A report on

“The Indian economy vs. the

Chinese economy”

Submitted to : Submitted by
Lec. Mr.jasleen singh Mandeep kaur (215)

Kiran khurana(214)

Jobanpreet singh(213)

MBA IIsem.(PTU)

Baba Farid Group Of

Institutions

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 CONTENTS

Acknowledgement …………………………………………………………. 01

Executive summary…………………………………………………………. 02

Overview …………………………………………………………………………
03

Globalization ………………………………………………………………..
10

Growth Trends: China’s Fast Track vs. India’s Gradualism

Model……………………………………………………………………………
11

Consumption - Macro: China Spends Twice As Much as India 12

Consumption - Micro: Markets for Most Products in India Are a Third to a Tenth
of China’s………………………………………………….. 17

Investments:
………………………………………………………………………….19

External Trade: China’s Share in Global Exports Is Six Times

India’s………………………………………………………………………………
…. 20

Summary of Key Reforms in India and China……………………… 23

BIBLOGRAPHY…………………………………………………………………
………………………. 29

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 ACKNOWLEDGEMENT

      “If words are considered as symbol of Approval and

Token of appreciation then let the words play the

heralding role of expressing my sincere gratitude and

thanks”. 

Any accomplishment requires the effort of many people this work is no different. We are

indebted to Mr.Jasleen Singh but for whose guidance and patience I would have not been able

to accomplish this task. I would like to express my gratitude to all those who gave me the

possibility to complete this project. I want to thank my teachers, who gave us a scope to make

this project.

I have furthermore to thank especially baba farid group of institutions, who gave me an
opportunity to do this project and encouraged me to go ahead with my project.

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Executive Summary
The Asia-Pacific region is experiencing tremendous demographic changes and
Unprecedented levels of urbanization.

 The region’s average food and drinks market growth between 2003 and 2007 was 25.0%, the
largest of any other region. Over the same time, growth in per capita Spend on food and
drinks averaged 18.5%.

 The region suffers from a consistently low per capita spend, as well as low scores for
commercial infrastructure and social structures. However, it boasts very large populations
and high levels of market growth.

 China has been ranked first overall, having received a score far above any other country. The
score is a result of high marks for market size, growth, and intensity, as well as population –
all pointing to the potential for high levels of reward.

 However, China ranks lower for per capita spend and social structures, reflecting the
widespread poverty in the country and some regulatory issues.

 Of the four Chinese food and drinks categories examined, the one exhibiting the most
growth is the soft drinks market.

 India has been ranked third overall, having received high scores in market size, growth and
intensity, as well as for its large population.

 Like China, India ranks low for per capita spends – again a reflection of widespread poverty
– and for commercial infrastructure, a result of the country’s highly fragmented retail market.

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 The Indian and the Chinese Economy: A Comparative
analysis
A LOOK INTO THE ECONOMIES OF BOTH THE COUNTRIES

INDIA-A GROWTH STORY:

INDIA is one of the oldest civilizations in the world with a kaleidoscopic variety and rich
cultural heritage. It has achieved all-round socio-economic progress during the last 60 years of
its Independence. To study the economic history, we divide the economic history into the Pre-
colonial period, the colonial period and the post-independence period.

The PRE-COLONIAL ERA can be said as the age of the Mughal and the different dynasties
that flourished during that era. A brief look into the economic happenings:

1525AD – 1550AD- India was the second largest economy in the world. The gross domestic
product of India in 1550 was estimated at about 40 per cent that of China.

1550AD – 1575AD- During this period also India still was the second largest economy in the
world. The gross domestic product of India in 1575 was estimated at about 50 per cent that of
China.

1575AD – 1600AD- During this period, the annual revenue of Emperor Akbar's treasury in 1600
at £17.5 million. The gross domestic product of India in 1600 was about 60 per cent that of
China.

1600AD – 1625AD- India was still the second largest economy. The gross domestic product of
India in 1625 was estimated at about 70 per cent that of China.

1625AD – 1650AD- The gross domestic product of India in 1650 was estimated at about 80 per
cent that of China.

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1650AD – 1675AD- The gross domestic product of India in 1675 was estimated at about 90 per
cent that of China.

1675AD – 1700AD- Annual revenue by the Emperor Aurangzeb's exceeded £100 million in
1700 (twice that of Europe then). Thus, India emerged as the world's largest economy followed
by China and France.

1700AD – 1725AD- During this period however China was the world's largest economy
followed by India and France. Collapse of the Mughal Empire and the resultant chaos triggered
India's long but slow decline on the world stage. The gross domestic product of India in 1725
was estimated at about 90 per cent that of China.

1725AD – 1750AD-During this period, Mughals were replaced by the Nawabs in north India, the
Marathas in central India and the Nizams in south India. China was the world's largest economy
followed by India and France. The gross domestic product of India in 1750 was estimated at
about 80 per cent that of China.

1750AD – 1775AD- China was the world's largest economy followed by India and France. The
gross domestic product of India in 1775 was estimated at about 70 per cent that of China.

COLONIAL PERIOD

The Colonial rule brought along a enormous change in the economic structure of the country.
The whole process of taxation was revised, which affected farmers a lot, a single currency
system with fixed exchange rates, `standardized` weights and measures, free trade was
encouraged and a kind of capitalist structure in the economy introduced. The raw materials and
man power were exported back to their home country which gradually caused a setback among
the millions of Indian population.
The finished goods were then brought back to India and sold at high rates among the well to-do
people. Other developments were in transport and communication like introduction of railways,
telegraph and so on was made which in a way affected the economy.
Towards the end of the colonial rule it was seen that development in the Indian economy was
hampered and it was reduced down from its glorious strong economic background.

1775AD- 1800AD- During this period, the East India Company began tax administration
reforms in a fast expanding empire spread over 250 million acres (or 35 per cent of Indian
domain). China was the world's largest economy followed by India and France. The gross
domestic product of India in 1800 was estimated at about 60 per cent that of China.

1800AD – 1825AD- China was the world's largest economy followed by India and France. The
gross domestic product of India in 1825 was estimated at about 50 per cent that of China.

