Comparison of India and China Economy

The above 2 charts depict the GDP of India since 1950 until 2008. Indian Economic growth can be classified into 3 phases. The first phase was 3 decades after Independence, during this period the growth was very slow, then came the period of moderate growth between 1980 to 1991. The 3rd phase was the high growth phase after the economic reforms of 1992. The reasons in details are discussed further in this Paper. Chart: 3 The above chart provides an overview of the GDP of India and the contribution of the 3 sectors (Agriculture, Industry and Services) towards GDP and the evolution of each of the sectors over the period 1950 to 2007.

Until 70’s agricultural sector was the dominant sector with Services catching up with agriculture, since 80’s services have piped agriculture and has grown very fast and now it captures over 50% of the GDP. Manufacturing Industry has been very stable since the 60’s without any dramatic increase or decrease. Sector wise Growth contribution to GDP (India) Table: 1 The above table depicts the growth rate of each industry across the 3 phases of Indian economic growth. Sector wise employment – India Table: 2 The above table indicates the share and the growth of employment in each of the 3 sectors.

Agriculture employs over 50% of the total employment. But the most productive sector is Services with just 26% of labor share but contributes for 50% of the GDP. Chart: 4 Chart: 5 The above 2 charts depict the GDP growth of China since 1952. There is no unique pattern found here until 1992. Occasional hike and drop in GDP has been the trend for China and sometimes the GDP has also gone down to negative mainly during the 60’s. But after 1992 the trend has been steadily raising. China: Contribution to GDP Chart: 6.

The above chart depicts the contribution of Agricultural sector (Primary), Industrial Sector (Secondary) and Services Sector (Tertiary) to Chinese GDP. The Industrial sector has always been outdoing the other sectors consistently. Table: 3 The above table provides the contribution of the 3 sectors in 2007 and also the employment share of the each sector in 2007. The Labor is highly productive in Industrial sector than in Agricultural and Services. China started with economic reforms in 1979 and it is an accepted fact that their current position in the world is due to the economic reforms.

In other words the economic reforms in China were a grand success, which is rightly reflected from the GDP growth rate from 1979. On the other hand the economic reforms in India started only in 1992, so India is behind China at least by 13 years and the simple logic says that India has more to learn from China than the other way. Nevertheless even China has certain things to learn from India, but they are quite minimal. So in this paper we would pre-dominantly concentrate on the lesson that India need to learn from China.

2. Understanding the economic growth model of China In order to compare and learn from Chinese economic model, we need to first understand what is that which is special about the Chinese economy. Overall the Chinese growth story has been well planned and well executed. To quote David Wessel of the wall street journal “China is making an ordered, disciplined and sustained growth”. In other words China ensures that its growth is balanced for a massive country with 1. 3 billion people. The journey for China started 29 years back in 1979, after the rein of Mao Zedong from 1949 to 1978.

Deng Xiaoping who succeeded Mao introduced the economic reforms and there is no looking back after that. The government in China is dominated by the Chinese communist party. China is virtually ruled by the Chinese communist party without any real opposition. This in terms of economic reforms is a great asset for China as the policies are not disrupted in-between due to change in power. Nevertheless there are several other social and political impacts due to the single party setup in China, since this does not fall under our scope of study, let us not get deeper in the political environment of China and its repercussion in society.

The point I wanted to insist here is that for the sustenance of the economic reforms, continuity of economic development plan and the sustained faster growth for 29 long years is primarily due to the single party rule in China. China has been an agrarian country, with majority of the population of China was dependent on agriculture. The initial years of Chinese economic reform were highly focused on agriculture and Manufacturing sector as interdependent sectors. The agricultural growth in China is contributed by its industrial growth, but the industrial growth is not contributed by the agricultural growth.

This indicates a diminishing role of the Chinese agricultural sectors as the Chinese economy makes a major progress in its economic development. Even though the above argument of industrial growth is not contributed by agricultural growth may be true for today, it is not the same during the start of economic reforms. During the initial years the agricultural growth resulted in the productivity increase of the agricultural labors, which resulted in surplus man power in agricultural sectors. This surplus man power in agricultural sector moved towards and contributed for the manufacturing sector.

This helped the manufacturing sector to get man power at a low cost. So in the initial years the growth in agricultural sector contributed for the industrial growth, but today the agricultural sector is playing only a diminishing role in Chinese economy. During the initial phases of the economic reform (1979 – 1985), China had a tremendous growth in agricultural sector. Agricultural sectors average growth rate since 1953 to 1979 was a moderate 2. 6% , but the period 1979 – 1985 had an average growth rate of around 8% , which is dramatical.

