International Management Institute, New Delhi

INDIA vs CHINA
Why China is considered as World Manufacturer and India is considered as Clerk producer"?

Group 7

2013

Contents
1. 2. 3. 4. 5. 6. 7. 8. 9. Manufacturing Sector in India .............................................................................................................. 2 Service Sector in India ........................................................................................................................... 4 Manufacturing in China......................................................................................................................... 5 Service sector in China .......................................................................................................................... 6 Factors favoring Chinas position as World Manufacturer ................................................................... 8 Factors favoring Indian manufacturing sector: ..................................................................................... 8 Import and Export scenario in India: .................................................................................................. 11 Import and Export scenario in China: ................................................................................................. 13 Future of Indian Economy ................................................................................................................... 16

10. Future of Chinese Economy ............................................................................................................... 18 11. References........................................................................................................................................... 19

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INDIA SCENARIO
1. Manufacturing Sector in India
India with a population of 1.237 billion and GDP of $1.842 trillion has an annual GDP growth of 3.2%. Deloittes global index for 38 nations (2013) ranked India as the fourth most competitive manufacturing nation. It contributes to about 15% of Indias GDP. The different sectors in the manufacturing industry in India are automotive, cement, chemicals, electronics, metals, food and textiles etc. FDI: Chinas FDI inflow totaled $16,853 million in 2013 (till September 2013), a 10 per cent decline from previous year in the first 9 months of 2013. There has been a decrease in overall FDI, further decreasing the amount available for manufacturing sector. Organized and Unorganized sector: India can be considered to have two sectors organized (i.e. for which statistics are available from budget documents, reports to any such documents) and unorganized. These two sectors differ in how they contribute to the Indian manufacturing sector. The organized sector dominates when measure by output, producing approximately two thirds of the countrys manufacturing output. When measured by employment levels, the unorganized sector dominates. Approximately 80 percent of the manufacturing employees work in the unorganized sector. Thus the unorganized sector must be regarded as an important part of Indian manufacturing. Labor costs: Recently, there has been an increase in labor cost which may turn out to be a challenge for India and may impede the growth in the manufacturing sector.

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Infrastructure investment: The development of a countrys infrastructure is important not only for the growth of its sectors but also for the growth of the overall economy. As per the trends observed during the 10th and 11th Five Year plans in India, private sector investments are driving the countrys infrastructure growth. There has been an increase in the private sector investment as a percentage of GDP from 1.7 per cent to 3.3 per cent in the 11th Five Year Plan reaching approximately Rs 7,42,912 crore (US$ 137 billion).

In terms of drawing private sector investments, the telecommunications and roadways are performing better. There has been a rise in the electricity sub sector as well.

Tax System: In India the corporate tax varies from 33.6 per cent for domestic companies to over 42 per cent for foreign firms. High corporate taxes in India can affect the flow of foreign direct
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investment (FDI) as rival economies such as China, Spain, Singapore and Germany have comparatively rates. Forward and backward integration: Presently, India lags far behind developed countries in coupling degree of the manufacturing industry chain and synergy of R&D system and innovation mechanism.

2. Service Sector in India

The service sector in India contributes to about 60 per cent of the countrys gross domestic product (GDP), 35 per cent of employment, a quarter of the total trade, and over half of the foreign investment inflows. In the global market, the services industry is one of the largest and fastest-growing sectors and its contribution to the Indian economy is particularly significant, with regard to two main aspects: 1. employment potential 2. Impact on national income. This service sector comprises of diverse activities, such as transportation, communication, trading, finances, real estate and health, among others. Thus, it provides massive business prospects to investors. Without the sectors capacity to generate revenue, it would be difficult for the Indian economy to acquire the healthy place it currently enjoys on the global platform. Some important Statistics:

According to Department of Industrial Policy and Promotion (DIPP), the services sector received foreign direct investment (FDI) equity inflows worth Rs 179,150.49 crore (US$ 28.78 billion) in the period April 2000August 2013

Out of the total India's total exports about 80% are dominated by high-skilled services, such as software business services, communication services and financial services.

The expenditure of Indian banking and securities companies on IT products and services has seen a 13 per cent increase from 2012. (i.e. around US$ 422 billion in 2013).