1825AD – 1850AD- China was the world's largest economy followed by the UK and India. The
gross domestic product of India in 1850 was estimated at about 40 per cent that of China.

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1850AD – 1875AD- China was the world's largest economy followed by the USA, UK and
India. The gross domestic product of India in 1875 was estimated at about 30 per cent that of
China.

1875AD – 1900AD- USA was the world's largest economy followed by China, UK, Germany
and India.

1900AD – 1925AD- USA was the world's largest economy followed by the UK, China, France,
Germany, India and the USSR. The gross domestic product of India in 1925 was estimated at
about 10 per cent that of the USA. During this period, India became a net importer from net
exporter of food grains.

1925AD – 1950AD- USA was the world's largest economy followed by the USSR, UK, China,
France, Germany and India. The gross domestic product of India in 1950 was estimated at about
7 per cent that of the USA. About one-sixth of the national populations were urban by 1950.

1950 – 1975- Socialist Reforms were introduced.USA was the world's largest economy followed
by the USSR, Japan, Germany and China. The gross domestic product of India in 1975 was
estimated at about 5 per cent that of the USA. Current GDP per capita grew 33% in the Sixties
reaching a peak growth of 142% in the Seventies, decelerating sharply back to 41% in the
Eighties and 20% in the Nineties. From FY 1951 to FY 1979, the economy grew at an average
rate of about 3.1 percent a year in constant prices, or at an annual rate of 1.0 percent per capita.
During this period, industry grew at an average rate of 4.5 percent a year, compared with an
annual average of 3.0 percent for agriculture. Many factors contributed to the slowdown of the
economy after the mid-1960s, the main one was the socialist policies pursued by Nehru and his
cabinet.

The following shows the GDP of India at market price.

Year Gross Domestic Product US Dollar Exchange in Rs.

1950 99,340 4.79
1955 108,730 4.79
1960 171,670 4.77
1965 276,680 4.78
1970 456,770 7.56
1975 832,690 8.39

*source: Ministry of Statistics and Programme Implementation

1975 - 2000

Privatization Reforms were introduced.USA was the world's largest economy followed by Japan,
Germany and China. The gross domestic product of India in 2000 was estimated at about 4 per
cent that of the USA. India started having balance of payments problems since 1985, and by the
end of 1990, it was in a serious economic crisis. The government was close to default, its central

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bank had refused new credit and foreign exchange reserves had reduced to the point that India
could barely finance three weeks’ worth of imports. The government introduced reforms such as
the liberalization.
The following shows the GDP of India at market price.
Gross Domestic US Dollar Exchange Inflation Index
Year Exports Imports
Product in Rs (2000=100)
1980 1,380,334 90,290 135,960 7.86 18
1985 2,729,350 149,510 217,540 12.36 28
1990 5,542,706 406,350 486,980 17.50 42
1995 11,571,882 1,307,330 1,449,530 32.42 69
2000 20,791,898 2,781,260 2,975,230 44.94 100

* Source: Ministry of Statistics and Programme Implementation

2000 – THE PRESENT SCENARIO

There was the rise of Oligarchy. The gross domestic product of India in 2007 was estimated at
about 8 per cent that of the USA. Currently, the economic activity in India has taken on a
dynamic character which is at once, curtailed by creaky infrastructure, cumbersome justice
system, dilapidated roads, severe shortages of power and electricity yet at the same time
accelerated by the sheer enthusiasm and ambition of the industrialists and the populace.

The following shows the GDP of India at market price.

Gross Domestic US Dollar exchange Inflation Index

Year Exports Imports
Product in Rs (2000=100)
2000 20,791,898 2,781,260 2,975,230 44.94 100
2005 34,195,278 44.09 121

* Source: Ministry of Statistics and Programme Implementation.

THE CHINESE ECONOMY – A HISTORICAL PERSPECTIVE

The history of the china can be studied by dividing into the Qing dynasty (1625AD-1911AD),
the nationalist republic economy (1911-1950), and the People’s Republic (1950 onwards).

THE QING DYNASTY

1625 – 1650- China was the world's largest economy followed by India and France.

1650 – 1675- China was the world's largest economy followed by India and France. From this
time to about the 1800s, the seclusion of China on a world-scale grew to its peak during the
Ming Dynasty after the Yung-lo emperor's reign in the 1400s.

1675 – 1700- India was the world's largest economy followed by China and France.

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1700 – 1725- China was the world's largest economy followed by India and France. Collapse of
the central authority of the Mughal Empire and the resultant chaos triggered India's long but slow
decline on the world stage.

1725 – 1825- China was the world's largest economy followed by India and France.

1825 – 1850- China was the world's largest economy followed by the UK and India. Industrial
Revolution in the UK catapulted the nation to the top league of Europe for the first time ever.

1850 – 1875- China was the world's largest economy followed by the UK, USA and India.

1875 – 1911- USA was the world's largest economy followed by China, UK, Germany and India.
Collapse of the central authority of the Qing Dynasty and the resultant chaos triggered China's
short but rapid decline on the world stage.

NATIONALIST REPUBLIC

1911 – 1925- USA was the world's largest economy followed by the UK, China, France,
Germany, India and the USSR. The gross domestic product of China in 1925 was estimated at
about 20 per cent that of the USA.

1925 – 1950- USA was the world's largest economy followed by the USSR, UK, China, France,
Germany, India and Japan. The gross domestic product of China in 1950 was estimated at about
10 per cent that of the USA.

PEOPLE'S REPUBLIC

1950 – 1975- USA was the world's largest economy followed by the USSR, Japan, Germany and
China. The gross domestic product of China in 1975 was estimated at about 10 percent that of
the USA.

1975 – 2000-USA was the world's largest economy followed by Japan, Germany and China. The
gross domestic product of China in 2000 was estimated at about 10 per cent that of the USA.

2000 – Present -The size of China's economy has been rapidly increasing, though some now
question whether the cost has been too great, and whether the economy has 'overheated', with
side effects such as pollution and a substantial gap between rich and poor worrying many
Chinese. In 2008, China's GDP was about 25% that of the USA, and its manufacturing sector
was 80% that of the USA.

