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INTERNATIONAL TRADE: STUDY

ON INDIA AND CHINA

SUBMITTED TO: SUBMITTED BY:


Dr. Tilak Raj Ankit Kumar
UBS, PU MBA (Section-B)
1st Semester
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TABLE OF CONTENTS:

S.NO CONTENTS PAGE NO.


1. INTRODUCTION 3

2. OBJECTIVES 6

3. REVIEW OF LITERATURE 6

4. RESEARCH METHODOLOGY 9

5. SCOPE OF THE STUDY 9

6. DISCUSSIONS/RESULTS 10

7. CONCLUSION 28

8. REERENCES 29

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INTRODUCTION:

Sino-Indian relations or Indo-China relations, refer to the bilateral relationship between the
People's Republic of China (PRC) and the Republic of India.
Bilateral trade between India and china, the world’s two most populous countries, have expended
substantially in recent years. They are the fastest growing economies in Asia as well as in the
world scenario. Both economies are classified by international agencies as emerging markets with
potential for rapid economy growth. They play an increasingly dominant role in world economy
affair. China has gained a large footprint in international trade and investment flows; today it is
world largest exporting nation while India’s export has grown in the Decay of 2001-10. This
paper is an attempt to examine and compare bilateral trade between the two economies and to
draw implications for trade and economies cooperation between India and china in future.
Especially, this paper investigates the major trends and changes in the India’s balance of trade
with China; in total import or export to china. The findings are used to Draw policy implications
for future trade and economic between the two Asian developing economics

HISTORICAL SIGNIFICANCE:

The rapid rate of economic growth in the two large countries of Asia – China and India – stands
in striking contrast to the Western world’s developed countries’ feeble growth rate. The dis-
appointing growth rate was compounded by recession which struck in the USA in 2008 and
spread to the countries of Europe. They are still struggling to overcome the effects of recession.
Hence the two countries have become the engine of growth. India was slightly ahead of China in
the 1970s but since the 1990s China has surged well ahead of India. Both have embarked on
economic reforms from the eighties onward. But China’s growth rate has been much faster than
India’s It is spectacular in respect of infra-structural development—highways, railways, airports,
power and apartment buildings in cities. The growth in both the countries is attributed to
economic reforms. At the core of economic reforms in both the countries is liberalisation. But the
nature and processes of liberalisation have been very different as only to be expected since the
reforms were introduced in an exciting economic structure which was very different in the two
countries. The Chinese economy under communist rule, which abolished capitalism, was owned
and run solely by the state authorities at various levels. On the other hand, India had a mixed

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economy with central planning. The private sector, the newly augmented public sector and the
cooperative sector particularly in the rural areas constituted the mixed economy.

The state authorities planned, controlled and regulated the economy. Different economic systems
in the two countries meant different types of reforms towards liberalisation of the economy.

In China it meant giving freedom to growers of agricultural produce to sell their output in the
market after a certain prescribed quota was delivered to the state authorities. The market incentive
gave economic boost to agricultural production and augmented the income of the agricultural
community. A similar incentive to state enterprises increased industrial production. They almost
started working as private enterprises run on commercial lines. A unique phenomenon in the
Chinese economic reforms was the establishment of a large number of village and town
enterprises set up by local authorities. This brought about massive expansion of labour intensive
manufacturing enterprises. The local Communist Party bosses acted like private entrepreneurs.
They made deals with private capitalists and gave generous concession to their enterprises by
way of land and other natural resources. These enterprises made a significant contribution in
increasing the Gross National Income. The local party bosses were often accused of nepotism and
corruption but frequently proved too powerful to be curbed by the central leader-ship. As in India,
in China to the foundations for growth were down in the pre-reform era (that is, before the Deng
revolution of 1979).