The agricultural reform started with establishing a family production responsibility system, which features small-scale production and fragmentation of output and factor markets. This reform shifted the basic production management unit from collective farms to individual households. Other changes under the reform included sales of commodities to private parties and free flows of surplus rural labor to local industries and urban areas. The agricultural sector responded to these reforms with increased production of most major commodities. The industrial sector in China has always received top priority in economic development.

From 1949 to 1978, the Chinese industrial sector was developed at the expense of the agricultural sector through an “agricultural squeeze”. The agricultural sector was a resource to be exploited to serve the economic development strategies. To accumulate capital to serve economic development of the country’s underdeveloped industry, the government adopted a monopolized procurement system for agricultural products and marketed them at lower prices. This policy helped to maintain the low costs of labors and raw materials for major industries and created sufficient profits and capital investment for its industrial development.

As agricultural production efficiency improved through economic reform, an underemployment problem emerged in the agricultural sector. This called for a faster industrial expansion to transfer surplus labors from agricultural sector to the industrial sector. With the successful initial reform in agriculture, the government was encouraged to take bolder step to carry out a similar reform in the industrial sector in 1985. Before 1985, there were only a few experimental reforms in the industrial sector. The Chinese government made a decision to shift the focus of the economic reforms from the agricultural sector to the industrial sector in 1985.

The reforms concentrated on strengthening the vigor of enterprises along with forming market mechanisms, mainly pricing and macro-economic management systems. The market-oriented rural industrial sector grew quickly across China. Millions of laborers were moved from agricultural sector to the industrial sector. Meanwhile China began to establish special economic zones and opened 14 costal port cities. Most experimental reforms in the industrial sector were conducted in these areas and gradually spread into other regions. In 1992, further steps were taken to establish a market economy.

Measures included allowing state-owned enterprises to become independent corporate entities and market competitors. In agriculture, the government abandoned its tight control over production of major crops such as grains and oilseeds. Private groups were allowed to compete with state-owned enterprises in grain and other agricultural commodity markets. In addition, the price reform has led to the liberalization of prices for about 80 percent of all capital goods, over 85 percent of agricultural products, and over 95 of industrial consumer goods.

From 1979 to 1993, China’s total agricultural output value increased at an average annual rate of 6. 1 percent far surpassing the average annual growth rate of 2. 6 percent for the 1953 to 1978 period. But most significant agricultural growth happened during the 1979 and 1985 period. After 1985, agriculture as a whole has grown at a rate of 4. 1 percent per year, and production of grain crops has stagnated. On the other hand, the industrial sector showed a strong growth after 1985. China’s open door policy has greatly increased its involvement in international trade.

From 1978 to 1993, the total trade value increased by 128. 8 percent annually. The Chinese government has adopted a strategy of exporting labor-intensive manufactured goods and acquiring advanced technology and management skills from developed countries. Advanced technology and management skills have greatly improved productivity in both agricultural and industrial sectors and China’s competitiveness in international markets. Exports of labor-intensive manufactures goods have contributed to the growth of the China’s national economy. 2.

1. Factors Leading to China’s Success in Manufacturing 2. 1. 1. Preferential Government Policy Among developing countries, the openness of China’s trade and industrial policy are often cited as its comparative advantage. While interventionist government policies are often noted as adversely affecting economic efficiency, these policies have worked for China’s manufacturing sector. The manufacturing sector requires large provision of investment capital, coordination of the localization process and the monitoring of technology transfer.

More specifically, in the automotive and electronic sectors, the emphasis is on promotion of learning rather than innovation. To further develop these industries, the government needs to be more interventionist. Local governments such as Shanghai have been very successful in coordinating investments across firms in the automotive industry to ensure a smooth supplier network. To date, the Shanghai area is considered one of the most robust manufacturing centers for electronics and automotive parts.

The Chinese government has led investment in the manufacturing sector by giving preferential loans to targeted industries. In recent years, the government has promoted growth in the value added manufacturing industries such as electronics and automotive components. Tools used to promote the electronics industry include public research, trade protection, sector-specific financial incentives, selective government procurement, and control of foreign participation, relaxed antitrust regulation, and the provision of training and education for sector-specific skills.

Additionally, the ease of doing business in China is very important. Compared to other countries in the Asia-Pacific, the cost and time to start up and close a business are lower in China. Moreover, the costs and procedures involved in importing and exporting a standardized shipment of goods in China are less than countries in the region. 2. 1. 2. Foreign Investments By welcoming foreign investment, China’s open-door policy has added power to the economic transformation. In 2005, China received $153 billion in foreign direct investment (US China Business Council).