The table below shows the year wise GDP of China:

Year Gross domestic product Percentage change

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 1980 7.91
1981 4.738 -40.10 %
1982 9.1 92.06 %
1983 10.9 19.78 %
1984 15.2 39.45 %
1985 13.5 -11.18 %
1986 8.8 -34.81 %
1987 11.6 31.82 %
1988 11.3 -2.59 %
1989 4.1 -63.72 %
1990 3.8 -7.32 %
1991 9.2 142.11 %
1992 14.2 54.35 %
1993 14 -1.41 %
1994 13.1 -6.43 %
1995 10.9 -16.79 %
1996 10 -8.26 %
1997 9.3 -7.00 %
1998 7.8 -16.13 %
1999 7.6 -2.56 %
2000 8.4 10.53 %
2001 8.3 -1.19 %
2002 9.1 9.64 %
2003 10 9.89 %
2004 10.1 1.00 %
2005 10.4 2.97 %
2006 11.1 6.73 %
2007 11.4 2.70 %
2008 9.272 -18.67 %

Now that we have seen the historical economic importance of both the economies, we now need
to see the current trends and the happenings of both the economies in the present scenario.

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

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alter the strategy. The outcome of these choices has profound implications – not just for the 40%
of the world’s population residing in China and India but also for the future of Asia and the
broader global economy. As recently as 1991, China and India stood at similar levels of
economic development. Today, the Chinese standard of living is over twice that of India’s. 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. While each approach has its advantages and disadvantages, China’s
outstanding performance in the development sweepstakes over the past 15 years makes it a very
tempting model for the rest of Asia to emulate.

The industry share of China’s GDP has risen from 42% to 47% over the past 15 years,
maintaining a huge gap over India’s generally stagnant 28% manufacturing portion over the
same period. By contrast, the services share of India’s GDP increased from 41% in 1990 to 54%
in 2005 –well in excess of the lagging performance in China’

s services, where the GDP share went from 31% in

1990 to 40% in 2005.

Retaining the Fruits of Globalization

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Annual GDP growth has averaged 10% in China in the past three years and 8% in India. During
the same period, the global economy has enjoyed the biggest boom in decades, averaging 4.5%
growth a year. The unprecedented economic expansion is due to rising productivity growth from
globalization and information technology. China and India have been at the center of increasing
global integration and have done well in keeping the fruits of globalization at home
to fuel their economies.
The two economies have used different approaches to retain some of the globalization benefits.
China has pursued the typical East Asian model of recycling export revenue into fixed
investment. As capacity expands in line with rapid export growth, the domestic economy does
not suffer from high inflation, merely floating upward with the global economy. Indeed, inflation
in China is less than 2% despite 33% annual growth in exports for the past three years. This
reflects the excessive savings and investment bias of the political system. In addition to the
traditional East Asian investment/export approach, China has taken advantage of its strong
government and the country’s size to achieve unprecedented economies of scale for productivity
gains. In infrastructure, for example, the economies of scale have cut capital costs in
transportation, telecommunications, and electricity to below those of any other economy. In the
production and distribution of consumer goods, the economies of scale that China has achieved
are unmatched elsewhere in the global economy. The increase in scale economies has also
contributed to low inflation. India has also achieved a breakthrough in trade. Exports grew 25% a
year in 2002-05 compared with 10.5% in the ten-year period prior to this. However, India’s
export base at 19.5% of GDP in 2005 is much lower than that for China (38%) and so its export
success is not sufficient to drive the economy’s strong growth. India has taken advantage of its
flexible financial markets to attract foreign capital to fund its growth. Consumer credit, funded
substantially by foreign capital inflows into its capital markets, has given the Indian economy a
strong consumption anchor in this boom. India’s credit rose by 25% a year over 2002-05 versus
19% growth in fixed investment. In contrast, China’s credit increased by 17% and fixed
investment by 27% in the same period; even though the share of China’s fixed investment in
GDP is one third higher than India’s. India’s growth model bears more resemblance to the
Anglo- Saxon than the East Asian model. Its external accounts have
evolved in a similar fashion. Its current account balance deteriorated to a deficit equivalent to
1.7% of GDP in 2005 from 1.5% of GDP in surplus in 2003. In contrast, China’s current account
surplus improved to 7.2% of GDP in 2005 from 2.8% in 2003. While China and India have
different growth models, they have both captured the opportunities from the current wave of
globalization. Productivity gains have benefited from a low-base effect. As the production chain
becomes fully integrated across the world in the coming years, the low-base effect will disappear
and the tailwinds from globalization for China and India will weaken. How to sustain fast
productivity growth beyond the current boom is a major challenge for both economies.

… IN INDIA:
The threat to India’s growth over the next two years is its poor infrastructure. To address the
problem, India needs to mobilize capital more effectively and streamline the process for the
implementation of infrastructure development, objectives that require strong government.
Coalition politics, as now prevailing in India, tend not to produce strong governments. Since
India has been able to achieve high growth in the past three years even with a poor infrastructure,
the hope is for continuation of the same for the next two years. Another challenge to India’s
growth is the potential bursting of its asset bubble. India has experienced enormous growth in its

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stock and property markets, mainly through price appreciation in response to low real interest
rates. In this low interest rate environment, the most important factors are an increase in foreign
capital inflow and a rise in import competition, which have contributed to low inflation.
However, both factors have limited life-spans.
First, the foreign capital inflow is a component of the financial globalization that has kept risk
appetite high and rising. The increase in globalization has resulted in low inflation and strong
liquidity – the backdrop for the current euphoria surrounding high-risk assets. As globalization
matures, global liquidity conditions will normalize, and money can no longer be expected to rush
to India in the same quantities under the same terms.
Second, increasing import competition forces local producers to accept lower prices. Low
inflation in India, as in the rest of the world, is due to globalization benefits from a low base. As
production responds to new prices, imports no longer are as effective in keeping inflation low.
Buoyant asset markets have had a massive wealth effect on consumption while the low cost of
capital has encouraged more capital investment. This is probably the reason for India’s growth
rate surpassing its historical trend. The appropriate policy would be to raise interest rates
aggressively to contain the cost when the bubble bursts. However, as politics favor ‘keeping the
party going for as long as possible’, preemptive measures are not being taken. Increasing scale
economies is also a source of productivity growth for India and should offset any waning in
foreign capital inflows to sustain economic expansion. The modernization of India’s consumer
sector, in particular, could accelerate productivity growth. To achieve this, India needs to build a
transportation system that supports modern logistics and retool the regulatory infrastructure to
support large-scale production.