The foundations were much stronger in China than in India because of much better spread of
educational facilities and health services. Another plus factor was the nature of the political
system. With the firm grip of the Communist Party, the authoritarian government could take firm
collective decisions and carry them out resolutely. India, on the other hand, has been a democracy
since independence. And democracy has become more and messier over the years. The
unquestioned authority of the Congress under the leader-ship of first Prime Minister, Jawaharlal
Nehru, both at the Centre and in the States, facilitated unity of approach both at the Centre and in
the States. But slowly, since 1967, the hegemony of the Congress party eroded and gave way to
a multiplicity of parties, some purely regional parties that came to power in the States and shared
power at the Centre. The 1991 government of the Congress party at the Centre under Prime
Minister Narasimha Rao was a minority government but took a bold initiative to introduce the
policy of marketization, liberalisation, privatisation and globalisation, no doubt, under the
pressure of the World Bank and International Monetary Fund. It was a reversal of the Nehruvian

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policy of a planned mixed economy, but Narasimha Rao deliberately avoided saying so publicly.
Yet the policy had all-round approval and was continued under non-Congress governments from
1996 to 2004. In 2004 the Congress came back to power although forming a coalition government
with smaller parties including the Communist Parties.

This naturally put brakes on “economic reforms”, especially disinvestment of the public sector.
The Communists withdrew support on the issue of the nuclear agreement with the US but the
Congress managed to get the vote of confidence and again came back to power in 2009.
Throughout the government followed a timid half-hearted policy of liberalisation but the first
initiatives of delicensing industry and business, and opening the economy to foreign investment
and multinationals continued. However, decline in public investment in the agricultural and rural
areas meant slower agricultural growth rate. Hence the pace of poverty reduction is much less in
India than in China. But that does not mean that a democracy such as India has only negative
points. It is much better in accommodating diverse options and resolving differences. It does not
use brute force to supress dissent but tries to win it over. Besides it has given greater freedom for
India’s dynamic private enterprises to flourish. The success may be limited but is likely to be
more sustainable. Also India has a more diversified financial system in terms of banking and
equity market. In the long run therefore India may well have a more enduring success.

Despite talk of local democracy in the shape of Panchayati Raj Institutions in rural areas and
municipalities in urban areas which were given constitutional status in 1993 through the 73rd and
74th Amendments of the Constitution, local democracy in India continues to be weak and has
neither the resources nor the leadership to contribute to the kind of dynamic economic growth
that the local governments in China have done through the setting up of town and village
enterprises. But apart from the nature of economic reforms and the political system in which they
are given shape, there are significant differences in the general tenor of the societies. Indian
society is diverse, more heterogeneous and even divisive, torn apart by caste and religious
tensions. Collective decisions are difficult to take and once taken are questioned by different
sections of the society. Chinese society, on other hand, has the tradition of ‘social harmony’; thus
the society prefers to cooperate with the authorities once the decisions are taken. India may well
learn to adopt the ethos of social harmony.

Corruption has been the concomitant of growth in both the countries. In India, thanks to poor
record of the investigative agencies, political interference, and long winding judicial procedures

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giving ample scope to the influential to find loopholes, the corrupt are seldom given exemplary
punishment. On the other hand, China is ruthless in punishing the corrupt by sending them to the
gallows. But despite the ruthless punishment meted out to the guilty, corruption is still flourishing
there.

OBJECTIVES:

This paper makes an endeavor to accomplish following objectives:


• To assess the present status of India and China in the global economy.
• To know which of the two countries is enjoying an edge over the other on the various
fundamentals of the economy.
• To give some practicable suggestions to the two countries especially India so that their policies
pertaining to economic growth may become more focused hither-to-be.

REVIEW OF LITERATURE:

