

The economies of India and China are influenced by a number of factors like social, political, economic

and other factors. The economy of China is more developed than that of India. In terms of exchange

rates, India is the 11th largest economy while China is in the 2

nd position surpassing Japan. Today, India’s

GDP is estimated at around USD 1.537 trillion while China’s average GDP is around USD 5.878 trillion.

China’s GDP growth has been marginally yet consistently ahead of its Indian counterpart. However, India

lags far behind China in the case of per capita GDP. Comparing the economic facts of these Asian giants,

China’s labor force, estimated at 813.5 million is almost twice that of India’s labor, estimated at 467

million. The agricultural sectors of both the countries form a major economic sector. However, China’s

use of agricultural techniques is far more developed than India thus yielding better quality and high

quantity of crops which significantly contributes to the exports. As a result, China shifted majority of its

agricultural labor to the manufacturing sector.

India enjoys an upper hand in the IT/BPO industry with the BPO sector alone contributing $49.7 billion

while China earned $35.76 billion. Although a socialist country, China began its liberalization, gained


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exposure to the global market and began receiving Foreign Direct Investments since the mid-1980s while

India’s liberalization policies were frozen only in 1990s.

Unlike India, China’s investments in manpower and labor development, water management, high quality

health care facilities and -services, communication and civic amenities has helped China create a positive

impact on its economy.

The Chinese capital market lags behind the India capital market in terms of predictability and

transparency. Owing to the quality of listed companies and India’s stock markets adhering to the

international guidelines, the Indian stock markets establish financial transparency and are more stable.

As on date, China lags far behind in the business forefront owing to its lack of management reform and its

inability to increase mergers and acquisitions with several organizations across the world. On the other

hand, India had rapidly emerged and is still expanding its mergers and acquisitions with several

international organizations.

With trade and manufacturing being the key sectors driving the Chinese economy ahead, India still strives

to strike the perfect balance between its service, manufacturing and trading sectors.

3. Challenges faced

3.1. By India

To lead the economy back to the high GDP growth rate of 9 percent per annum

Handling Overpopulation resulting in low per-capita income and increasing poverty.

High levels of debt and growth in lending by 30% because of a property boom. Besides the high

risk in such loans, if inflation increases further, it may force the RBI to increase interest rates. This

will increase interest payments and potentially reduce consumer spending in the future.

Sharp and growing regional variations among different states and territories in terms of poverty,

availability of infrastructure and socio-economic development

Literacy rate of 74% is still lower than the worldwide average and there exists a severe disparity

in literacy rates and educational opportunities between males and females, urban and rural areas,

and among different social groups

Low agricultural productivity due to large number of agricultural subsidies, overregulation of

agriculture, governmental intervention in labor, land, and credit markets, inadequate

infrastructure, small size of land holdings, partial failure of land reforms, inadequate irrigation

facilities, inadequate use and adoption of modern agriculture practices etc.

Corruption

Unemployment


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3.2. By China

NPL - Chinese bank loans stood at USD 6,500 per capita in 2010 compared to gross domestic

product (GDP) per capita of USD 4,400. China`s NPL, currently stands at 1% of total loans as on

today. Some analysts estimate that this could increase to 6% of loans, 10% of loans, and even

15% of loans within a few years’ time.

Expansion in economy is bringing inflation. Consumer price inflation, which was -1% a year ago,

is expected to cross this threshold in the next few months. Property price inflation has slowed to

about 9% following restraints in home financing, but the volume of housing transactions remains

undiminished, and prices continue to advance to new highs every month.

Property Boom: Very high increase in property prices. Growing concerns over the burst of such a

property bubble thereby leading to an economic slowdown.

Shortage of power: More power required with growing Chinese economy.

Growing Income Inequality: China’s economic growth has benefited the south and eastern

regions more creating a growing disparity between north and south which has led to migration of

farmers from north to south.

Unemployment: mainly due to many state-owned enterprises which are grossly inefficient. Lot of

unemployment prevalent in the agricultural sector.

Demographic transition– By 2050, China will be older and more age-challenged on every

important measure. The absolute numbers of those aged under 25 will decline by about 140

million, while those aged over 65 will rise by 220 million. These changes will lead to lower trend

growth, higher labor costs and inadequate social protection.