… AND CHINA:
The challenges to China in sustaining its high growth are quite different. The fundamental
weakness of the economy is low consumption. Household consumption at 40% of GDP is
exceptionally low by any standard. The excessive dependence on investment and exports makes
China vulnerable to the global economic cycle. The dominant role of the government in the
economy, its bureaucratic bias towards investment, and lack of organized forces in society to
check government excesses have led to macro vulnerabilities. Excessive liquidity due to low
consumption and foreign speculation on a possible renminbi revaluation has resulted in rapid
growth in the property market in terms of both production and price. The rise in property prices
has become another deterrent to consumption, as Chinese households hunker down to shelter
from escalating living costs. This further sustains the liquidity boom that feeds the property
sector. This sort of dynamic increases the imbalance in the economy. China’s cyclical risk and
structural imbalance are one and the same. Unless China is able to rebalance its economy, it
could suffer from mounting appreciation pressure on its currency and deflationary conditions at
the same time. The required reforms in China would not be hard to implement.
China just needs to find ways to give money to households.

Growth Trends: China’s Fast Track vs. India’s Gradualism Model

 Acceleration in growth in the post-reform period:

China’s economic growth has averaged 9.4% a year since 1978. Taking advantage of a sharp
rise in the working population ratio in the early 1970s, the government initiated major

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structural reforms in 1978, which allowed the virtuous interplay of labor and capital. India’s
economic growth underwent a structural shift at the start of the 1980s. Over the decade, the
government made an attitude shift in favor of the private sector. Economic growth averaged
5.7% a year in the 1980s versus 3.5% in the prior three decades. Since 1991 the government
has initiated major liberalization measures, adopting the open-economy model. India has
achieved average growth of 6% a year since 1991 and in the past five years, growth has
averaged a higher rate of 6.7%.

 The emphasis for China remains manufacturing and for India, services: In terms of
segment growth mix, China has followed a model similar to that of other Asian countries,
relying on manufactured exports as a key anchor for sustainable acceleration in growth
and integration with the global market place. As a result, China’s manufacturing sector
has recorded real growth of 11.5% a year since 1978. Growth in services and agriculture
averaged 10.6% and 4.6%, respectively, over the period. India’s growth mix, however,
has been significantly different from that of China. Over the past 15 years (since the start
of India’s reforms), India’s services sector growth has averaged 7.9% a year compared
with 6.0% for manufacturing and 2.5% for agriculture. In comparison, China’s
manufacturing growth has been about 12.6% a year over this period versus 10.1% for
services and 3.8% for agriculture.

 Differing focus on exports and fixed investments as growth drivers: China has been
over-reliant on exports for stimulating growth compared with India. Its export (goods
plus services) to GDP ratio has increased to 38% from 7% in 1980. India’s exports to
GDP ratio has risen to 19% from 6% in 1980. Similarly, China’s investment-to-GDP
ratio has increased to 49% from 20% in 1980 compared with a rise in India’s investment
share of GDP to 30% from 21% in 1980.

 Accounting for growth differences: A simplistic way to account for growth in a country
would be to consider the contributions from the three basic drivers:
(1) labor force inputs,
(2) capital inputs and
(3) total factor productivity.

Total factor productivity (TFP) is that part of non-factor inputs that enables higher
growth with less application of factor inputs. It encompasses the contribution of
technology and managerial aspects to the growth of real output. The two major areas
where India’s growth suffers compared with that of China are capital accumulation and
lower productivity growth. In the past 10 years, on average, more than 4.5 percentage
points of China’s GDP growth was accounted for by capital accumulation, which was
supported by its high national savings rate. In comparison, capital accumulation in India,
contributed only about 2.1 percentage points of GDP growth. For India, a large
proportion of its growth is accounted for by total factor productivity although it was
lower than that for China on average in the past ten years.

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Consumption - Macro: China Spends Twice As Much As India

 India’s consumption-to-GDP ratio is higher than China’s: Although in nominal US

dollar terms India’s GDP is 35% of China’s size, India’s consumption spending is about
45% of China’s. India’s overall consumption-to-GDP ratio was 72% in 2004 compared
with 54% for China. Not all the difference in consumption-to-GDP ratio is explained by
the demographic position (as defined by the age-dependency ratio) of the two countries.
Indeed, China’s consumption ratio was lower than India’s even while its demographic
position was similar to India’s in 1975. India’s active consumerism culture, populist
attitude of the government and the larger share of household income in GDP are the key
reasons for consumption’s relatively higher share of GDP.

 China’s consumption growth rate is higher than India’s: Although China’s share of
consumption in GDP is lower than India’s, its absolute spending on consumption was
US$1,074 billion in 2004 compared with India’s US$498 billion. China’s consumption
growth has also been higher at 7.6% over the past 10 years (compared with India’s 5.8%),
driven by its higher per capita income.

 Both India and China are witnessing a shift in the consumption mix: In India and
China, rising per capita income, changing demographics (rising young population),
rapidly emerging modern retail format and increased access to financing are bringing
about a change in the consumption basket. The share of organized sector products is
increasing while that of primary products is declining. The Indian consumption basket is
still relatively primitive currently and biased towards such products as food, beverages
and tobacco. An average Indian spends about 49% of his/her expenditure on products
other than food, beverages and tobacco compared with the average for China of 67%

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  Reforming the retail distribution network: China has already built a modern retail
distribution system to a large extent while India has just initiated such a network. The
new retail format is beginning to drive a change on the supply side in India. This is a
reverse of the process in China where the supply chain was relatively modernized for
exports before the shift was initiated in retail distribution. We believe this change in the
retail sector could lead to a significant transformation in India’s small & medium
manufacturing as well as farming segments. This, in turn, could provide India with the
opportunity to participate in the global export market for low-ticket manufactured goods.