This foreign money has built factories, created jobs, linked China to international markets, and led to important transfers of technology. Through this strategy, multinationals have brought large sums of capital and senior talent to China, helping China develop its manufacturing arm without relying on local institutions. Joint venture firms have also been a huge boon for the Chinese manufacturing sector. By employing local managers and workers, foreign-invested companies teach management, production, and marketing skills to local employees. The process is especially well delineated in the automotive electronics sector.

The majority of the automotive electronics exports are coming from foreign-invested firms rather than fully domestic companies because most domestic companies lack the necessary advanced technology. Moreover, foreign companies are putting time and money into developing a local supplier network. Through opening up its retail and distribution sectors, China has been successful in promoting the automotive component market. Automaker Ford Motor and foreign auto parts makers like Tenneco Automotive and Lear have set up production facilities in western China (US China Business Council 2004).

High-tech companies are also establishing operations in western China: Intel Corp. announced a $375 million chip testing and packaging facility in Chengdu, Sichuan (US China Business Council, 2004) 2. 1. 3. Infrastructure Investment One of the most important success factors is China’s superior infrastructure. It is especially essential in manufacturing. Good roads are needed to transport raw materials and finished products. Resources such as power supply and sound facilities are needed to prevent the interruption of production.

China invests heavily in maintaining its transport system. It makes enormous efforts to lower congestion levels on main railways. Additionally, China has built 25,000 km of four- to six-lane, access-controlled expressways in the past 10 years. Having a stable power supply is very vital to manufacturing efficiency. Power outages can lead to loss of sales by forcing downtime or idle capacity on managers. Power disruptions waste material, damage equipment, add maintenance and repair costs, thus increasing the overall cost of doing business in a country.

In China, power outages happen on average every other week, which is considered low, compared to other developing countries (World Bank). To prevent power shortages, China is continuing ton invest in power generating structures. The Chinese government continues to pay close attention to investing in infrastructure such as roads and transportation systems, manufacturing machinery, and communications systems. 2. 1. 4. Human Capital Cheap labor is one of the main draws for firms relocating in China. Firms come in search of human resources.

During our visit to Xian’s High Tech Zone, we heard the same sentiment from the local businesses elites. Many hi-tech firms choose to locate in Xian because the surrounding universities provide an abundant supply of educated laborers. Similarly, one of the reasons global electronics and car manufacturers are relocating its headquarters to Beijing and Shanghai is to access the readily available supply of cheap, skilled human capital. In addition to its vast supply of cheap but skilled human capital, China has large numbers of foreign educated people coming back from Silicon Valley and other centers of innovation.

China currently has 1,731 universities and continues to build more universities and trade schools. In 2005, there were an estimated 3. 4 million college graduates (EIU China Country Report, 2006). In terms technical resources, China adds 600,000 new engineers every year. 3. Understand the economic growth model of India Between 1900 and 1950, economic growth averaged 0. 8 percent a year exactly the same rate as population growth, resulting in no increase in per capita income. In the first decades after independence, economic growth picked up, averaging 3. 5 percent from 1950 to 1980.

But population growth accelerated as well. The net effect on per capita income was an average annual increase of just 1. 3 percent. The slow growth was due to the Fabian socialist policies of Indian government until the 1980’s. India followed an economic model called mixed economy, which was to make use of the best features of both capitalism and socialism. Their model was inward-looking and import-substituting rather than outward-looking and export-promoting, and it denied India a share in the prosperity that a massive expansion in global trade brought in the post-World War II era.

(Average per capita growth for the developing world as a whole was almost 3 percent from 1950 to 1980, more than double India’s rate. ) The mixed economy concept setup an inefficient and monopolistic public sector, overregulated private enterprise with the most stringent price and production controls in the world, and discouraged foreign investment thereby causing India to lose out on the benefits of both foreign technology and foreign competition. This further degenerated in to “License Permit quota raj” as said by Chakravarthi Rajagopalachari due to mundane inability to implement policy.

In the 1980s, the government’s attitude toward the private sector began to change. Modest liberal reforms especially lowering marginal tax rates and tariffs and giving some leeway to manufacturers spurred an increase in growth to 5. 6 percent. But the policies of the 1980s were also profligate and brought India to the point of fiscal crisis by the start of the 1990s. Fortunately, that crisis triggered the critical reforms of 1991, which finally allowed India’s integration into the global economy and laid the groundwork for the high growth of today.