Likely transfer of power to new leaders in 2012 who are no radical reformers which could result in

more pronounced differences between those who favor faster economic and some political

reforms, and those who are skeptical about reform altogether and will lead to policy

procrastination.

3.3. Common Problems

Inflation

Unemployment

Regional inequality

High debt levels

Foster expansion of Chinese and Indian companies in Europe and of European companies

in India and China.

Produce joint programmes for education and training to capitalize on the enormous potential for

beneficial cooperation.


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4. Comparison of Indian and Chinese Economies

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.

As recently as 1991, China and India stood at similar levels of economic development. Today, the

Chinese standard of living is over thrice that of India’s, with China’s GDP per capita hitting US$ 4,382.14

in 2010 versus US$ 1,264.84 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.

1985 1990 1995 2000 2005 2010

India ($Billion) 229.563 325.928 367.725 479.871 809.723 1,537.97

China ($Billion) 307.017 390.278 727.946 1,198.48 2,256.92 5,878.26

0

1000

2000

3000

4000

5000

6000

7000

U.S

. do

llars

Nominal GDP (Current Prices)


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1985 1990 1995 2000 2005 2010

India ($) 296.296 378.036 385.801 460.269 716.177 1,264.84

China ($) 290.046 341.352 601.007 945.597 1,726.05 4,382.14

0500

100015002000250030003500400045005000

U.S

. do

llars

GDP Per Capita (Current Prices)

1985 1990 1995 2000 2005 2010

India (% of GDP) 20.382 25.126 25.496 24.293 33.9 37.874

China (% of GDP) 38.348 36.142 41.896 35.119 42.099 48.774

0

10

20

30

40

50

60

(% o

f G

DP

)

Investment

1985 1990 1995 2000 2005 2010

India (% of GDP) 18.221 21.883 23.582 22.905 32.63 34.69

China (% of GDP) 34.6 39.216 42.118 36.831 49.225 53.983

0

10

20

30

40

50

60

(% o

f G

DP

)

Gross National Savings


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1985 1990 1995 2000 2005 2010

India (% Change) 5.556 8.971 10.225 4.009 4.246 13.187

China (% Change) 9.3 3.1 17.1 0.4 1.817 3.326

0

2

4

6

8

10

12

14

16

18

(% C

han

ge)

Inflation, average consumer prices

1985 1990 1995 2000 2005 2010

India (% Change) 9.104 5.272 18.915 0.127 17.994 11.506

China (% Change) 57.348 -16.931 14.679 24.796 11.757 17.747

-30-20-10

010203040506070

(% C

han

ge)

Import volume of goods and services


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China: 5th Largest exporter of merchandise and primarily exports:

o Computers and accessories, videos, household goods, toys and sporting goods.

India’s exports grew by 26.8%.

China’s upper hand:

o Vast and cheap labor resources

o Domestic savings to initiate infrastructure in coastal areas

o Widespread production and distribution networks

o Large FDI inflows to facilitate more exports

1985 1990 1995 2000 2005 2010

India (%) -1.081 7.749 12.972 10.69 18.881 10.229

China (%) 6.889 12.75 18.225 25.224 23.672 34.573

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0

5

10

15

20

25

30

35

40

Pe

rce

nt

chan

ge

Export volume of goods and services

1985 1990 1995 2000 2005 2010

China (%) 6.5 12.027 19.279 26.637 23.672 33.759

India (%) 0.579 9.734 12.202 13.491 10.814 13.647

05

101520253035404550

Pe

rce

nt

chan

ge

Export volume of goods


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5. Why does China have higher economic growth than India?

China began its economic reforms 12 years before India and thus had a head start. Nevertheless,

by normalizing, China has still grown faster than India.

1985 1990 1995 2000 2005 2010

India (%) 17.234 16.951 16.645 18.379 17.486

China (%) 25.322 19.017 10.718 13.782 17.218 20.361

0

5

10

15

20

25

30

Pe

rce

nt

of

GD

P

General government revenue

1985 1990 1995 2000 2005 2010

India (%) 67.393 71.44 78.838 69.17

China (%) 3.305 6.948 6.137 16.445 17.635 17.711

0

10

20

30

40

50

60

70

80

90

Pe

rce

nt

of

GD

P

General government gross debt


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By instituting the one-child policy, China benefited earlier from a "demographic dividend" - effects

of which should start to level off and then reverse in the next five to ten years. India's

demographic dividend is still to come.