Consumption - Micro: Markets for Most Products in India Are a Third to a Tenth of
China’s

 Consumer product penetration rates higher in China: Penetration rates and per capita
consumption are higher in China than in India for most broad-based manufactured
consumption items because China’s per capita income is 2.4 times that of India. In fact,
real per capita private consumption expenditure in China has increased by an average of
7.3% a year over the past 10 years compared with 5.3% in India.
 China’s consumer product market is significantly larger than India’s: Not only is
China well ahead of India in terms of exports, its domestic market for consumer products
is also much bigger. For consumer non-durables as well as durables China’s market
(annual sales) is about three to ten times that of India. Among durables, annual sales in
China for products like cell phones are about double those in India whereas at the other
extreme are items such as televisions where annual sales in China are about seven times
those in India For non-durables, India’s market is of similar size to China’s in basic
products like soaps but lags in products such as detergents, skin care products and bottled
water.

Investments:

 China’s investment-to-GDP ratio is 1.6 times that of India: In 2005, China’s

investment was 49% of GDP (US$1,082 billion) while India’s was an estimated 30% of
GDP (US$240 billion). The key driver for China’s high investment rate is a higher
domestic savings rate. FDI accounts for about 5.5% of total investment in China versus
2.7% for India. Indeed, China’s capex to GDP is now 2.7 times that of the US and it
accounts for about 11% of global investment.

 Rising share in global capex: While the world investment to GDP ratio has been
constant over the past 10 years, the ratios for India and China have increased; hence, the
combined share for the two in global investment rose significantly to 13.4% in 2005 from
7.2% in 2000 and 3.0% in 1990.
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External Trade: China’s Share in Global Exports Is Six Times India’s

 India lags China substantially despite an improvement in the trend over the past
few years: While India had a 2.2% share of global goods exports in 1948, this position
has been steadily eroded, reaching a low of 0.4% in 1981 and around 0.9% currently.
Even if we consider services, India’s combined share in goods and services was 1.1% in
2005 versus 0.4% in 1990 and 1980. In contrast, China’s combined share in goods and
services rose sharply to 6.6% in 2005 from 1.6% in 1990 and 0.9% in 1980.

 India takes the lead in high-end commercial services: On an aggregate basis, China’s
share in world commercial services exports is 3.3% versus India’s 2.3%. However, this
includes tourism and transport revenues. China’s total services exports are about US$81
billion compared with US$57 billion for India. The mix, however, is very different. India
has a bias toward scaleable IT software services and IT-enabled business process services
(IT and ITES). IT and ITES currently account for 37% of India’s total services exports.
We expect IT and ITES exports to rise to US$60 billion by 2010 from US$21 billion in
2005. Due to strong growth in IT and ITES, India’s commercial services exports have
grown 29% a year in the past five years compared with 21% for China. We believe that
India’s aggregate share in the global commercial services trade will start to outpace
China’s share in the next five to six years.

China's Import & Export (2010/11)

As far as exports of both the countries are concerned both the countries managed to do pretty
well in 2010.China's total imports and exports stood at US $2677.28 billion at the end of
November 2010. India's exports grew by 26.8% and imports increased by 11.2%. Below is
presented details about China's import and exports for the year 2010.

Comparison on the basis of GDP

India is the 11th largest economy in terms of the exchange rates, China occupies the second
position surpassing Japan. Compared to the estimated $1.3123 trillion GDP of India, China has
an average GDP of around $4909.28 billion. In case of per capital GDP, India lags far behind
China with just $1124 compared to $7,518 of the latter. To make a basic comparison of India and
China Economy, we need to have an idea of the economic facts of the countries.d high yield of
crops which can be exportedOne of the sectors where Indi enjoys an upper hand over China is
the IT/BPO industry. India's earnings from the BPO sector alone in 2010 is $49.7 billion while
China earned $35.76 billion. Seven Indian cites are ranked as the world's top ten BPO's while
only one city from China features on the lis

• Agriculture

17
 Agriculture is another factor of economic comparison of India and China. It forms a
major economic sector in both the countries. However, the agricultural sector of China is
more developed than that of India. Unlike India, where farmers still use the traditional
and old methods of cultivation, the agricultural techniques used in China are very much
developed. This leads to better quality anGoing by the basic facts, the economy of China
is more developed than that of India.

Political system

• India: Political democracy deeply entrenched, though not translated into economic
enfranchisement. Plays a role in creating more confused but less extreme patterns of
economic growth; allows for progressive legislation such as NREGA (National Rural
Employment Guarantee Act). India: Political democracy deeply entrenched, though not
translated into economic enfranchisement. Plays a role in creating more confused but
less extreme patterns of economic growth; allows for progressive legislation such as
NREGA (National Rural Employment Guarantee Act).

• China: Potential future instabilities because of excessive top-down growth orientation

SUMMARY OF KEY REFORMS IN INDIA AND CHINA

India China
How did the reform process begin?

The reform process in India was
triggered by a major macroeconomic
crisis in early 1991. This was caused
by a large fiscal and current account
deficit, high inflation, increasing
internal and external debt, three
changes of government in a span of
two years and socio-political
upheaval. In June 1991,the new
government (led by Mr. PV
Narsimha Rao from the
Congress Party, with Dr. Manmohan
Singh as the Finance Minister)
immediately made a commitment to
structural reform. The rupee was
devalued by 19% against the US
dollar in two quick moves in July
The Third Plenum (of the 11th Party
Congress Central Committee) held in
1978 is widely regarded as the starting
point of China's reform process. The
government initiated market oriented
reforms with the gradual
experimentation approach in
the rural sector and later followed it up
in the industrial sector. On the rural
front, China initiated a massive de-
collectivization program whereby the
land was distributed or contracted out
to households. This program was
accompanied by a sharp increase in
agricultural procurement prices and a
decrease in agricultural input prices.
The government later initiated a “big

