India and China Economy Comparison: GDP, Growth, Reforms

India and China: An Economy Comparison

India and China: An
Economy Comparison

Date: 08/07/2011

Submitted by:

Ram Sundaresa Kumar (2012MLP011)
Anurag Kanoongo (2012MLP015)
Prasoon Malviya (2012MLP017)
Pradeepan N (2012MLP020)
Pratibha Sangwan (2012HRLP012)
Monika Sahni (2012HRLP22)
Sahiba Sanan (2012HRLP029)



Contents

1. Executive summary……………………………………………………………………………………...3
2. Present Economic status of India and China……………………………………………………….4
3. Challenges faced…………………………………………………………………………………………4
3.1. By India………………………………………………………………………………………………..4
3.2. By China………………………………………………………………………………………………5
3.3. Common problems…………………………………………………………………………………..5
4. Comparison of Indian and Chinese Economies……………………………………………………6
4.1. GDP comparison……………………………………………………………………………………..6
4.2. Comparison of Investment, Gross National Saving & Inflation………………………………….7
4.3. Comparison of Import and Export Volumes……………………………………………………….8
5. Why does China have higher economic growth than India?..................................................10
6. Key Economic Reforms……………………………………………………………………………….12
7. References……………………………………………………………………………………………….15
8. Appendix…………………………………………………………………………………………………….
8.1. International Financial Statistics (IFS)………………………………………………………………
8.2. Key Economic Indicators……………………………………………………………………………..
8.3. Projection of both economies………………………………………………………………………...

2


1. Executive Summary

“The love of economy is the root of all virtue.

George Bernard Shaw

India and China, two of the Asian giants have locked horns against one another to become a world
superpower. Historically, inevitable comparison of economies between these two giants has shown that
China usually emerges on top. The economists attribute this to the Chinese fast-acting government
implementing new policies making India’s political system appear sluggish. Both countries are
consistently analyzing their economic strengths and reinforcing their political and financial systems to
sustain and establish themselves as a superpower in the global economy.

This paper aims to compare the Indian and Chinese economies and analyze the several parameters that
govern both the economies. The study report shall include analysis of present economic status of India
and China underlying the challenges faced by both the economies. The comparison of various economic
parameters such as GDP, Investment, Import/Export volume etc. will be done which will help us
understand the reasons behind higher economic growth of China.

2. Present Economic status of India and China

Together accounting for 2.5 billion people, China and India are today the engines of growth in the midst of
rapid economic transformation in the global economy. In fact, driven by India and China, the emerging
Asian economies are no longer witnessing a slump, as per a report by the UK financial services major
Barclays.
The economies of India and China are influenced by a number of factors like social, political, economic
and other factors. The economy of China is more developed than that of India. In terms of exchange
th nd
rates, India is the 11 largest economy while China is in the 2 position surpassing Japan. Today, India’s
GDP is estimated at around USD 1.537 trillion while China’s average GDP is around USD 5.878 trillion.
China’s GDP growth has been marginally yet consistently ahead of its Indian counterpart. However, India
lags far behind China in the case of per capita GDP. Comparing the economic facts of these Asian giants,
China’s labor force, estimated at 813.5 million is almost twice that of India’s labor, estimated at 467
million. The agricultural sectors of both the countries form a major economic sector. However, China’s
use of agricultural techniques is far more developed than India thus yielding better quality and high
quantity of crops which significantly contributes to the exports. As a result, China shifted majority of its
agricultural labor to the manufacturing sector.
India enjoys an upper hand in the IT/BPO industry with the BPO sector alone contributing $49.7 billion
while China earned $35.76 billion. Although a socialist country, China began its liberalization, gained

3


exposure to the global market and began receiving Foreign Direct Investments since the mid-1980s while
India’s liberalization policies were frozen only in 1990s.
Unlike India, China’s investments in manpower and labor development, water management, high quality
health care facilities and -services, communication and civic amenities has helped China create a positive
impact on its economy.
The Chinese capital market lags behind the India capital market in terms of predictability and
transparency. Owing to the quality of listed companies and India’s stock markets adhering to the
international guidelines, the Indian stock markets establish financial transparency and are more stable.
As on date, China lags far behind in the business forefront owing to its lack of management reform and its
inability to increase mergers and acquisitions with several organizations across the world. On the other
hand, India had rapidly emerged and is still expanding its mergers and acquisitions with several
international organizations.
With trade and manufacturing being the key sectors driving the Chinese economy ahead, India still strives
to strike the perfect balance between its service, manufacturing and trading sectors.