Government policy on attracting investments was very focused on upgrading (i) human

development index (HDI) factors such as education, literacy and health, and (ii) infrastructure -

both of these were crucial in attracting foreign investors to tap into this labour pool.

India’s low HDI rankings indicates its low labour pool. Similarly, its infrastructure notoriously lags

behind, and that is another key component in basic economic development. China has simply

done a better job improving HDI and infrastructure.

Many years after the initial reforms, many industry sectors in India are still held back by

bureaucracy and over-regulation. Sectors that were not burdened by over-regulation, such as

business process and IT outsourcing, have thrived and will continue to do so. Still, that provides

only 3 million jobs out of a country of 1.2 billion people. India has not been as successful in

spurring job creation and drawing people from the non-productive rural areas into the cities.

China's development, particularly in the last decade, has been investment-centric. Contrast that

with India, which has been consumption-driven. It is easier to control investment-driven growth

(e.g. forcing the state-owned banks to lend) - and thus grow very rapidly over a short to medium-

term horizon - than it is to control consumption, which is driven by individual decisions of millions

of consumers (and is largely correlated with growth in disposable income).

China benefited from its cultural and business ties to its Diaspora - in particular, Hong Kong and

Taiwan, which had blazed the trail as two of the original Asian Tigers and provided investment

capital, expertise, and trade channels. It was a win-win game as China got the capital and jobs it

needed to move up the economic ladder while the Hong Kong and Taiwanese businessmen

could massively scale their operations (and profits). China's export-centric development has

benefited tremendously from globalization and trade in the post-Cold War era.

China's one-party system enables faster decision-making than India's democratic process. When

you are playing catch-up to the advanced nations of the world, what needs to get done is often

pretty obvious and so the nation that can make decisions more quickly will simply get more done.

It remains to be seen what will happen to this advantage when you are no longer playing catch-

up, and need innovation to move the economy forward. Democracies are better in fostering

innovation, but at the lower rungs of development, it's more of a catch-up game, and China has

done a good job climbing up the first few rungs.


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6. Key Economic Reforms

INDIA: CHINA:

Indian reform triggered by major macroeconomic crisis in early 1991.

Caused by a large fiscal and current account deficit, high inflation, increasing internal and external debt, three changes of government within two years and socio-political upheaval.

June-July 1991: Structural reform by the newly elected Congress-led government, led by Mr.P.V.Narasimha Rao: Rupee was devalued by 19% against the US dollar in two quick moves.

China’s reform triggered by the Third Plenum (of the 11th Party Congress Central Committee) held in 1978.

The government initiated market oriented reforms with initial experimentation in the rural sector and later in the industrial sector.

Rural reform: Massive de-collectivization program initiated, whereby land was distributed or contracted out to households.

“Big Bang” industrialization plan wherein Government initiated gradual liberalization of product pricing and set up new reward systems for local governments that promoted development in various ways.

PARAMETER INDIA CHINA

External Sector Reforms

Exchange Rate

Devaluation of Indian rupee by 19%: US$1 = Rs.26 from Rs21.

The rupee was subsequently floated on the current account.

Current Exchange Rate: 1USD = INR 44.82240

Current account convertibility of the Renminbi (RMB) implemented in 1996 - followed a fixed exchange rate regime until recently.

July 2005: change in currency regime: Renminbi (RMB) revalued by 2.1% against the US dollar

Since 2005, fluctuations of 0.3% allowed on either side of the central rate which is announced by the central bank on the previous day

Current Exchange Rate: 1USD = 6.5 CNY

Tariffs

Weighted average import tariff rate lowered FY1991: 87% FY1994: 47% FY2006: ~15-17%

Peak rate on non-agricultural products reduced: FY1992: 355% FY2001: 35% FY2006: 12.5%

Dramatically lowered import tariffs.

Weighted average import tariffs lowered: 1980s: over 50% Current: 9.9%

Reduction to honor WTO commitment to reduce tariffs to 9.8% by 2010.