18
 1991.Various external as well as
internal reform measures have been
implemented subsequently. The
government cut tariffs on imports,
reduced quantitative restrictions on
trade, liberalized the foreign
investment policy and encouraged
exports through tax exemptions. On
the internal front, licensing
requirements were removed for most
major sectors, undue control on
trade & business was reduced,
banking reforms were initiated and
the process of fiscal consolidation
was initiated.
Capital account reforms
FDI
bang” industrialization plan with
gradual liberalization of product
pricing, the setting up of new systems
that rewarded local government for
promoting development, allowing
greater autonomy of management to
SOEs, encouraging external trade
through deregulation, implementing
labor reforms, setting up special
economic zones, attracting FDI,
establishing township & village
enterprises and transferring
commercial banking operations from
just one bank (People's Bank of China)
to four banks.
In 1979, the Chinese government
granted legal status to foreign
investment. The establishment of
SEZs in 1980 also improved the
climate for FDI flows. In 1986, new
provisions were passed, which
included reducing fees for labor and
land use; establishing a limited foreign
currency market for joint ventures; and
extending the maximum duration of a
joint-venture agreement beyond 50
years. The FDI climate further
improved in 1990, when a number of
provisions were adopted to make
China an attractive destination for FDI
(e.g., protection from nationalization).
Hong Kong played an instrumental
role in the takeoff in FDI in the mid-
1980s to early 1990s amid the
migration of the manufacturing base
19