3. Challenges faced

3.1. By India

 To lead the economy back to the high GDP growth rate of 9 percent per annum
 Handling Overpopulation resulting in low per-capita income and increasing poverty.
 High levels of debt and growth in lending by 30% because of a property boom. Besides the high
risk in such loans, if inflation increases further, it may force the RBI to increase interest rates. This
will increase interest payments and potentially reduce consumer spending in the future.
 Sharp and growing regional variations among different states and territories in terms of poverty,
availability of infrastructure and socio-economic development
 Literacy rate of 74% is still lower than the worldwide average and there exists a severe disparity
in literacy rates and educational opportunities between males and females, urban and rural areas,
and among different social groups
 Low agricultural productivity due to large number of agricultural subsidies, overregulation of
agriculture, governmental intervention in labor, land, and credit markets, inadequate
infrastructure, small size of land holdings, partial failure of land reforms, inadequate irrigation
facilities, inadequate use and adoption of modern agriculture practices etc.
 Corruption
 Unemployment

4


3.2. By China

 NPL - Chinese bank loans stood at USD 6,500 per capita in 2010 compared to gross domestic
product (GDP) per capita of USD 4,400. China`s NPL, currently stands at 1% of total loans as on
today. Some analysts estimate that this could increase to 6% of loans, 10% of loans, and even
15% of loans within a few years’ time.
 Expansion in economy is bringing inflation. Consumer price inflation, which was -1% a year ago,
is expected to cross this threshold in the next few months. Property price inflation has slowed to
about 9% following restraints in home financing, but the volume of housing transactions remains
undiminished, and prices continue to advance to new highs every month.
 Property Boom: Very high increase in property prices. Growing concerns over the burst of such a
property bubble thereby leading to an economic slowdown.
 Shortage of power: More power required with growing Chinese economy.
 Growing Income Inequality: China’s economic growth has benefited the south and eastern
regions more creating a growing disparity between north and south which has led to migration of
farmers from north to south.
 Unemployment: mainly due to many state-owned enterprises which are grossly inefficient. Lot of
unemployment prevalent in the agricultural sector.
 Demographic transition– By 2050, China will be older and more age-challenged on every
important measure. The absolute numbers of those aged under 25 will decline by about 140
million, while those aged over 65 will rise by 220 million. These changes will lead to lower trend
growth, higher labor costs and inadequate social protection.
 Likely transfer of power to new leaders in 2012 who are no radical reformers which could result in
more pronounced differences between those who favor faster economic and some political
reforms, and those who are skeptical about reform altogether and will lead to policy
procrastination.

3.3. Common Problems

 Inflation
 Unemployment
 Regional inequality
 High debt levels
 Foster expansion of Chinese and Indian companies in Europe and of European companies
in India and China.
 Produce joint programmes for education and training to capitalize on the enormous potential for
beneficial cooperation.

5


4. Comparison of Indian and Chinese Economies

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 alter the strategy.
As recently as 1991, China and India stood at similar levels of economic development. Today, the
Chinese standard of living is over thrice that of India’s, with China’s GDP per capita hitting US$ 4,382.14
in 2010 versus US$ 1,264.84 in India. 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.

Nominal GDP (Current Prices)
7000
6000
5000
U.S. dollars

4000
3000
2000
1000
0
1985 1990 1995 2000 2005 2010
India ($Billion) 229.563 325.928 367.725 479.871 809.723 1,537.97
China ($Billion) 307.017 390.278 727.946 1,198.48 2,256.92 5,878.26

6


GDP Per Capita (Current Prices)
5000
4500
4000
3500
U.S. dollars

3000
2500
2000
1500
1000
500
0
1985 1990 1995 2000 2005 2010
India ($) 296.296 378.036 385.801 460.269 716.177 1,264.84
China ($) 290.046 341.352 601.007 945.597 1,726.05 4,382.14

Investment
60
50
(% of GDP)

40
30
20
10
0
1985 1990 1995 2000 2005 2010
India (% of GDP) 20.382 25.126 25.496 24.293 33.9 37.874
China (% of GDP) 38.348 36.142 41.896 35.119 42.099 48.774

Gross National Savings
60
50
(% of GDP)