Capital Accounts Reforms

FDI

Initiated liberalization of FDI policy in 1991, which allows 100% FDI in most of its manufacturing sectors, except those pertaining to defense equipment.

100% FDI is allowed in infrastructure sectors except atomic

1979: Chinese government granted legal status to foreign investment

1980: The establishment of SEZs improved FDI flows.

1986: new provisions introduced which included fee reduction for labor and land use; establishing a


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energy.

In services, 100% FDI is allowed for many sectors other than civil aviation, retail trade, satellite TV/FM broadcasting, banking and insurance and professional services.

Reforms since 1991:

Removal of prior approval condition in case of existing joint ventures/ technical collaborations in the “same field”

Pricing of convertible instrument – greater flexibility introduced Liberalization of policy for non-cash capital contributions

Hundred Percent FDI in some area of Farm Sector

limited foreign currency market for joint ventures; and extending the maximum duration of a joint-venture agreement beyond 50 years.

1990: China made an attractive destination for FDI by introducing number of provisions like protection from nationalization.

Portfolio Investments

1992: FII investment in Indian capital markets allowed.

Each FII allowed investing up to 10% in a company.

Though initial investment ceiling of 24% of paid-up capital; later liberalization allowed FIIs to invest in Indian companies with no limits (subject to certain sector caps). FIIs/SAs free to invest till the total investment reaches USD175 million.

The reciprocity condition for domestic mutual funds relaxed in 2006.

Individual debt investment limits earlier allocated for 100% FIIs/Sub-Accounts will be realigned based on the remaining available limit.

1990: Establishment of Shanghai and Shenzhen stock exchanges.

China allowed FIIs to invest in B shares. Qualified FIIs (QFIIs) were allowed to invest in the A share market.

The investment limit for any stock: 10% of the total share capital for each QFII; maximum 20% for all QFIIs combined.

Restrictions on outbound portfolio investment gradually being relaxed.

Internal Sector Reforms

Agriculture Reforms

Post-independence, land reforms were initiated by dividing land among the tenants and green revolution was introduced.

Increased agricultural output in 1960s. No major reforms in agriculture since then.

The first sets of reforms in China were in the agriculture sector.

Agriculture collectivized in the 1950s, by establishment of the commune system.

Late 1970s: Household responsibility system developed - the communes’ land was divided among households.

Industrial Reforms

Removal of licensing regime: 1991: De-Licensing for several industries. 1998–99: Further de-licensing – Licenses now only for alcohol, tobacco and defense equipment

1979: state-owned enterprises allowed retaining of profits. SOE labor reforms adopted.

Deregulation of product prices:

SME reforms since 1978:


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related industries.

1991: Removal of undue control of trade and business:

Deregulation of product prices: Market forces driven pricing of manufactured product prices.

Reduction of protection to SME sector

Privatization of SOEs

Lagging Labor reform

Encouraging private and joint sectors

Privatization of SOEs

Successful flexible Labor reforms

Fiscal Reforms

Tax Structure: major tax reforms in the early 1990s.

Reduced personal tax marginal rate to 30% currently

Lowered corporate tax rate to 30%

Peak excise and non-agriculture import tariff cut to 24% and 12.5%, respectively.

Service tax levied.

Fiscal Prudence

Tax Structure: Total import tariff less than 2.5%, compared with 10% in India.

Value-Added tax system increased efficiency

Good fiscal prudence

Banking Sector Reforms

Improved regulatory framework

Private sector entry allowed since mid-1990s.

Foreclosure act: Power to forfeit assets

China lags India in banking sector reforms.

Infrastructure Reforms

Roads: Low investments in India over 10 years, averaging USD 2.5-3 billion

Telecom: Cellular and pager services –Recent foreign investment limit: 74%

SEZs: 2000: Initiation in establishing SEZs.

In May 2005, the government approved a new SEZ legislation which is more comprehensive and provides for a larger tax incentive package.

Roads: large government investments.

Telecoms: Last 10 years: China’s telecom subscriber base increased 17-fold to 744 million.

