CHINA vs INDIA

Arun Prateek K Viswesh Ramnath Gaurav Tikkas Kavya Sarraju Nakshab Usmani

CHINA ECONOMIC MODEL

INDIA

Unfair on people Regulated interest rates to rip off savers. Underpays them for deposits Barriers to competition SOEs rule the roost by overcharging customers No equal access to public services for rural immigrants Arbitrary land laws. Local governments can cheat farmers and buy them off for development and underpaying them

Government spending isn't driven by investments needed for long-term growth A third of expenditure is spent on interest payments and subsidies Controlled fuel prices driven by political considerations None of them reach the poor Inefficient SOEs continue to get more public funds at the expense of private competitors

Crowds-out private sector credit

CHINA 2011-12 AND OUTLOOK FOR 2012-13

Growth rate about 7% Concentration on increasing growth Infrastructure spending increased Business tax replaced with value added tax Interest rates brought down

INDIA

Policy paralysis. Actual growth at 5.4% High inflation. Fiscal deficit at 5.1% of GDP High interest rates

Expansive fiscal policy and contractionary monetary policy

Slew of reforms. Political pressures

Borrowing rates for the private sector may Liberalization expected increase Companies may look overseas to fund their But China expected to repeal property curbs and operations, exposing them to the currency risk appeal to state-owned firms to expand capacity of a volatile rupee

World's View of China

Cronyism and profligacy. Comparision to South East Asian Crisis
Investing faster than the TIGERs Bankers and other lenders on an astonishing lending streak Credit jumped from 122% of GDP to 171% of GDP in 2010 due to their concept of stimulus lending

Pros (Short term)

Very little reliance on foreign borrowing Growth financed internally Saving rate (51% of GDP) higher than investment rate

Cons (Long term)

Ageing population Labour becomes more expensive Saving rate will fall with time Savers looking for other alternatives. Some even going out of the country. Deposits grew at a record low this year Has to lift barriers on private investment in profitable markets dominated by wasteful SOEs Lending to SOEs at 1/3rd the rates to private firms

Highly liquid banks (Deposits > Loans) (CRR=20%) Debt=Only 25% of GDP Can capitalize any bank threatened by insolvency

MEASURES TAKEN BY RBI MONETARY POLICY

2011-12 highlights Objective: contain inflation by curbing demand-side pressures. Inflation control takes precedence over short term growth Short term lending rate (repo) hiked by 50 bps to 7.25 per cent. Repo rate to become the only effective policy rate in indicating monetary policy stance. Reverse repo to be fixed 100 basis points lower than the repo rate, gets fixed at 6.25 per cent. Cash reserve ratio and bank rate left unchanged at 6 per cent each. Interest rates on savings bank deposits hiked to 4 per cent from 3.5 per cent. WPI inflation projection lowered to 6 per cent. Low likelihood of oil prices moderating. 2012-13 highlights Growth also a priority. Repo Rate cut by 50 bps to 8.00 percent. CRR unchanged. SLR cut by 1 pc to 23 pc. Growth projection lowered to 6.5 pc from 7.3 pc. March-end inflation pegged at 7 pc, up from 6.5 pc. Containing inflation - main focus. Situation in the euro area continues to cause concern. Fiscal deficit poses a risk to economic stability. Asks government to cut fertiliser and fuel subsidy. Actual growth rate to decelerate from 6.5 percent in 2011-12 to 5.6 percent in the current fiscal. (delayed monsoon, falling global demand, curtailed agriculture)

MEASURES TAKEN CHINA MONETARY POLICY

2011-12 highlights Objective: Inflation control top priority CPI grew at an average of close to 6% every quarter in 2011 and hence inflation control was priority. Money supply was reduced in 2011 Contractionary policy reflected in higher interest rates with yield curve on Chinese bonds moving upwards. Yield curves in general showed a moderate upward trend due to issue of about 64Tn Yuan bonds. This issuance can possibly be due to sterilization of incoming FOREX reserves. Bank lending rates increased each quarter from 7% to close to 8.2% RRR hiked 14 times by 8 percentage points 2012-13 highlights Effects of contractionary policy seen in 2012 with GDP falling from 9.6% to 8.2% Industrial production grew by 9%, slowest since 2009 CPI also falls due to the policy measures taken in 2011 China's economy will likely expand by 7.7 percent this year, down from a May estimate of 8.2 percent, while the growth forecast for 2013 was cut to 8.1 percent from an earlier 8.6 percent. RRR reduced by 0.5 percentage points Hike in consumer prices moderated Reserve requirement ratio currently at 20.5%