1. The Export-Led growth hypothesis has been dominating the development literature for
the last four decades. Several studies examined the relationship between exports and
growth in the 1970s and 1980s.
2. According to Michaely(1977), Heller & Porter(1978), Tyler(1981), Feder(1983),
Kavoussi(1984), Ram(19870), Mohanty and Chaturvedi(2006), Wah(2004), Wong(2007
and 2008), the expert growth has a strong association with growth of real output.
Moreover, causation between the two variables is not established with certainty among
different cross-section of countries and at different points of time. During the last several
decades, such relationships were examined in the framework of time-series.
3. Several studies have (Jung and Marshall, 1985; Hsiao, 1987; Bahmani-Oskooee, et al.,
1991; Dodaro, 1993 and Love, 1994; Love and Chandra 2005) used different time-series
approaches to lend support to the export-led hypothesis. Their results are not conclusive
in supporting the hypothesis, but rather mixed in nature. Taking a large set of 87 countries,
Dodaro (1993) examined the causality between export growth and causality. Results of
the study found weak support for the hypothesis that export growth promotes GDP
growth. Using the Granger causality, Jung and Marshall (1985) found that the exported
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growth hypothesis is supported by 10 per cent of the sample in the cross-country analysis.
The results of the study by Bahmani-Oskooee et al. (1991), combining Granger causality
with Akaike’s Final Prediction Error (FPE) were to some agreement with the export-led-
growth hypothesis, although the evidence is inconclusive.
4. Using a similar methodology, with Johansen’s multivariate approach to cointegration,
Love and Chandra (2005) examined the hypothesis of an export-led growth hypothesis
for Bangladesh. The findings suggest that the direction of both long- and short-term
causality is from income to export and therefore country inward trade strategy of
development discriminated against export.

5. In several countries, both ELG and DDLG are pursued simultaneously in order to insulate
the domestic economy from the adverse impacts of global business cycles. Several studies
have observed that empirical findings do not strongly support the export-led growth stance
and this is because of the missing impact of DDLG misspecification in the model. In many
other cases, both development paradigms are empirically found to be important in
contributing to growth, meaning thereby a simultaneous pursuit of these two strategies to
optimize national welfare. Lin and Li (2002) examined contribution of the external sector
to GDP growth to examine efficacy of export-led growth in China. They proposed a new
methodology to estimate the direct and indirect contribution of exports to GDP growth.
Their results indicate that a 10 per cent increase in export growth would lead to 1 per cent
growth in GDP in the 1990s.

6. In a recent paper, Mohanty (2012a) examined the possibility of maintaining a sustained


high growth performance in India while simultaneously pursuing both ELG and DDLG
strategies. Since India falls in the Low Middle Income Country Group, it has a large
number of products with export competitiveness globally. Time Series analysis with the
VECM model reveals that both strategies have a significant long-term relationship with
income. If India’s medium-term growth performance were sustainable, India’s trade
integration with ASEAN would be strengthened with either ELG or by a combination of
both strategies. India’s interest could be to pursue both strategies alternatively to maintain
sustained high growth until its export competitiveness is fully realized.

7. In the case of China, a study by Tang and Selvanathan (2008) suggested that FDI had not
only compensated a shortage of capital but also induced high economic growth through

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domestic investment. Therefore, FDI encouraged the relevance of the DDLG strategy in
China.

8. Wah (2004) tried to examine the specific paradigm of development that contributed to the
high growth phase of the Malaysian economy during the period 1961-2000. During the
high growth period, export remained an important factor in the economic transformation
of the economy. However, various studies examining the export-led hypothesis in
Malaysia found weak support for this hypothesis in the long run, and this could be because
of exclusion of various factors relating to domestic demand in the models. Results support
the domestic demand hypothesis in the long run, but the export-led hypothesis was not
supported by the empirical findings.
9. In another study, Wong (2008) examined the relevance of development stance of some of
the South East Asian countries, particularly ASEAN-5, during and after the ‘Asian
Economic Crisis’. The regional overview indicated that there was bilateral Granger
causality between exports and economic growth, and private consumption and economic
growth. The empirical findings could not suggest that the crisis in the region was due to
export-led growth. The broad conclusion of the study is that sustained economic growth
requires steady growth in the exports and domestic demand.
10. A similar hypothesis was examined by Wong (2007) for some Middle East countries
including Bahrain, Iran, Oman, Qatar, Saudi Arabia, Syria and Jordan, and found that
sustainability of economic growth went hand in hand with growth of both exports and
domestic demand. However, the results were less conclusive to support any development
strategy responsible for sustained economic growth in the Middle East region.
11. An overview of the current literature highlights the role of both exports and domestic
demand to put economic growth on a high growth trajectory in a sustainable manner. The
exact sequencing of policies and their impact on the growth prospects of a country are
empirical issues, which can be examined in case of India and China.