Portfolio In September 1992, the government
investments allowed FIIs to invest in Indian
capital markets. A single FII is
allowed to invest up to 10% in a
company. Initially, the government
limited the investment by FIIs to a
ceiling of 24% of paid-up capital;
however, this has since been
liberalized and FIIs are now allowed
to invest in Indian companies with
no limits (subject to certain sector
caps). In 2003, domestic mutual
funds/resident individuals were
allowed to invest in companies
abroad that have a reciprocal 10%
holding in a listed Indian company
(subject to specified conditions).
The reciprocity condition for
domestic mutual funds was relaxed
in 2006.
Internal Sector Reforms
Agricultural After independence India initiated
reforms some land reforms by dividing land
among the tenants and introduced
the green revolution, which
increased agricultural output in the
1960s. There have not been any
major reforms in agriculture since
the broader macro reform process
began in 1991. The government’s
spending on infrastructure for
agriculture has been very low. Total
public spending on agriculture
dropped to 0.4% of GDP in F2004
from 0.6% in F1991. Only about
40% of the land is irrigated, leaving
farmers exposed to the vagaries of
monsoons. Over the past few years,
the government has launched some
and the subsequent expansion.
Overseas Chinese and Hong Kong
enterprises had already established
robust track records in China before
WTO accession in 2002, which has
further helped increase FDI Inflows
into the country.
The Shanghai and Shenzhen stock
exchanges were established in 1990.
China allowed FIIs to invest in B
shares. Subsequently, China allowed
Qualified FIIs (QFIIs) to invest in the
A share market. The investment limit
for any stock is 10% of the total share
capital for each QFII, with a 20%
maximum for all QFIIs combined.
Restrictions on outbound portfolio
investment are gradually being
relaxed. Formal announcement was
made in mid-April 2006 for the QDII
(qualified domestic institutional
investor) scheme. Under this scheme,
Chinese institutional investors are
allowed to invest abroad. Domestic
banks, insurers and fund management
companies will be the first institutions
to do so.
The first sets of reforms in China were
in the agriculture sector. China
collectivized agriculture in the 1950s,
with the establishment of the
commune system. However, in the late
1970s a household responsibility
system was developed, under which
the communes’ land was divided
among households. This gave a big
impetus to the rural economy, with
incomes increasing by up to 50% over
1978-84. Recently, the government
has decided to increase its rural
spending plan. In March 2006,
Premier Wen Jiabao announced that
the government would make a
concerted effort to build “a new
socialist countryside” over the next
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 initiatives to accelerate agriculture
growth, including allowing
exchange-trading of commodities;
encouraging states to reform laws to
liberalize marketing of agricultural
produce; and encouraging banks to
increase lending to the agriculture
sector.
Industrial Key industrial reforms implemented
reforms in India are:
Removal of licensing regime: The
government abolished licensing
requirements for setting up all but 18
industries in 1991. In 1998-99,
further de-licensing took place and
now licenses are required only in
industries such as alcohol, tobacco
products and those pertaining to
defense equipment.
Removal of undue control of trade
and business: In 1991, the
government abolished the
Monopolies and Restrictive Trade
Practices Act, which constrained
corporate acquisitions and over-
regulated business practices.
Deregulation of product prices: The
prices of various goods, such as
steel, cement, paper and pulp, have
been deregulated since the reform
process began. Now most
manufactured product prices are
determined by market forces except
for a select few products like oil &
coal.
Reduction of protection to SME
sector: The government has over the
years been reducing reservations for
small-scale industries (SSI). The
number of items reserved was
reduced from a peak of 873 in 1984
to 506 in 2005.
Privatization of SOEs: In India, the
disinvestment process initially
focused on the transfer of minority
rights to public and financial
five years. The government announced
a 14% increase in its 2006 rural budget
to Rmb340 billion (US$42 billion,
1.7% of GDP). It also abolished the
tax on agricultural income and plans to
invest US$148 billion on rural roads
over the next five years.
Key industrial reforms implemented in
China are:
Reforming SOEs: In 1979 the
government allowed state-owned
enterprises to retain profits. Gradually,
the government is trying to build
professional management within
SOEs. It has also adopted SOE labor
reforms, such as the contracting of
labor, retrenchment and performance-
linked pay. The reform process picked
up in 1995 when the central
government adopted the idea of
‘grasping the large and letting go the
small’, wherein it intended to keep
about 1,000 enterprises as state-owned
and privatize the rest.
Deregulation of product prices:
Initially, China adopted a dual track
approach to price liberalization
wherein price determination was
through both planned and market
forces. By the mid-1990s, prices of
most products in China were
liberalized.
SME reforms: Since 1978, the
importance of Township and Village
Enterprises (TVEs) in China has
increased manifold. The TVEs are
hybrid institutions – alliances between
TVE entrepreneurs and local
government officials (acting in the
capacity of ‘owners’). TVEs have
emerged as one of the key growth
drivers of industrial output in China.
Encouraging private and joint
sectors: The government has allowed
non-state-owned enterprises to operate
21
 institutions. However, no controlling
right was sold to the private sector.
In 2003-04, the government
privatized a few public sector
enterprises, where it passed the
controlling interest to strategic
investors. However, the sale of
controlling stakes is unlikely to take
place in India in the near term, with
a clear change in government policy
in this area. The public sector
accounts for about 20% of industrial
output.
Labor reforms: India still lags on
labor reforms. Current regulations
require enterprises employing more
than 100 people to undergo a
complex approval process before
retrenching employees.
Fiscal Reforms Tax Structure: India initiated major
tax reforms in the early 1990s. It has
reduced the marginal rate of
personal tax from 56% in F1992 to
30% currently, lowered the
corporate tax rate from 50% in
F1992 to 30%, and cut the peak
excise and non-agriculture import
tariff from over 100% and 150% in
F1992 to 24% and 12.5%,
respectively. Since the mid-1990s,
the government has expanded the
tax net by levying taxes on services.
In 2005-06, the government replaced
the multiple-rate sales tax (ST)
system, which was independently
managed by various states, with a
synchronized single-rate system.
in China and they have proven to be a
primary driver of economic growth
since the 1980s. Non-state-owned
enterprises accounted for 61% of total
value-added industrial output in 2005,
up from 43% in 1998.
Privatization of SOEs: China has
pursued a limited form of privatization
by way of the sale of stakes in state-
owned companies to public and
foreign institutional shareholders. The
government has used this as an
opportunity to strengthen state-owned
enterprises. The amount collected in
China from the sale of stakes in SOEs
is many times that in India.
Labor reforms: China has been
successful in introducing a flexible
labor system. China has over the years
shifted to a more flexible policy on
labor in terms of both hiring and
firing. Geographical mobility of labor
is still limited, nevertheless.
Unfavorable conditions for migrant
workers in urban areas have limited
the pace of migration; hence, the
apparent labor shortage in recent years
in the coastal cities.
Tax Structure: China has
implemented major changes in its tax
structure over the past 20 years. It has
already cut its import tariff such that
the total import tariff as a proportion
of the value of imports is less than
2.5%, compared with 10% in India.
China adopted the value-added tax
system in the mid-1990s, which
further improved the efficiency of the
tax system. Tax incentives have been
widely used to attract foreign capital,
but the upcoming reform on unifying
tax rates on local vs. foreign
enterprises will be a landmark change
towards a more level playing-field in
China.
Fiscal Prudence: China has initiated
22
 The new system leaves the central
tax collection system independent.
The government has since
announced its intentions to shift to a
country-wide common goods and
services tax (GST) by 2010-11.
Fiscal Prudence: India pursued
some public finance reforms from
the early 1990s to the mid-1990s by
reining in expenditure and
augmenting revenues. This helped
reduce the consolidated fiscal deficit
to 6.4% of GDP in F1997 from 9.4%
in F1991. However, the emergence
of coalition government at the center
resulted in major slippage in
government finances and pushed the
fiscal deficit to a new high of 9.9%
of GDP in F2002. Although the
headline fiscal deficit has since
dropped to 7.8% of GDP in F2006,
the off-budget oil and electricity
subsidy burden remains high at
1.9%. We believe the government
needs to initiate major expenditure
reforms and move effectively to
outcome-based expenditure
management from the current
outlay-based system to cut non-
interest revenue expenditure.
Banking sector India has steadily strengthened its
reforms banking system, improving the
regulatory framework, imposing
strict prudential norms and
encouraging greater competition.
The government has allowed private
sector entry since the mid-1990s.
Private players have already built a
27% share of loan assets in the
banking system. The prudential
norms in terms of capital adequacy
requirements have gradually
tightened, and currently banks are
required to maintain a CAR of 9%.
Most banks already comply with the
norm of 9% CAR and will move to
several measures for better
management of government finances.
Previously, all government revenue
and expenditure had to go through the
central government. However, in the
1980s, the process was decentralized,
with the local government transferring
a negotiated amount to the central
government and keeping the rest. This
gave increased incentives to the local
governments to improve revenue
collection and tax efficiency.
Government accounts in China are
relatively well placed. The aggregate
fiscal deficit in China has remained
under 3% of GDP over the past 10
years.
Although China has initiated reforms
for the banking sector, its progress
pales when compared with India. Until
1980, there was hardly any
competition. The government then
created four large banks.
Subsequently, joint stock banks were
formed and foreign banks were also
allowed to open branches. By 2007,
foreign banks will receive national
treatment in China under the WTO
agreement. Of a total of around 115
banks in China, 53 do not yet comply
with the Basel I requirement of capital
adequacy ratio of 8%. However, over
the past few years the government has
23
 meeting Basel II requirements by
March 2007. In 2002, the
government enacted the Foreclosure
Act, which gave lenders powers to
forfeit assets of defaulting
borrowers, enabling quick recovery
of NPAs. One area where the Indian
banking system lags is in the
relatively restricted access to foreign
capital, which is capped at 20% for
the SOE banks and 74% for private
banks.
Infrastructure Except for telecoms, overall
Reforms progress in infrastructure has
historically been slow in India.
However, over the past two years,
infrastructure has gained the
attention of policymakers.
Roads: Investments in this long-
gestation sector have been low,
averaging just US$ 2.5-3 billion
over the past 10 years. The
government has now initiated a
US$38 billion seven-phase national
highway development, covering
65,000 kms of national highways to
increase road spending.
Seaports: Over the past few years,
the government has introduced
several measures to augment private
investment in the sector. The
average turnaround time at Indian
ports improved to about 3.4 days in
F2005 from 8.5 days in F1996.
Although a good beginning has been
made, progress is still slow, leaving
the overall cost-efficiency at Indian
ports relatively low compared with
world averages.
Telecom: The government opened
up services like cellular, radio
paging, and data services to the
private sector in F1993 and followed
it up with the opening up of basic
telephony to private participation
and foreign equity (up to 49%) in
taken steps to reduce NPLs and has
recapitalized the weaker banks. China
has also announced that certain banks
with a large number of overseas
branches will adopt Basel II norms
from 2010 to 2012. On balance, China
lags India in banking sector reforms.
While the overall regulatory system in
China is still fairly weak, the
government has undertaken major
initiatives to encourage adequate
investments in infrastructure.
Roads: China has largely relied on
government investments in this area.
Investments have averaged US$34
billion p.a. over the past 10 years.
Indeed, in 2005 China spent US$67
billion on road development. The
government plans a major push on
building rural roads over the next the
few years.
Seaports: China has built world-class
port infrastructure. A large part of this
is owned and developed by the
government. Hong Kong enterprises
have played a big role in the
development of China’s ports, but they
have also done so in partnership with
local governments.
Telecoms: Prior to 1994, the Ministry
of Post and Telecommunications
(MPT) was the regulator as well as the
biggest player in the Chinese market
through its arm, China Telecom.
Subsequently, the entity was split into
two parts: the Ministry of Information
Industry (MII), the operational arm,
and China Telecom. Later China
Telecom was further divided on the
basis of geography and business. In
recent years, China's telecom sector
24
F1995. It also fixed a 49% foreign
investment limit for cellular
telephony, which has recently been
increased to 74%. The favorable
policy environment has encouraged
the private sector to participate
aggressively, and private investment
has contributed significantly to
growth in the sector. Significant
technological change has resulted in
a 90% decline in the cost of
accessing telecom services over the
past seven years. Overall progress in
this sector is commendable with the
subscriber base having risen to 130
million as of 2005 from 12 million
over the past 10 years.
Airports: After neglecting airport
infrastructure for years, over the past
three years, the government has
initiated a number of policy
measures to attract the private sector
and improve efficiency. Some of the
major initiatives taken by the
government in this context are an
open-skies policy for passenger
traffic, restructuring and
privatization of Mumbai and Delhi
airports, announcing construction of
Greenfield airports in select cities
and undertaking the modernization
of other domestic airports.
Electricity: The electricity sector is
one area in need of serious and
immediate overhaul. The most
important investment deterrent in the
power sector is the poor financial
condition of the state electricity
boards (which own more than 90%
of the distribution in the country).
The electricity operations of the
public sector incur annual losses of
US$4-5 billion due to the large
burden of subsidies and theft in
electricity distribution. While the
government has initiated several
has become more open to foreign
investment. The government has
encouraged foreign companies to
establish telecom companies by
acquiring domestic companies and has
also allowed established joint ventures
to apply to operate telecom services.
Over the last ten years, China’s
telecom subscriber base has increased
17-fold to 744 million from 44
million.
Airports: Over the past 15 years,
China has spent approximately
US$14.8 billion on upgrading its
airport infrastructure. Recently, the
Civil Aviation Administration of
China (CAAC) announced plans to
invest a further US$17.4 billion over
the next five years on airport
infrastructure.
Electricity: The Electricity Law was
promulgated in 1995 and was the first
comprehensive legislation for the
electricity sector. In 1997, the State
Power Corporation (SPC) was formed.
In 2002-2003, the government split the
SPC into 11 separate companies,
which included two grid corporations,
five power generating groups and five
other companies. The government also
established the State Electricity
Regulatory Commission (SERC) to be
responsible for supervising and
regulating market competition in the
electricity industry. However, the
SERC shares power with regards to
pricing and electricity sector
investments and as a result the
government continues to control the
sector. Despite this, the operations are
far more efficient than those in India.
The government has taken the lead in
boosting investments in the sector.
China has increased its electricity
generation capacity to 508 GW
currently from 217 GW in 1995.
25
 measures over the past few years, SEZs: In 1980 China created four
the effective implementation of Special Economic Zones, which
reforms in this area is far slower enjoyed special policy benefits like
than required. This constrains lower tax rates in addition to good
investments in the sector with peak infrastructure facilities. The success of
electricity shortages at 12%. these SEZs led to the creation of more
SEZs: The government initiated the such zones, and this has been a
first major change in April 2000 for cornerstone of China’s reform success.
the establishment of Special
Economic Zones. However, the
response from investors has been
poor. In May 2005, the government
approved a new SEZ legislation
which is more comprehensive and
provides for a larger tax incentive
package. Since the new legislation
was passed, various private investors
have announced their intentions to
set-up SEZs. However, the response
from the private sector is largely for
investing in small SEZs where tax
benefits are a key attraction.