40
30
20
10
0
1985 1990 1995 2000 2005 2010
India (% of GDP) 18.221 21.883 23.582 22.905 32.63 34.69
China (% of GDP) 34.6 39.216 42.118 36.831 49.225 53.983

7


Inflation, average consumer prices
18
16
14
12
(% Change)

10
8
6
4
2
0
1985 1990 1995 2000 2005 2010
India (% Change) 5.556 8.971 10.225 4.009 4.246 13.187
China (% Change) 9.3 3.1 17.1 0.4 1.817 3.326

Import volume of goods and services
70
60
50
40
(% Change)

30
20
10
0
-10
-20
-30
1985 1990 1995 2000 2005 2010
India (% Change) 9.104 5.272 18.915 0.127 17.994 11.506
China (% Change) 57.348 -16.931 14.679 24.796 11.757 17.747

8


Export volume of goods and services
40
35
30
Percent change

25
20
15
10
5
0
-5
1985 1990 1995 2000 2005 2010
India (%) -1.081 7.749 12.972 10.69 18.881 10.229
China (%) 6.889 12.75 18.225 25.224 23.672 34.573

Export volume of goods
50
45
40
Percent change

35
30
25
20
15
10
5
0
1985 1990 1995 2000 2005 2010
China (%) 6.5 12.027 19.279 26.637 23.672 33.759
India (%) 0.579 9.734 12.202 13.491 10.814 13.647


th
China: 5 Largest exporter of merchandise and primarily exports:

o Computers and accessories, videos, household goods, toys and sporting goods.

 India’s exports grew by 26.8%.

 China’s upper hand:

o Vast and cheap labor resources

o Domestic savings to initiate infrastructure in coastal areas

o Widespread production and distribution networks

o Large FDI inflows to facilitate more exports

9


General government revenue
30

25
Percent of GDP

20

15

10

5

0
1985 1990 1995 2000 2005 2010
India (%) 17.234 16.951 16.645 18.379 17.486
China (%) 25.322 19.017 10.718 13.782 17.218 20.361

General government gross debt
90
80
70
Percent of GDP

60
50
40
30
20
10
0
1985 1990 1995 2000 2005 2010
India (%) 67.393 71.44 78.838 69.17
China (%) 3.305 6.948 6.137 16.445 17.635 17.711

5. Why does China have higher economic growth than India?

 China began its economic reforms 12 years before India and thus had a head start. Nevertheless,
by normalizing, China has still grown faster than India.

10


 By instituting the one-child policy, China benefited earlier from a "demographic dividend" - effects
of which should start to level off and then reverse in the next five to ten years. India's
demographic dividend is still to come.

 Government policy on attracting investments was very focused on upgrading (i) human
development index (HDI) factors such as education, literacy and health, and (ii) infrastructure -
both of these were crucial in attracting foreign investors to tap into this labour pool.

 India’s low HDI rankings indicates its low labour pool. Similarly, its infrastructure notoriously lags
behind, and that is another key component in basic economic development. China has simply
done a better job improving HDI and infrastructure.

 Many years after the initial reforms, many industry sectors in India are still held back by
bureaucracy and over-regulation. Sectors that were not burdened by over-regulation, such as
business process and IT outsourcing, have thrived and will continue to do so. Still, that provides
only 3 million jobs out of a country of 1.2 billion people. India has not been as successful in
spurring job creation and drawing people from the non-productive rural areas into the cities.

 China's development, particularly in the last decade, has been investment-centric. Contrast that
with India, which has been consumption-driven. It is easier to control investment-driven growth
(e.g. forcing the state-owned banks to lend) - and thus grow very rapidly over a short to medium-
term horizon - than it is to control consumption, which is driven by individual decisions of millions
of consumers (and is largely correlated with growth in disposable income).

 China benefited from its cultural and business ties to its Diaspora - in particular, Hong Kong and
Taiwan, which had blazed the trail as two of the original Asian Tigers and provided investment
capital, expertise, and trade channels. It was a win-win game as China got the capital and jobs it
needed to move up the economic ladder while the Hong Kong and Taiwanese businessmen
could massively scale their operations (and profits). China's export-centric development has
benefited tremendously from globalization and trade in the post-Cold War era.