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RESEARCH METHODOLOGY:

The researchers have primarily relied on published secondary data to draw necessary conclusions.
All possible efforts have been made to ensure that gathered data is an authentic one. It is in this
context that a deliberate attempt was made to collect the information supplied by various
Government agencies. The collected data have been presented and analyzed with the help of
appropriate statistical tables.

SCOPE OF THE STUDY:

The present study is confined to two fastest growing economies of the world i.e. China and India.
The comparison of these two economies has been made on key economic variables only. All the
secondary data collected in this regard is of the period 2010-11.

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DISCUSSION/RESULTS:

INDIA-CHINA ECONOMIC COMPARISON:


‘Future belongs to India and China.’ Most of the experts around the globe don’t hesitate in
expressing such sentiments. However, just concentrating on future may jeopardize desired efforts
at present. The researchers have tried to assess how the selected countries are faring on key
economic parameters at this juncture. The same have been discussed with the help of table:

China’s economy has been growing at an outstanding pace for years which has not escaped the
attention of global investors. Needless to say, the country’s stock market has gained 109 per cent
since 2009. India, on the other hand, has not yet forayed into the top ten countries of the world in
this context. The size of Chinese economy is 4.5 times more than that of Indian economy. Further,
India’s per-capita GDP is 1/7th of that of China at this juncture. China has done miraculously

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well to reduce its poverty to the level of 8 per cent. Not long back, like India, it was struggling
on this front with a 30 plus per cent poverty. However, urgency in this regard has led to a situation
that its poverty rate has come down to one digit. The country is optimistic to bring the same to
zero in near future. India, on the other hand, in spite of all hype has failed to curtail its poverty
rate and the same stands at 37 per cent at this point of time. This obviously does not argue well
for it. The difference perhaps lies in the attitude and policies of the two countries. One of the
major indicators of poverty is rate of unemployment. On this front too, India has failed to match
its counterpart. An unemployment rate of 9.4 per cent in comparison to 4.6 per cent of China
proves India’s apathy on this front as well.

There is no denying the fact that steps such as implementation of MNREGA may prove fruitful
in reducing unemployment but to make any significant improvement on this front, the country
will have to adopt a more proactive approach. China has outshined India on Foreign Direct
Investment (FDI) front as well. Estimated annual FDI inflow in China is $108 a year against
$34.6 billion a year of India. More importantly, India has failed to attract desired kind of FDI.
China has been getting FDI in labor intensive industries while India, on account of its poor
policies has to content with capital intensive FDI. Needless to say, FDI in China has generated
huge employment and has surged its exports as well. India, on the other hand has been made to
wonder as to why in spite of attracting FDI, unemployment and poverty rate are not coming down.
Although foreign exchange reserves of India looks healthy at $2.41 billion, the same are
negligible in front of China’s $2.65 Trillion.
Inflation, especially food inflation has also rattled India in the recent past. The food inflation in
India, for instance is persisting at 15 % plus level for some time now. The Government, on its
part, is coming out rather funny arguments such as Indians consuming more or account of
enhanced prosperity to justify such a hefty price increase of food items. In reality, however,
ignorance of agricultural sector, cuts in subsidies and price hikes of inputs like diesel and
fertilizers, hoarding and growing penetration of big corporates in the food economy are the
reasons behind it. The comparative position of China is much better in this regard as well.
All this has culminated into rather sorry ranking of India on the various socio-economic health
indicators. India’s ranking in global exports is 20th. This is in spite of the fact that India is the
seventh largest country of the world and nature has showered all kind of blessings on it. China is
at the top on this front as well. On overall world prosperity index, the country’s 88th ranking
certainly creates lot of doubts about its future.
It is however, heartening to note that India is not far behind China when it comes to the growth

