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By:
Sanjay Sinha
Dr Neerja Sinha
India and China – Global Economy
Both, India and China are the fastest growing and largest emerging
markets economies. In fact, according to Economic Times dated 23rd
March 2011, in the very recent visit to India, billionaire Warren Buffet
has described India as a ‘large market’ and not an ‘emerging market’.
These two countries account for almost one third of the total population
of the world and in recent times, have also contributed to the majority of
world GDP growth.
For the past two decades, China has been growing at an astounding 9.5%
a year, and India by 6%. Given their young populations, high savings,
and the sheer amount of catching up they still have to do, most
economists figure China and India possess the fundamentals to keep
growing in the 7%-to-8% range for decades. As per the estimates of
leading economists, within three decades India should surpass Germany
as the world's third-biggest economy.
It was only in these two countries that the rate of growth of the economy
declined but it not go into negative figures. In both these countries the
export growth also declined but again the economies could sustain itself
because of the government stimulus packages and growth in domestic
consumption.
Since the late 1970s China has moved from a closed, centrally planned
economic system to a more market-oriented one that plays a major role in
the global economy - in 2010 China became the world's largest exporter.
Reforms began with the phasing out of collectivized agriculture, and
expanded to include the gradual liberalization of prices, fiscal
decentralization, increased autonomy for state enterprises, creation of a
diversified banking system, development of stock markets, rapid growth
of the private sector, and opening to foreign trade and investment. China
generally has implemented reforms in a gradualist fashion.
In recent years, China has renewed its support for state-owned enterprises
in sectors it considers important to "economic security," explicitly
looking to foster globally competitive national champions. After keeping
its currency tightly linked to the US dollar for years, in July 2005 China
revalued its currency by 2.1% against the US dollar and moved to an
exchange rate system that references a basket of currencies.
From mid 2005 to late 2008 cumulative appreciation of the Renminbi
against the US dollar was more than 20%, but the exchange rate remained
virtually pegged to the dollar from the onset of the global financial crisis
until June 2010, when Beijing allowed resumption of a gradual
appreciation.
The next major step was foreign minister Vajpayee's visit to China in
February 1979 which laid the foundation for today’s trade relation.
In 1984 India & China signed a Trade Agreement, providing for Most
Favoured Nation Treatment. In 1994 the two countries signed the
agreements on avoiding double taxation. Agreements for cooperation on
health and medical science, MOUs on simplifying the procedure for visa
application and on banking cooperation between the two countries have
also been signed.
Chinese Premier Wen Jiabao said "We have set an objective (in the
joint statement) to increase the two-way trade volume from 13.6
billion dollar at present to 20 billion dollar by 2008.....we plan to take
it to 30 billion dollar by 2010." Addressing Indian business leaders at
New Delhi, he said that the two countries agreed for a joint feasibility
study for a bilateral Free Trade Agreement.
Indian Commerce Minister Kamal Nath said China was poised to become
India's largest trade partner in the next two-three years, next only to the
US and Singapore.
According to a CII study, special focus on investments and trade in
services and knowledge-based sectors, besides traditional manufacturing,
must be given, in view of the dynamic comparative advantage of India.
Indian companies could enter the $615 billion Chinese domestic market
by using it as a production base.
Presently, Iron ore constitutes about 53% of India's total exports to China.
Among the potential exports to China, marine products, oil seeds, salt,
inorganic chemicals, plastic, rubber, optical and medical equipment and
dairy products are the important ones. The study said that services and
knowledge trade between India and China have significant potential for
growth in areas like biotechnology, IT and ITES, health, education,
tourism and financial sector.
Agriculture :
IT/BPO:
One of the sectors where India 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 list.
All these aspects are well developed in China which has put a positive
impact in its economy to make it one of the best in the world. Although
India has become much developed than before, it is still plagued by
problems such as poverty, unemployment, lack of civic amenities and so
on. In fact unlike India, China is still investing in huge amounts towards
manpower development and strengthening of infrastructure.
Company Development:
Tax incentives are one area where China is lagging behind India. The
Chinese capital market lags behind the Indian capital market in terms of
predictability and transparency. The Indian capital or stock market is both
transparent and predictable. India has Asia's oldest stock exchange which
is the BSE or the Bombay Stock Exchange. Whereas China is home to
two stock exchanges, namely the Shenzhen and Shanghai stock exchange.
As far as capitalization is concerned the Shanghai Stock Exchange is
larger than the BSE since the SSE has US$1.7 trillion with 849 listed
companies and the BSE has US$1 trillion with 4,833 listed companies.
But more than the size what makes both these stock exchanges different
is that the BSE is run on the principles of international guidelines and is
more stable due to the quality of the listed companies.
It is said that Indians have great managerial skills. India also leaves China
behind as far as management abilities are concerned. As compared to
China India has better managed companies. One of the major reasons for
this is that management reform training in China began 30 years ago and
sadly the subject has still not picked up as a matter of interest by the
citizens of the country.
Another important factor behind China not doing well in the business
forefront is that most of the countries came to China and manufactured
their goods. It was not China’s exports that drove the economy instead it
was the export products of outsiders. Even in the case of mergers and
acquisitions China still has not managed to do too well. On the other hand
Indian companies are rapidly expanding mergers and acquisitions. Some
of the recent examples include; Tata Steel's $13.6 Billion Acquisition of
Corus, Tata Tea's purchase of a controlling stake in Britain's Tetley for
US$407 million, Indian Pharmaceutical giant Ranbaxy's acquisition of
Romania's Terapia etc.