 China's one-party system enables faster decision-making than India's democratic process. When
you are playing catch-up to the advanced nations of the world, what needs to get done is often
pretty obvious and so the nation that can make decisions more quickly will simply get more done.
It remains to be seen what will happen to this advantage when you are no longer playing catch-
up, and need innovation to move the economy forward. Democracies are better in fostering
innovation, but at the lower rungs of development, it's more of a catch-up game, and China has
done a good job climbing up the first few rungs.

11


6. Key Economic Reforms

INDIA: CHINA:
 China’s reform triggered by the Third Plenum
(of the 11th Party Congress Central
 Indian reform triggered by major Committee) held in 1978.
macroeconomic crisis in early 1991.  The government initiated market oriented
 Caused by a large fiscal and current account reforms with initial experimentation in the rural
deficit, high inflation, increasing internal and sector and later in the industrial sector.
external debt, three changes of government  Rural reform: Massive de-collectivization
within two years and socio-political upheaval. program initiated, whereby land was
 June-July 1991: Structural reform by the distributed or contracted out to households.
newly elected Congress-led government, led  “Big Bang” industrialization plan wherein
by Mr.P.V.Narasimha Rao: Rupee was Government initiated gradual liberalization of
devalued by 19% against the US dollar in two product pricing and set up new reward
quick moves. systems for local governments that promoted
development in various ways.

PARAMETER INDIA CHINA
External Sector Reforms
 Current account convertibility of the
Renminbi (RMB) implemented in
1996 - followed a fixed exchange
rate regime until recently.
 Devaluation of Indian rupee by
 July 2005: change in currency
19%: US$1 = Rs.26 from Rs21.
regime: Renminbi (RMB) revalued by
Exchange  The rupee was subsequently floated
2.1% against the US dollar
Rate on the current account.
 Since 2005, fluctuations of 0.3%
 Current Exchange Rate:
allowed on either side of the central
1USD = INR 44.82240
rate which is announced by the
central bank on the previous day
 Current Exchange Rate: 1USD =
6.5 CNY
 Weighted average import tariff rate
 Dramatically lowered import tariffs.
lowered
FY1991: 87%  Weighted average import tariffs
FY1994: 47% lowered:
FY2006: ~15-17% 1980s: over 50%
Tariffs Current: 9.9%
 Peak rate on non-agricultural
products reduced:  Reduction to honor WTO
FY1992: 355% commitment to reduce tariffs to 9.8%
FY2001: 35% by 2010.
FY2006: 12.5%
Capital Accounts Reforms
 Initiated liberalization of FDI policy  1979: Chinese government granted
in 1991, which allows 100% FDI in legal status to foreign investment
most of its manufacturing sectors,  1980: The establishment of SEZs
FDI except those pertaining to defense improved FDI flows.
equipment.  1986: new provisions introduced
 100% FDI is allowed in which included fee reduction for
infrastructure sectors except atomic labor and land use; establishing a

12


energy. limited foreign currency market for
 In services, 100% FDI is allowed for joint ventures; and extending the
many sectors other than civil maximum duration of a joint-venture
aviation, retail trade, satellite TV/FM agreement beyond 50 years.
broadcasting, banking and  1990: China made an attractive
insurance and professional destination for FDI by introducing
services. number of provisions like protection
 Reforms since 1991: from nationalization.
 Removal of prior approval condition
in case of existing joint ventures/
technical collaborations in the
“same field”
 Pricing of convertible instrument –
greater flexibility introduced
Liberalization of policy for non-cash
capital contributions
 Hundred Percent FDI in some area
of Farm Sector
 1992: FII investment in Indian
capital markets allowed.
 Each FII allowed investing up to
10% in a company.  1990: Establishment of Shanghai
 Though initial investment ceiling of and Shenzhen stock exchanges.
24% of paid-up capital; later  China allowed FIIs to invest in B
liberalization allowed FIIs to invest shares. Qualified FIIs (QFIIs) were
in Indian companies with no limits allowed to invest in the A share
(subject to certain sector caps). market.
Portfolio
FIIs/SAs free to invest till the total  The investment limit for any stock:
Investments investment reaches USD175 10% of the total share capital for
million. each QFII; maximum 20% for all
 The reciprocity condition for QFIIs combined.
domestic mutual funds relaxed in  Restrictions on outbound portfolio
2006. investment gradually being relaxed.
 Individual debt investment limits
earlier allocated for 100% FIIs/Sub-
Accounts will be realigned based on
the remaining available limit.
Internal Sector Reforms
 The first sets of reforms in China
 Post-independence, land reforms were in the agriculture sector.
were initiated by dividing land  Agriculture collectivized in the 1950s,
among the tenants and green by establishment of the commune
Agriculture
revolution was introduced. system.
Reforms
 Increased agricultural output in  Late 1970s: Household responsibility
1960s. No major reforms in system developed - the communes’
agriculture since then. land was divided among households.