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rate these two countries are likely to achieve in the coming years and the way it has recovered
over recent recession. A projected growth rate of 9 percent (second fastest) and that too on
sustained basis for some years is likely to place India in the proximity of developed nations. This
argument also sounds authentic keeping in view the growth projections of the advanced countries.
All these countries are likely to witness negative or very low economic growth rates in the coming
years. India’s recovery over recession also was swifter in comparison to most of the other
economies of the world. The recent recession shattered the economies of many might countries.
However, its impact on India was marginal and short lived. Whatever negative impact was
witnessed, that was marginalized by a very swift and smooth recovery - the recovery, which has
not been replicated by even very strong economies of the world. Indian corporates, for instance,
experienced some erosion in both gross and net profit margins in third quarter of 2008-09, relative
to pre-crisis level.
The erosion in case of manufacturing sector was more pronounced as its net profit margins
dwindled to half of what the same was prior to pre-crisis level. However, within no time i.e. by
2nd quarter of 2009-10 profit margins of manufacturing sector rebounded to pre-crisis level.
Initially meager impact and subsequently extremely quick recovery by Indian corporate sector
has surprised even the optimists.

MATCHING CHINA- IMPERATIVES FOR INDIA:

The above discussion leads us to the conclusion that although statistically speaking, India looks
a struggler yet, the fundamentals of its economy and future growth projection makes it a dark
horse in the global scenario. India, by addressing the below mentioned issues can not only match
China but also enhanced its pace towards the tag of a developed nation. At the outset, we need to
pay special attention towards developing rather crippled infrastructure of the country. It is so
because the same is a crucial factor that influences growth of any country. We, at this juncture,
lag behind developed and many developing countries of the world on this front. Inadequate
infrastructure in the country can be made visible from the fact that over 40 percent of the fruit
rots before reaching the final destination in the country. Government of India, in the budget of
2010-11 has rightly allocated lion’s share of Rs 1.73 lakh crore to infrastructure development in
the country. This trend must follow for many more years. An extremely high food inflation rate
has dampened the growth rate euphoria in the country. The same must be checked to ensure that
growth rate is not adversely hampered. In this context, we must stop ignoring agriculture on the
pretext of developing industry and services. Besides it, hoarding must be dealt with severely, land
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mafia should be taken to the task, nature and extent of corporate involvement in agriculture must
be defined and all possible support should be given to the farmers as they are prone to havoc of
the nature. Agriculture will remain the crucial factor in the growth of the country.
India will have to have a re-look at its FDI policy. FDI inflows in the country are no-where near
to that in China. More disturbing fact, as mentioned earlier, is kind of FDI inflows in the country.
Perhaps we have succumbed to the pressure of MNCs and the countries of their origin and are
allowing them to operate in the fields which are profitable to them only. Needless to say, foreign
investment in the country has not lead to improvement in the areas such as poverty alleviation,
employment generation etc. on account of the same being highly inclined towards capital
intensive industries. We must learn from China which has made it crystal clear to MNCs investing
in it to help the country or perish.

Corruption, black money and huge fiscal deficit are some other issues which will have to be
addressed to in the right earnest by the country. How can the standard of living in the country are
improved if more than 90 per cent of the money circulated for welfare activities finds a place in
the pocket of the middlemen. Further, black money constituting more than 40 per cent of GDP
(official estimates, unofficially the figure is much higher) make one wonder how powerful
(economically) India could have been if black money was a productive resource. For all the mess,
various governments at the central and state level are also responsible. Their spending on items
such as security of the politicians, election campaigns and all other amenities provided to
themselves and their near and dear ones has put India in a precarious situation as fiscal deficit has
risen to 3.6 lac crores. India can never hope to grow if such issues are ignored by our politicians.
Indian business sector must also start spending more on Research and Development. It is a known
fact that India’s spending on R&D as a ratio of GDP is very low in comparison to other emerging
economies. The research and development nexus is judged to be very weak, with little
collaboration between business and academics, and little success in commercializing or adopting
new technologies. Lack of initiative in this regard has led to a situation that Indian corporate
remains follower rather than innovator in product development. There is no denying the fact that
innovator always enjoy privilege of customers. Indian corporate, in order to ensure that it is not
lagging behind its counterparts, will have to reverse the trend by investing more in R&D.
In addition to the above challenges, we will have to serious look upon improving the education
rate and standards in the country; curtailing adverse balance of trade; making our laws especially
labor laws simple and straight forward, making our financial markets more efficient and so on.