Tariffs and other trade barriers were lowered, industrial licensing scrapped, tax rates reduced, the rupee devalued, opened India to foreign investment, and rolled back currency controls. Many of these measures were gradual, but they signaled a decisive break with India’s past. The economy returned the favor immediately: growth rose, inflation plummeted, and exports and currency reserves shot up. To appreciate the magnitude of the change after 1980, recall that the West’s Industrial Revolution took place in the context of 3 percent GDP growth and 1.

1 percent per capita income growth. If India’s economy were still growing at the pre-1980 level, then its per capita income would reach present U. S. levels only by 2250; but if it continues to grow at the post-1980 average, it will reach that level by 2066 a gain of 184 years. The success story of Indian economic growth is mainly due to the services sector which today contributes for 51% of the total GDP of India. Major portion of this Services share is grabbed by the ITeS, Software and BPO’s.

During the initial years when the Software Industry was at its nascent stage (late 80’s), government’s indifference or non-interference towards this sector contributed for its success. As this is not a capital intensive industry, the license raj did not care much about these small entrepreneurs, who started with small software companies without any capital investment. This encouraged many entrepreneurs with less capital to venture into this emerging sector. Discussed below are some of the important factors leading to India’s success in Services sector. 3. 1. Factors Leading to India’s Success in Services.

3. 1. 1. Passive Role of Government India’s IT industry has flourished with minimal intervention or support from the central government. While the Indian government made itself famous (or infamous) to many business executives during the 1980s with its “license raj” bureaucracy, the government exhibited “benign neglect and active encouragement” with software, a story similar across India’s entire IT sector. In particular, the Indian IT industry did not face a rigorous process for starting new companies, a certification that had often encumbered the formation of new businesses in other industries.

IT also faced limited labor restrictions on hours and overtime, while having the opportunity early in its development to receive foreign direct investment. Whether the Indian government consciously did not regulate IT, or just underestimated its possible growth, is unclear, but the resultant growth of the industry has been helped by the government being hands-off, especially when compared to regulated slow growth industries (financial institutions, retail).

Rather than being lauded for facilitating IT growth, the central Indian government has often been criticized for its lack of widespread broadband infrastructure and slow technology adaptation. Similarly, the Indian government’s special economic zones “have had difficulty attracting foreign and domestic investors” to spur IT (or other industry) growth. Hence, it can even be argued that the Indian IT industry has growth despite the government. 3. 1. 2. English.

At least 70M individuals speak English at a professional level in India, a fact that is regularly cited as a critical advantage in India’s IT growth. This factor was especially critical during IT’s nascent stage as multinationals still becoming familiar with the language of IT did not want the further challenge of managing language differences when creating offshore development centers or partnerships. India’s English endowment became further magnified with the growth of email, as international linkages became increasingly cheap.

Indian software engineers could easily market their new company or product using email or the Internet, while global companies could conversely reach out to hundreds of new possible partners, all accessible via the web. As India’s IT industry has matured from software to business process off shoring (BPO), English has again been a comparative advantage as the sheer number of employable English speakers has made India a key FDI destination (#3 rank in A. T. Kearney FDI index) for customer-facing services like call centers and billing, tasks for which communication is the key skill required.

3. 1. 3. Education A common belief, especially in the popular press, is that India’s IT growth is driven primarily by the success of its technical education. This is true to some degree, especially if citing absolute numbers, as India graduates between 130,000 and 150,000 engineers each year and has more than twice the number of annual college graduates of the United States. Yet, of the college educated populace, India has only 4% engineers, while Germany and China have 20% and 33% respectively.

Further suggesting that India’s government did not play a positive role in the growth of IT, India’s aggregate “education policy has been widely criticized as being ineffective,” as technical facilities are inadequate, limited interaction exists between industry and academia, and enormous student inequity exists (the IIT system is a world leader, but most Indian students attend significantly lower quality institutions). But particularly helpful to the growth of Indian IT is the historical style of education, which has focused on “rote learning” and prowess in mechanical computation.

That style of training has been highly beneficial in developing the software industry and IT infrastructure, as labor-intensive computer coding and programming were disproportionately valued. 2 similarly, the profound technological changes associated with IT required large numbers of technical graduates, especially relatively inexpensive, English speaking ones, which has been a major advantage for India, despite overall shortcomings in the education system. 3. 1. 4. Entrepreneurship

While the heavily regulated post-Independence economy in India was not conducive to entrepreneurship, IT beginning the 1980s was an exception. To start, Indian IT entrepreneurs (especially in software) benefited greatly from the minimal start up capital necessary to start a firm. Given underdeveloped capital markets in India and the large number of technical workers, starting a software company was comparatively easy to manufacturing or other capital intensive industries.