Foreign Trade Policy 2012

India
Double exports to $500 Bn. by 2014 Schemes Extended by One year: EPCG (export promotion capital goods) Interest subvention scheme (2%) Sops on apparel exports -US, EU Nil duty on capital goods export SEZ - New guidelines Coming Soon

China
Government Work Report 2012
targets 10 % growth despite a slowdown

Decreasing Trade Surplus

External Reasons
Global Financial Crisis European Debt Crisis

Internal Reasons
rising raw material prices rising labor costs

FTA Negotiations with Australia, Canada, New Zealand

Comprehensive Trade Pact with (EU).

Policy measures
reducing their tax burdens Reform foreign trade structure level its trade balance encouraging more imports

INDIA TRADE WOES 2012-13 2012-2013 Months Exports Growth (%) Imports Growth (%) Trade deficit

April
May June July

24.45
25.68 25.07 22.40

3.23
-4.16 -5.45 -14.80

37.94
41.90 35.37 37.90

3.83
-7.36 -13.46 -7.78

13.48
16.30 10.30 15.50 118.40 109.60 118.70 184.90

2008-09 2009-10 2010-11 2011-12

185.30 178.80 251.10 303.70

19.45 -3.50 40.44 20.94

303.70 288.40 369.80 488.60

28.73 -5.03 28.24 32.13

*Source: Ministry of Commerce & Industry / Values in $billion

Together Chindia.
Strengths
Demographic Dividend Fastest Growth Rates Biggest Defense Spenders

Weakness
Geo-political conflicts Economic Policies Different Cultural Differences

Chindia
Opportunities
Trade Co-operation Resolving Disputes Cultural Integration

Threats
Geo-political Escalation Nuclear Proliferation Western Hegemony

FOREX SCENARIO A COMPARISON INDIA FERA (1947) used to control all external transactions. 1991 India moved from Import Substitution to Export Promotion. Large Capital inflow resulted in FOREX at $294.81 Bn. India follows a floating exchange rate (market Determined within Limits). Liberalization of current account transactions leading to current account convertibility. CHINA Value of Yuan kept artificially low to boost exports and trade surplus.

Mostly invested in low yielding US treasury bonds.

China holds $3.2 tn of FOREX. Chinese policy makers exchange rate carefully managed. Follows a policy of gradual appreciation.

FOREX SCENARIO A COMPARISON INDIA Purchasing power over goods and services and minimizing risk and volatility. India builds reserves Anticipated Current Account deficits and Liquidity at risk because of Unanticipated capital movements. Primary Objective: Safety and Liquidity. RBI and GOI manages the FOREX Attention paid to the duration of investment and currency composition. China has a development strategy with its FOREX. Primary Objective: Export led growth. Other Objectives: Providing macro economic stability, keeping inflationary pressures at bay and force a gradual upgrading of industrial sector. CHINA

POLITICAL SCENARIO A COMPARISON INDIA CHINA Under fifth generation of communist party leadership Ruling Coalition Not Strong Reforms like the ones proposed in Retail Attracts strong opposition Spending cuts by Government not easy Ex: ) fuel price hike Slew of corruption scandals not helping RTI - A Glimmer of hope can help increase awareness and vigilance Government a lot more stable than in India Rocked by a Scandal within the party Control of Information/ corruption and Abuse of power Hopeful that the new government are pro reforms Faced with a huge challenge of reinvigorating the small and medium business

POLITICAL SCENARIO A COMPARISON INDIA CHINA

Consolidated FDI Policy GST framework still in the Pipeline Lack of good infrastructure Growth mostly by private enterprises

World bank report pushing for a free economy

Growth is mainly Government Engineered State owned companies contribute to 40 % of GDP

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