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India by addressing the issues mentioned above can not only match China but also rise to the top
in coming time. China has already attained rapid growth by technological leapfrogging and its
potential for further leapfrogging has already starting diminishing. . India, on the other hand,
precisely because it has lagged behind till now can maintain high growth rate for a much longer
period by technological leapfrogging.

India vs. China Economy:


Making an in depth study and analysis of India vs. China economy seems to be a very hard task.
Both India and China rank among the front runners of global economy and are among the world’s
most diverse nations. Both the countries were among the most ancient civilizations and their
economies are influenced by a number of social, political, economic and other factors. However,
if we try to properly understand the various economic and market trends and features of the two
countries, we can make a comparison between Indian and Chinese economy.
Going by the basic facts, the economy of China is more developed than that of India.
While India is the 11th largest economy in terms of the exchange rates, China occupies the
second position surpassing Japan.
Compared to the estimated $1.3123 trillion GDP of India, China has an average GDP of around
$4909.28 billion. In case of per capital GDP, India lags far behind China with just $1124
compared to $7,518 of the latter.
To make a basic comparison of India and China Economy, Scholars need to have an idea of the
economic facts of the countries.

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When Scholars make the analysis of the India vs. China economy, they can see that there are a
number of factors that has made China a better economy than India. First things first, India was
under the colonial rule of the British for around 190 years. This drained the country’s resources
to a great extent and led to huge economic loss. On the other hand, there was no such instance of
colonization in China. As such, from the very beginning, the country enjoyed a planned economic
model which made it stronger.

AGRICULTURE:
Agriculture is another factor of economic comparison of India and China. It forms a major
economic sector in both the countries. However, the agricultural sector of China is more
developed than that of India. Unlike India, where farmers still use the traditional and old methods
of cultivation, the agricultural techniques used in China are very much developed. This leads to
better quality and high yield of crops which can be exported.

IT/BPO:
One of the sectors where Indi 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.
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LIBERALIZATION OF THE MARKET:
In spite of being a Socialist country, China started towards the liberalization of its market
economy much before India. This strengthened the economy to a great extent. On the other hand,
India was a little slow in embracing globalization and open market economies. While India’s
liberalization policies started in the 1990s, China welcomed foreign direct investment and private
investment in the mid-1980s. This made a significant change in its economy and the GDP
increased considerably.

DIFFERENCE IN INFRASTRUCTURE:
Difference in Infrastructure and Other Aspects of Economic Growth Compared to India, China
has a much well developed infrastructure. Some of the important factors that have created a stark
difference between the economies of the two countries are manpower and labor development,
water management, health care facilities and services, communication, civic amenities and so on.
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:


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. In addition to this the Chinese government is the major stake holder of most
of its State-owned organizations hence the listed firms have to run according to the rules and
regulations lay down by the government. Hence India is ahead of China in matters of financial
transparency.
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COMPANY MANAGEMENT CAPABILITIES:
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 Chinas exports that drove the
economy instead it were 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.

CHINA’s IMPORT & EXPORT (2010/11):


As far as exports of both the countries are concerned both the countries managed to do pretty well
in 2010. China’s total imports and exports stood at US $2677.28 billion at the end of November
2010. India’s exports grew by 26.8% and imports increased by 11.2%.
Below is presented details about China’s import and exports for the year 2010.

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Further, in terms of manufacturing China’s lead over India in terms of manufacturing is
considerable. China is the world’s third largest nation in terms of manufacturing after the U.S.
and Japan. India is a still impressive, but much further back 12th place in the same list according
to Global Insight and the Financial Times. These points out the fact that to this point, India’s

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success in expanding its Service industry has yet to be as firmly demonstrated in the
manufacturing sector.

