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 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 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
18000
16000
14000
12000
10000
8000
6000
4000
2000
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. 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.

 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.

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%).

SHARE OF SERVICE SECTOR IN THE
VARIOUS ECONOMIES

15% USA
26%
JAPAN
12%
U.K
CHINA
25% 22%
INDONESIA

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 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.

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

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 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 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 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 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.

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 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.

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,

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.

 GDP GROWTH IN INDIA

8
7
6
5 1991
PERCENTAGE 4 1992
3 2001
2
2002
1
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 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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