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CHINA SCENARIO
3. Manufacturing in China
China with a population of 1.351 billion and GDP of $8.227 trillion has an annual GDP growth of 7.8%. The Chinese manufacturing industry is fourth among the manufacturing industries of the world, behind the USA, Japan and Germany. It contributes to about 32% of Chinas GDP. The six predominant industries in the manufacturing industry in China are petrochemicals, metallurgy, forestry, medicine, food and machinery. Chinas manufacturing contributes to 19.8% of worlds output. China manufacturing stands out due to a large cadre of skilled, disciplined work force. Manufactured goods have replaced raw materials as the top export item, accounting for more than 80 percent of total exports. FDI : Chinas FDI inflow totalled $79.77 billion, up 6.37 per cent from previous year in the first 8 months of 2013 of which manufacturing constitutes 40.9% but losing some new factory investments to lower-cost locations, such as Vietnam. Labor costs: Availability of cheap labor is the major reason for other countries looking towards China for outsourcing. Over the years, the hourly compensation has remained constant but in the recent times, an increase in labor cost is observed which may turn out to be a challenge for China to continue as a major outsourcer to major developed and developing countries as the gap in labor costs decreases. Below are a few statistics:

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Quality of Infrastructure: China has a sufficient power supply, highly developed highway and railway network, the worlds largest port cargo volume, extensive coverage of communication networks, and a social system supporting the effective operations of the infrastructure. Manufacturing enterprises in China have been provided with a favorable fundamental environment for investment. Quality of infrastructure and comprehensive management of the facilities in a country are essential factors for a countrys logistics sector which makes it an alternative indicator to understand the overall quality of infrastructure in the nation. Based on the Logistics Performance Index (LPI) organized by the World Bank Group, China remains in a strong position among the BRICS and other major Asian countries with similar advantage in resources. Tax system: According to data from World Bank, Chinas composite tax burden ranked 31st among documented 209 countries with China being in top 15% of the countries with heaviest taxation. This heavy taxation led to restriction of investment in technical innovation and market expansion. Forward and backward integration: To compete in the global market, it is important to achieve technological innovation in individual enterprises as well as enhance the organization and integration of downstream and upstream business in individual chain. Currently, China lags far behind developed countries in coupling degree of the manufacturing industry chain and synergy of R&D system and innovation mechanism.

4. Service sector in China

Service sector in China, which spans areas as diverse as logistics, tourism, engineering, health care and information technology, accounts for about 45% of economy with development being encouraged by policy makers to reduce the dominance of heavy industry, manufacturing and investment in infrastructure, which for decades were the driving forces of Chinas sizzling growth. They have aimed to diversify the economy and foster more productive growth by raising the share of activity generated by the service sector. The non-manufacturing Purchasing Managers Index (PMI) for China rose to 56.3 in October,2013 from 55.4 for the previous month.

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The services sector saw a steady increase of FDI inflows in the first eight months of the year, up 13.5 per cent and accounted for 49.84 per cent of the total FDI inflows during the period. The jobs generated by logistics centers, hotels, software companies and airlines tend to be not just numerous but also generally more suited to the millions who graduate from high schools and universities every year and who are reluctant to take jobs on factory assembly lines. Economic growth and the increase of employment of service industry can promote the development of the service sector in China which has a positive effect on urbanization process of China.

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Gap analysis between India and China Manufacturing sector

5. Factors favoring Chinas position as World Manufacturer
1. Preferential Government Policy: coordinating investments across firms in the automotive industry to ensure a smooth supplier network by giving preferential loans to targeted industries. 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. In capital intensive industries, government interventions such as preferential industrial and fiscal policies are needed to channel growth. 2. Superior Infrastructure: In China, power outages happen on average every other week, which is considered low, compared to other developing countries. To prevent power shortages, China is continuing to 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. 3. 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.