SEZs: 4 SEZs In 1980


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7. References

http://www.ibef.org/india/indiachina.aspx

http://business.mapsofindia.com/india-economy/india-vs-china.html

http://www.imf.org/external/pubs/ft/weo/2011/01/weodata/weorept.aspx?sy=1985&ey=2011

&scsm=1&ssd=1&sort=country&ds=.&br=1&c=924%2C534&s=NGDP_R%2CNGDP_RPCH

%2CNGDP%2CNGDPD%2CNGDP_D%2CNGDPRPC%2CNGDPPC%2CNGDPDPC%2CP

PPGDP%2CPPPPC%2CPPPSH%2CPPPEX%2CNID_NGDP%2CNGSD_NGDP%2CPCPI

%2CPCPIPCH%2CPCPIE%2CPCPIEPCH%2CTM_RPCH%2CTMG_RPCH%2CTX_RPCH

%2CTXG_RPCH%2CTXGO%2CTMGO%2CLUR%2CLP%2CGGR%2CGGR_NGDP%2CG

GX%2CGGX_NGDP%2CGGXCNL%2CGGXCNL_NGDP%2CGGSB%2CGGSB_NPGDP%

2CGGXWDG%2CGGXWDG_NGDP%2CNGDP_FY%2CBCA%2CBCA_NGDPD&grp=0&a=

&pr1.x=63&pr1.y=13

http://www.moneycontrol.com/news/world-news/china39s-debt-situation-not-far-offgreece-

analyst-_560660.html

http://www.minyanville.com/businessmarkets/articles/china-emerging-markets-political-

reform- economic/12/28/2010/id/31910

http://ibnlive.in.com/news/three-challenges-before-indian-economy/96464-7.html

http://en.wikipedia.org/wiki/Economy_of_India#Economic_trends_and_issues

http://www.quora.com/Why-is-Indias-economic-growth-rate-lower-than-Chinas

China and India: A comparison of two trade integration approaches [Article] by Przemyslaw

Kowalski at Organization for Economic Co-operation and development.

China and India: Economic Performance, competition and co-operation – an update by

T.N.Srinivasan

China and India: A comparison of trade, investment and expansion strategies by Renfeng

Zhao, Chatham House.

http://www.ibef.org/india/indiachina.aspx

http://business.mapsofindia.com/india-economy/india-vs-china.html

http://www.imf.org/external/pubs/ft/weo/2011/01/weodata/weorept.aspx?sy=1985&ey=2011&scsm=1&ssd=1&sort=country&ds=.&br=1&c=924%2C534&s=NGDP_R%2CNGDP_RPCH%2CNGDP%2CNGDPD%2CNGDP_D%2CNGDPRPC%2CNGDPPC%2CNGDPDPC%2CPPPGDP%2CPPPPC%2CPPPSH%2CPPPEX%2CNID_NGDP%2CNGSD_NGDP%2CPCPI%2CPCPIPCH%2CPCPIE%2CPCPIEPCH%2CTM_RPCH%2CTMG_RPCH%2CTX_RPCH%2CTXG_RPCH%2CTXGO%2CTMGO%2CLUR%2CLP%2CGGR%2CGGR_NGDP%2CGGX%2CGGX_NGDP%2CGGXCNL%2CGGXCNL_NGDP%2CGGSB%2CGGSB_NPGDP%2CGGXWDG%2CGGXWDG_NGDP%2CNGDP_FY%2CBCA%2CBCA_NGDPD&grp=0&a=&pr1.x=63&pr1.y=13









http://www.moneycontrol.com/news/world-news/china39s-debt-situation-not-far-offgreece-analyst-_560660.html

http://www.moneycontrol.com/news/world-news/china39s-debt-situation-not-far-offgreece-analyst-_560660.html

http://www.minyanville.com/businessmarkets/articles/china-emerging-markets-political-reform-%20economic/12/28/2010/id/31910

http://www.minyanville.com/businessmarkets/articles/china-emerging-markets-political-reform-%20economic/12/28/2010/id/31910

http://ibnlive.in.com/news/three-challenges-before-indian-economy/96464-7.html

http://en.wikipedia.org/wiki/Economy_of_India#Economic_trends_and_issues

http://www.quora.com/Why-is-Indias-economic-growth-rate-lower-than-Chinas

india and china_an economy comparison

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