Barriers to the growth of India Economy:
Economic Prospects:
The Indian economy, was hit in the latter part of the global recession and
the real economic growth witnessed a sharp fall, followed by lower
exports, lower capital outflow and corporate restructuring. In order to
sustain economic growth during the time of the worst
recession, government authorities in India have announced the
stimulus packages to prop up economic growth.
To finance the stimulus packages, the Indian government has raised over
$100 billion over the last four quarters in a way to finance the stimulus
package. The country’s public debt, according to the RBI, has surged to
over 50% of the total GDP .The effect of stimulus programs is yet to bear
fruit and tax cuts are working their way through the system in 2010. Due
to the strong position of liquidity in the market, large corporations now
have access to capital in the corporate credit markets.
Though China is doing very well economically, there are certain factors
which impede the growth to a certain extent. The Chinese government
faces numerous economic development challenges, including:
domestic demand.
Economic Prospects:
In the past the Chinese Economy has had a high growth rate of around 9
%. The high growth rate of China is attributed to high levels of trade and
greater investment effort. China is the world's second largest recipient
for FDI with total FDI inflows crossing US $ 53 billion in 2003. Growth
in Special Economic Zones (SEZ) has also helped China increase its
productivity. Though the global economic downturn reduced foreign
demand for Chinese exports, but China rebounded quickly,
outperforming all other major economies in 2010 with GDP growth
around 10%. The economy appears set to remain on a strong growth
trajectory at the moment, lending credibility to the stimulus policies the
regime rolled out during the global financial crisis. The government
vows to continue reforming the economy and emphasizes the need to
increase domestic consumption in order to make the economy less
dependent on exports for GDP growth in the future, but China likely will
make only marginal progress toward these rebalancing goals in the near
future.
Conclusion
It is an undisputed fact that both China and India are the largest market
due to their huge population. The rising middle income and upper
income group is swelling. What's more, Chinese and Indian consumers
and companies now demand the latest technologies and features. Studies
show the attitudes and aspirations of today's young Chinese and Indians
resemble those of Americans a few decades ago. Surveys of thousands of
young adults in both nations by marketing firm Grey Global Group found
they are overwhelmingly optimistic about the future, believe success is in
their hands, and view products as status symbols. In China, it's
fashionable for the upwardly mobile to switch high-end cell phones every
three months, says Josh Li, managing director of Grey's Beijing office,
because an old model suggests "you are not getting ahead and
updated." That means these nations will be huge proving grounds for
next-generation multimedia gizmos, networking equipment, and wireless
Web services, and will play a greater role in setting global standards. In
consumer electronics, "we will see China in a few years going from
being a follower to a leader in defining consumer-electronics trends,"
predicts Philips Semiconductors Executive Vice-President Leon
Husson.
The main reason being the limitation to the extent of ownership. This is
well indicated in Warren Buffet statement in his recent visit to India that
“ an foreign investment cap of 26 per cent in insurance sector here
was a deterrent”. India currently allows only 26 per cent foreign
investment in insurance business, but a proposal is underway to hike it to
49 per cent.
The two countries are also becoming a new and reliable destination for
research work not only because Indian and Chinese brains are young,
cheap, and plentiful. In many cases, these engineers combine skills --
mastery of the latest software tools, a knack for complex mathematical
algorithms, and fluency in new multimedia technologies -- that often
surpass those of their American counterparts. As Cisco's Scheinman puts
it: "We came to India for the costs, we stayed for the quality, and
we're now investing for the innovation."
But in spite all the huge advantages they now enjoy, India and China
cannot assume their role as new superpowers. Today, China and India
account for a mere 6% of global gross domestic product -- half that of
Japan. They must keep growing rapidly just to provide jobs for tens of
millions entering the workforce annually, and to keep many millions
more from crashing back into poverty. Both nations have to confront and
fight ecological degradation that's as obvious as the smog shrouding
Shanghai and Bombay, and face real risks of social strife, war, inflation,
poverty and financial crisis.
But India's long-term potential may be even higher. Due to its one-child
policy, China's working-age population will peak at 1 billion in 2015 but
then shrink steadily. India has nearly 500 million people under age 19 and
higher fertility rates. By mid-century, India is expected to have 1.6 billion
people -- and 220 million more workers than China. That could be a
source for instability, but a great advantage for growth if the government
can provide education and opportunity for India's masses. India is now
opening its power, telecom, commercial real estate and retail sectors to
foreigners. These industries could lure big capital inflows.
A few years ago, Indian markets were under the threat of being swamped
by Chinese imports. Today, India enjoys a positive balance of trade with
China. Major industry players or industrialist realised in India that giving
the Chinese a free ride into the domestic market so early would have
hampered India’s domestic manufacturing base. The Indian have become
more cost and quality conscious . The Indian customer prefers Indian to
Chinese products and our manufacturing base is again gearing up.
Whether or not India overtakes China in the next two decades, it is clear
that both countries will be economic powerhouses in the medium term.
Undoubtedly, their growth will have significant impacts on the World
economy.
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