6. Factors favoring Indian manufacturing sector:

1. India has also developed Special Economic Zones (SEZ) that allowed for government, private or joint sector initiatives to develop business. The SEZs provide high quality infrastructure facilities and support services, besides allowing for the duty free import of capital goods and raw materials 2. India has a well-developed technical and tertiary education infrastructure that produces over 500 PhDs, 200,000 engineers, 300,000 non-engineering postgraduates and 2,100,000 other graduates each year with strong technical and managerial capabilities. 3. Indias adherence to quality and trade standards makes exporting from India a viable option. India manufacturing companies have quality management programs in place
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including ISO 14001, TS 16949 and TQM that make them export ready. Approximately 80 percent of automotive component manufacturers in India meet ISO 9000 quality standards. In addition they are WTO compliant for Trade Related Intellectual Property (TRIPS) (IBEF 2006). Companies who set-up operations from India need to take advantage of these opportunities to expand Indias manufacturing sector to serve international markets. Given the competitive advantages of both the countries, the main reasons for China being a leader include: Lower Levels of Foreign Investment in India than China due to regulatory quality and corruption, and provision of infrastructure, stricter labor laws Lack of Infrastructure: Gains made through low labor costs are often lost through bottlenecks in power supply, telecommunication, and transportation.

Gap analysis between India and China Service Sector

On one hand, the service sector has become the dominant contributor to the Indian economy, accounting for 57 per cent of GDP whereas on the other hand, Chinas service sector has lagged behind the manufacturing sector (or the secondary sector according to Chinese terminology) contributing to 45 percent of GDP. Estimates for 2012 show a deceleration in the services growth from 9.4 per cent (in 2011) to 8.1 per cent in 2012 in China; and from 8.2 per cent (in FY 201112) to 6.6 per cent in FY 2012-13 in India. While the share of services in employment for many developed countries is very high and in many cases higher than the share of services in incomes, the gap between these shares is relatively wide in case of India and China, with gap being wider for India. Chinas share of services in both income and employment is relatively low due to the domination of the industrial sector, but the gap is also narrower than that of India. Chinas services compound annual growth rate (CAGR) of 11.1 per cent was accompanied by marginal change in its share of services over the period whereas for India it was as high as 9.2 per cent (CAGR) which was second highest amongst the world. This indicates the domination of the industrial sector along with services in China in its growth, while Indias growth has been powered mainly by the services sector. Despite the higher share of services in Indias GDP and
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dominance of industry over services in China, in terms of absolute value of services GDP as well as growth in services ( both decadal and annual in 2001, 2010, and 2011) China is still ahead of India.

Imports And Exports: India And China

'Imports' means, bringing into goods from a place outside domestic country. In other words, it refers to the goods which are produced abroad by foreign producers and are used in the domestic economy in order to cater to the needs of the domestic consumers. Income and import moves ion the same direction that is they have positive relation. On the other hand real exchange rates and import have a negative relationship 'Exports' of goods means, taking goods out of domestic country to a place outside. It refers to the goods which are produced domestically and are used to cater to the needs of the consumers in other countries. Foreign income , real exchange rates and exports are positively related . The country which is purchasing the goods is known as the importing country and the country which is selling the goods is known as the exporting country. The traders involved in such transactions are importers and exporters respectively. The import and export of the country mainly depends on three factors: Domestic income Foreign Income Real exchange rate

Impact of trade on importing countries: When a country allows trade and becomes an importer of the good, domestic consumers of goods are better off, and domestic producers of the goods are worse off Trade raises well -being of a nation in the sense that the gains of the winners exceeds the loss of the losers

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Impact of trade on exporting countries: When a country allows trade and becomes an importer of the good, domestic producers of goods are better off, and domestic consumers of the goods are worse off Trade raises well -being of a nation in the sense that the gains of the winners exceeds the loss of the losers