CONCLUSION

China and India represent the future of Asia – and quite possibly the future for the global
economy. Yet both economies now need to fine-tune their development strategies by expanding
their economic power bases. If these mid-course corrections are well executed – and there is
good reason to believe that will be the case – China and India should play an increasingly
powerful role in driving the global growth dynamic for years to come. With that role, however,
come equally important consequences. IT-enabled globalization has introduced an unexpected
complication into the process – a time compression of economic development that has caught the
rich industrial world by surprise. The resulting heightened sense of economic insecurity that has
stoked an increasingly dangerous protectionist backlash could well pose yet another major
challenge to China and India – learning how to live with the consequences of their successes.
The Indian government has recently signaled its intention to lift the economy to a higher growth

26
path, whereby GDP would expand at an annual rate of 10 per cent. High growth, according to the
government, provides the best antidote to poverty.29 The economic expansion that started in
2003/04 provides evidence that India’s growth rates in favorable circumstances are comparable
to Asia’s powerhouse, China. Whereas high domestic demand has increased inflationary
pressures in the Indian economy and dragged the current account into deficit, China’s economy
has experienced deflationary tendencies that seem to reflect excess supply in the economy. In
this regard, investment in infrastructure is imperative to increase the supply-side potential of the
Indian economy. It is equally critical to push forward with the economic reforms that have
progressed slowly of late, especially in terms of privatization and labor laws. The recent growth
in industry is a positive sign of the economic expansion reaching beyond the services sector – a
necessary evolution for employment growth and further progress in poverty reduction. An
increase in fiscal revenues would provide resources for spending in education, health and
infrastructure, without further worsening the delicate state of fiscal balances. A gradual phasing-
out of budget subsidies, replaced by direct cash transfers, could also form an important part of
fiscal reform.

Bibliography:

www.google.com

www.wikipidia.com

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