As multinationals began using India for IT services, early Indian IT entrepreneurs matched local talent with international projects, exposing local Indians to the tremendous growth opportunities internationally in IT. Amplified by the thousands of Indian engineers working abroad and “with only a limited demand for their services from the rest of their (Indian) economy,” numerous start-ups began to grow in geographic areas with high numbers of computer and electrical engineering graduates.

As a result, clusters of high tech areas formed in cities like Bangalore and Hyderabad, essentially creating natural high tech zones that pulled in greater amounts of investment. While the role of the Indian Diaspora was limited as entrepreneurs in the new technology clusters of India, it has been beneficial in linking local entrepreneurs with capital and technology abroad, especially in the United States. The consequence of this is that the Indian IT industry has been focused on the international market since its inception, exposing it to tremendous growth opportunity and international standards for intellectual property.

The Diaspora also supplemented shortcomings in India’s education system (which does not provide skills for global businesses success) by providing context to western investors about Indian business culture and also advising Indian entrepreneurs on the skills necessary to engage in international businesses. 3. 2. Lessons for China from Indian Services Success Story China does not have a big gap, the are 2 area in which it is lacking. A concrete and focused action by the Chinese government would really threaten the Indian Superiority in services sector.

The areas are the English knowledge and Chinese Government policies to support and encourage entrepreneurs. With this and already with superior infrastructure and with a large Industrial sector, China can complete its evolution process and move in to take on and challenge the US in all spheres of excellence. 4. Shortcoming of Indian Economy compared to China India’s growth is really very peculiar, because it is skipping a whole big process of Industrial revolution, this is something unusual.

Any proven economic growth follows the path of transition from an agrarian to Industrial revolution and then from Industrial revolution to Services growth. This is the proven hierarchy of a growth model. More so for India and China because of the enormous human capital available with both these countries. This is a luxury of India and China which is not available to any other country of this world. In order to attain a balanced growth, India should use its human capital to full potential; this is possible only with Industrial revolution. 4. 1. Problems of skipping the Industrial revolution.

This will result in the danger of imbalanced growth and widening of rich and poor gap. The reason behind this is our human capital is not productive. On the one hand we will have a large population 56% dependent on agriculture which will yield low productivity and hence low income, but on the other side of the spectrum we have 26% of the people who are in services are earning more and more, this is social imbalance and which will result in the India growth story having a tragic end and will result in a severe social unrest which will impact the whole country to adverse effect.

Our intensions of growing fast are well appreciated, but the growth is not only a measure of GDP and the living standards of the higher echelons of the society, but it is also about the gap between the rich and poor, the overall living standard of its people. Having the Industrial sector in-between the agriculture and Services is very essential to provide balance to the economy. The Industrial sector acts as a cushion for the Agriculture labor to move towards Industrial sector more easily to increase the standard of living and this sector can accommodate a large labor.

The Industrial sector reduces the gap between the rich and poor and will help in maintain social equality to some extent. India has a large young population and it is not possible for the Services sector to accommodate all of the employable people with the current state of education system in India. The poor of India are not able to afford good education due to the bad state of public education system in India. The private educational institution provides quality education but it comes with a cost which only the middle and upper class people and afford.

This will further make it difficult for the poor people to break into the services sector in large number to improve their economical status. The Indian services sector is mostly dominated by the high knowledge industries such as ITeS, Financial sector, Software and BPO’s. Give below is a comparison of the poverty in India and China; this is an indication of how the Industrial revolution has helped reduce the poverty of its people. Chart: 7 Chart: 8 The are several advantages in having a strong Industrial sector. The industrial sector is needed to improve the infrastructure of India.

The roads, ports, airports, railways, sanitation and power are some of the areas which need a very big improvement in India. Apart from the being a source of employment, the strong industrial sector is will help in improving the needed infrastructure. Good infrastructure in India will not only help boost the Industrial sector, but also allow realizing our full potential in Services sector. The productivity of Services sector will further increase, as seen from table 2 and 3 above the productivity of Indian services sector is more than China’s, with better infrastructure the productivity of our services industry will further improve.

Unlike China, India is a economy with more domestic consumption. China is more export oriented and an economy which saves more than Indians. This is an advantage for India, because internal consumption really helps the economy during the times of Global recession, like the one that is currently underway. But the export oriented economies like the East Asian countries and Japan will be really hit in case there is a recession in US and western countries, as most of their revenue is via export to the western countries.

Since India is a kind of balanced economy with more consumption and with reasonable savings, the industrial growth with help further boost the local consumption which wil