7. Import and Export scenario in India:

In India, exports and imports are regulated by the Foreign Trade (Development and Regulation) Act, 1992, which replaced the Imports and Exports(Control) Act,1947, and gave the Government of India enormous powers to control it. Imports : Crude petroleum is India's biggest import with $155bn spent on it in 2012. Imports of gold and silver amounted to $62bn and electronic goods and pearls and precious stones are also top import items for the country. India's top import source is China followed by the UAE, Switzerland and Saudi Arabia. The UK came in at 21st place in 2011-12 with India importing a total of $7.7bn. In the six months recorded so far for 2012-13, the UK has dropped a place and has a 1.4% share of the India's import sources. Exports: It has been observed that trends for exports have been moving towards southern regions especially Asia and Africa. Asia is a key destination of India's exports - in 2001-02 Asia's share stood at 40.2% but in 2011-12 it grew to to 51.6%. Europe, however has seen a decline in its share, down to 19% in 2011-12 from 24.8% in 2001-02. India's key exports in 2012 were petroleum products which generated $56bn; followed by gems and jewellery with $47bn. Pharmacy products, transport equipment, machinery and readymade garments are also big exports for India. The 2012 data shows that the United Arab Emirates (UAE) was India's biggest export market, closely followed by the USA. The latest data available from the Indian Government's Ministry of Commerce and Industry covering April-September 2012: shows the US to have slightly overtaken the UAE. The UK is the eighth biggest export market for India and held 2.9% of the market share in April-September 2012.

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Figure I: It gives the division of various sectors in which the import and export of the country is dealing with.

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8. Import and Export scenario in China:

BASIC INDICATORS Population (thousands, 2012) GDP (million current US$, 2012) GDP (million current PPP US$, 2012) Current account balance (million US$, 2012) Trade per capita (US$, 2010-2012) Trade to GDP ratio (2010-2012) 1 350 695 8 358 363 12 470 982 190 000 2 853 53.2 2012 200 200 180 Annual percentage change 2012 2011 10 9 12 9 10 5

Real GDP (2005=100) Exports of goods and services (volume, 2005=100) a Imports of goods and services (volume, 2005=100) a Exports: Chinas share in total world exports is 11.13%. Export Scenario in China
Agricultur al products 3%

Fuels and mining products 3%

Manufact ures 94%

exports

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Exports to main destinations

Korea, Republic of 16% Japan 17%

United states 26%

Hong Kong 20%

EU 21%

The top 5 countries to which China exports and their break-up is given below. Source: stat.wto.org Imports: Chinas share in total world imports is 9.78%. The break up of the imports are shown below.

imports

Agricultur al products 9% Fuels and mining products 31%

Manufact ures 60%

Source: stat.wto.org

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The main destination countries from which China imports and their break-up is given below.

Imports
Korea, Republic of 16%

Japan 17% Hong Kong 20%

United states 26%

EU 21%

MERCHANDISE TRADE Merchandise exports, f.o.b. (million US$) Merchandise imports, c.i.f. (million US$)

Value (US $)

Annual percentage change 2 048 714 20 1 818 405 25

COMMERCIAL SERVICES TRADE Commercial services exports (million US$) Commercial services imports (million US$)

Value (US $) 2012 190 440 280 164

Annual percentage change 2011 2012 9 23 8 18

China's total imports and exports grew slowly owing to weakness at home and abroad. The trade surplus was 48.1 percent from the year before to a four-year high of $231.1 billion. The increase was largely due to low growth in imports as a result of commodity prices declining last year. Total imports increased just 4percent to $1.82 trillion, while exports rose 8 percent to $2.05 trillion.

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Future Of India And China

9. Future of Indian Economy
There are two priorities for India-creation of 10 million jobs per year, growth of 10-15% per year. This is not possible to achieve solely on the basis of service industry. Growth is needed both in inputs and efficiency. The three things that can be done are: Be a solution provider Connect our manufacturing operations to non-manufacturing functions Create new markets by focusing on bottom of economic pyramid. India needs to maintain a balance between manufacturing and service industry for higher growth rate. The favorable factors for Indias manufacturing competitiveness are: Cheap raw materials Manufacturing skills and quality Software and services support Competitive labor cost Large Domestic market advantage Global supply capability

After the first major reforms in the industrial sector during the 80s, the second policy thrust to the industrial sector came with the economic reforms initiated post 1991. After a span of two decades where there was no major reforms for the industrial sector, the current spate of policy initiatives by the government right from the fast-tracking the Indian manufacturing policy, land acquisition policy, introducing measures to facilitate FDI in India, reforms in the corporate governance through the Companies bill and many more augurs well for the development of the industrial sector. Some of the measures that can augur manufacturing growth in country are: National Manufacturing Policy: It the goal to make India an international manufacturing hub; if implemented effectively would provide the much needed thrust to the manufacturing sector and bring about a rebound in economic growth. The major objectives of the National Manufacturing Policy are:

Increase manufacturing sector growth to 12.014.0% over the medium term To enable manufacturing to contribute at least 25.0% of GDP by 2025.