 Removal of licensing regime:  1979: state-owned enterprises
allowed retaining of profits. SOE
1991: De-Licensing for several labor reforms adopted.
Industrial industries.
Reforms  Deregulation of product prices:
1998–99: Further de-licensing –
Licenses now only for alcohol,  SME reforms since 1978:
tobacco and defense equipment

13


related industries.  Encouraging private and joint
sectors
 1991: Removal of undue control
of trade and business:  Privatization of SOEs

 Deregulation of product prices:  Successful flexible Labor reforms
Market forces driven pricing of
manufactured product prices.

 Reduction of protection to SME
sector

 Privatization of SOEs

 Lagging Labor reform
 Tax Structure: major tax reforms in
the early 1990s.
 Reduced personal tax marginal rate  Tax Structure: Total import tariff
to 30% currently less than 2.5%, compared with 10%
in India.
Fiscal  Lowered corporate tax rate to 30%
 Value-Added tax system increased
Reforms  Peak excise and non-agriculture
efficiency
import tariff cut to 24% and 12.5%,
respectively.  Good fiscal prudence
 Service tax levied.
 Fiscal Prudence
 Improved regulatory framework
Banking  Private sector entry allowed since  China lags India in banking sector
Sector mid-1990s. reforms.
Reforms  Foreclosure act: Power to forfeit
assets
 Roads: Low investments in India
over 10 years, averaging USD 2.5-3
billion

 Telecom: Cellular and pager  Roads: large government
services –Recent foreign investments.
investment limit: 74%
Infrastructure  Telecoms: Last 10 years: China’s
Reforms  SEZs: 2000: Initiation in telecom subscriber base increased
establishing SEZs. 17-fold to 744 million.

 In May 2005, the government  SEZs: 4 SEZs In 1980
approved a new SEZ legislation
which is more comprehensive and
provides for a larger tax incentive
package.

14


7. References

 http://www.ibef.org/india/indiachina.aspx
 http://business.mapsofindia.com/india-economy/india-vs-china.html
 http://www.imf.org/external/pubs/ft/weo/2011/01/weodata/weorept.aspx?sy=1985&ey=2011
&scsm=1&ssd=1&sort=country&ds=.&br=1&c=924%2C534&s=NGDP_R%2CNGDP_RPCH
%2CNGDP%2CNGDPD%2CNGDP_D%2CNGDPRPC%2CNGDPPC%2CNGDPDPC%2CP
PPGDP%2CPPPPC%2CPPPSH%2CPPPEX%2CNID_NGDP%2CNGSD_NGDP%2CPCPI
%2CPCPIPCH%2CPCPIE%2CPCPIEPCH%2CTM_RPCH%2CTMG_RPCH%2CTX_RPCH
%2CTXG_RPCH%2CTXGO%2CTMGO%2CLUR%2CLP%2CGGR%2CGGR_NGDP%2CG
GX%2CGGX_NGDP%2CGGXCNL%2CGGXCNL_NGDP%2CGGSB%2CGGSB_NPGDP%
2CGGXWDG%2CGGXWDG_NGDP%2CNGDP_FY%2CBCA%2CBCA_NGDPD&grp=0&a=
&pr1.x=63&pr1.y=13
 http://www.moneycontrol.com/news/world-news/china39s-debt-situation-not-far-offgreece-
analyst-_560660.html
 http://www.minyanville.com/businessmarkets/articles/china-emerging-markets-political-
reform- economic/12/28/2010/id/31910
 http://ibnlive.in.com/news/three-challenges-before-indian-economy/96464-7.html
 http://en.wikipedia.org/wiki/Economy_of_India#Economic_trends_and_issues
 http://www.quora.com/Why-is-Indias-economic-growth-rate-lower-than-Chinas
 China and India: A comparison of two trade integration approaches [Article] by Przemyslaw
Kowalski at Organization for Economic Co-operation and development.
 China and India: Economic Performance, competition and co-operation – an update by
T.N.Srinivasan
 China and India: A comparison of trade, investment and expansion strategies by Renfeng
Zhao, Chatham House.

15

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