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CURRENT SCENARIO INDO-CHINESE RELATIONSHIP

S

ervice sector is SIndia is booming. Experts say that in the of shoring world, SIndia 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. SChina seems to have realized that any sector, no matter how profitable will slump into recession once it reaches the peak. However, in SIndia, 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 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.

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. 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.

T
services?

SERVICE SECTOR IN INDIA
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 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. 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 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%).

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 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 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.

PROBLEMS FACED BY CHINA IN THE SERVICE SECTOR:

I

n IChina, 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. 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 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 .

CHINA Vs. INDIA

C

A COMPARITIVE STUDY
hina and CIndia 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, CChina's GDP growth, GDP per capita growth and labour productivity have been significantly higher than that of CIndia. Why is this? What should CIndia do to compete with CChina and establish itself as the world's workshop, factory and supplier of quality goods and services? Although CIndia 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 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. 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 laborintensive 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 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, labor rationalization investments. Thus, the post-reform China has successfully created in the public sector and infrastructure

manufacturing conditions that have redefined the concept of productivity. With interest rates being relatively low at around 46 percent, high productivity of labor, enabling infrastructure, lower input costs, Chinese private firms have evolved themselves into mighty price warriors.

CAUSES OF LIBERALISATION IN

I

CHINA
n the early 1990s was that after ITiananmen Square in 1989, the conservative economic planners took control of the country. At that time the State Owned Enterprises

(SOEs) ie. IChina’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 prompted the leadership to open up the Chinese economy to FDIs.

LIBERALISATION-ONE STEP AT A TIME

T
them.

his liberalization strategy of the Chinese government can be broadly classified into two stages:

Stage one: Restructuring SOEs, rather than privatising

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. 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.

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 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 rise in exports and foreign currency earnings led to a general rise in personal incomes.

LIBERALISATION OF INDIAN ECONOMY

S

ince the start of liberalization of its economy in 1991, SIndia 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, biotechnology, communications, electricity, financial services,

manufacturing, mining, trade and transport.

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 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 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

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 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.

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