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Increase the rate of job creation in manufacturing to create 100 mn additional jobs by 2025. Increase domestic value addition and technological depth in manufacturing. To enhance global competitiveness Environmental sustainability of growth

Creation of large integrated industrial townships called National Investment and Manufacturing Zones (NIMZs) with state-of-theart infrastructure; land use on the basis of zoning; clean and energy efficient technologies; necessary social and institutional infrastructure in order to provide a productive environment to persons transitioning from the primary to the secondary and tertiary sectors are preferences. Single window clearance Industries, especially MSMEs (micro, small and medium enterprises), will have a onestop solution and would not require obtaining clearances from various departments or board or statutory authorities. Many states in India have already implemented this. Self-certification of industries It is a practice where an institution/organization is offered a facility to voluntarily fulfill all mandatory social and legal obligations as mentioned by state laws. Social Security for laborers A provision of unemployment allowance is required to protect the interest of workers and to make the labor market more flexible. The key obstacle for India is its poor infrastructure, especially in ports and shipping facilities and power. These are important entities and India need to invest significantly in infrastructure. Equally important but perhaps less challenging is the need for India to build the reputation of the made in India brand label. India has the potential and capacity to become the next manufacturing hub. All the factors can collectively contribute towards growth of manufacturing sector in India

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10.Future of Chinese Economy

China not only overtook the United States in 2011 to become the worlds largest producer of manufactured goods but also used its huge manufacturing engine to boost living standards by doubling the countrys GDP per capita over the last decade. Today, however, China faces new challenges as economic growth slows, wages and other factor costs rise, value chains become more complex, and consumers grow more sophisticated and demanding. Manufacturing growth is slowing more quickly than aggregate economic growth, for example, and evidence suggests that the country is already losing some new factory investments to lower-cost locations, such as Vietnam, sparking concern about Chinas manufacturing competitiveness. The major challenges for manufacturing industry are as follows: Rising factor costs Rising consumer sophistication Rising value-chain complexity Heightened volatility

Some of the major factors that Mckinsey suggests for manufacturing in China are: Achieve manufacturing excellence Look upstream Tame supply-chain complexity Chinese Government will advocate for two points to facilitate globalization in next 5 years: 1. Industrial Transition: to move labor-intensive and low-added-value industries to low cost countries to low cost countries while bringing in capital and technology intensive industries from developed countries 2. Strength Capital utilization: to support Chinese companies cross border investment in machinery, ships and ports, railway and other industries. Chinas 12th Five-Year Plan (2011-2015) recognizes the need to deepen market-oriented reform, change the countrys development model, and focus on the quality of growth, structural reforms, and social inclusion to overcome the rural-urban divide and stem the rise in income inequality. Some of the measures that can augur manufacturing growth in country are: Becoming a green manufacturer is a major challenge and opportunity available to China to save itself from facing massive environmental costs later and to build an international competitive advantage in the global industry. Addressing the rural-urban disparities in access to jobs, finance, and high-quality public services is another necessity for China. It is also vital to strengthen Chinas fiscal positionby mobilizing additional revenues and ensuring that local governments have adequate financing to meet their rising expenditure
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responsibilities. To become a proactive stakeholder in the global economy by continuing to intensify its global trade, investment and financial links to benefit from specialization, increased investment opportunities, and higher returns to capital, as well as mutually beneficial flows of ideas and knowledge

11.References
http://data.worldbank.org/indicator/NV.IND.MANF.ZS http://articles.economictimes.indiatimes.com/2013-09-17/news/42148677_1_inflowsforeign-direct-investment-foreign-investment http://www.nytimes.com/2013/11/11/business/international/service-sector-gaining-steamin-chinas-economy.html?_r=0 http://www.mckinsey.com/insights/operations/fulfilling_the_promise_of_indias_manufac turing_sector http://dipp.nic.in/English/Publications/FDI_Statistics/2013/india_FDI_September2013.pd f http://www.infrastructure.gov.in/pdf/inv-infra.pdf http://www.ibef.org/download/Infrastructure-Sector-040213.pdf

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