In terms of performance, here are some charts comparing and contrasting the two economies in
terms of first GDP, then exports and finally imports: (Chris Runkell 2007).

Indian Companies in China:


With the growth in bilateral trade between India and China in the last few years, many Indian
companies have started setting up Chinese operations to service both their Indian and MNC
clientele in China. Indian enterprises operating in China either as representative offices, Wholly
Owned Foreign Enterprises or Joint Ventures with Chinese companies are into manufacturing
(pharmaceuticals, refractories, laminated tubes, auto-components, wind energy etc.), IT and IT
enabled services (including IT education, software solutions, and specific software products),
trading, banking and allied activities. While the Indian trading community is primarily confined
to major port cities such as Guangzhou and Shenzhen, they are also present in large numbers in
places where the Chinese have set up warehouses and wholesale markets such as Yiwu. Most of
the Indian companies have a presence in Shanghai, which is China’s financial center; while a
few Indian companies have set up offices in the capital city of Beijing. Some of the prominent
Indian companies in China include Dr. Reddy’s Laboratories, Aurobindo Pharma, Matrix
Pharma, NIIT, Bharat Forge, Infosys, TCS, APTECH, Wipro, Mahindra Satyam, Dr. Reddy’s,
Essel Packaging, Suzlon Energy, Reliance Industries, SUNDARAM Fasteners, Mahindra &
Mahindra, TATA Sons, Binani Cements, etc. In the field of banking, ten Indian banks have set
up operations in China. State Bank of India (Shanghai), Bank of India (Shenzhen), Canara Bank
(Shanghai) and Bank of Baroda (Guangzhou), have branch offices, while others (Punjab
National Banks, UCO Bank, Allahabad Bank, Indian Overseas Bank, Union Bank of India etc.)
have representative offices. Apart from PSU banks, private banks such as Axis, ICICI also have
representative offices in China.

Chinese Companies in India:


According to information available with the Embassy of India, close to 100 Chinese companies
have established offices/operations in India. Many large Chinese state-owned companies in the
field of machinery and infrastructure construction have won projects in India and have opened
project offices in India. These include Sinosteel, Shougang International, Baoshan Iron & Steel
Ltd, Sany Heavy Industry Ltd, Chongqing Lifan Industry Ltd, China Dongfang International,
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Sino Hydro Corporation etc. Many Chinese electronic, IT and hardware manufacturing
companies also have operations in India. These include Huawei Technologies, ZTE, TCL, Haier
etc.

A large number of Chinese companies are involved in EPC projects in the Power Sector. These
include Shanghai Electric, Harbin Electric, Dongfang Electric, Shenyang Electric etc. Chinese
automobile major Beijing Automotive Industry Corporation (BAIC) has recently announced
plans to invest US$ 250 million in an auto plant in Pune. TBEA a Xinjiang-based transformer
manufacturer has firmed up plans to invest in a manufacturing facility in Gujarat. During the
visit of Premier Wen to India, Huawei announced plans to invest in a telecom equipment
manufacturing facility in Chennai.

FACTORS LEADING TO CHINA’s SUCCESS IN MANUFACTURING:

 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 (Segal and Thun 2001). 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 (Segal and
Thun, 2001). 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 (Linden, 2003). Additionally, the ease of doing business in China
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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 (IFC Doing Business). Moreover, the
costs and procedures involved in importing and exporting a standardized shipment of
goods in China are less than countries in the region (IFC Doing Business).

 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 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 (Hu and Khan, 1997).
 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

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college graduates (EIU China Country Report, 2006). In terms technical resources, China
adds 600,000 new engineers every year (Christian Science Monitor).

OVERVIEW OF MANUFACTURING IN INDIA:

While India’s Information Technology services sector has been credited with much of India’s
economic growth (in 2004 51.1% of GDP), experts predict that manufacturing (in 2004 16% of
GDP) will fuel India’s next era of growth (EIU India Country Report, 2006). India’s
manufacturing sector has lagged behind those of China, Thailand, Malaysia, and Mexico. The
main reasons multinational companies have not invested in India results from the lack of
infrastructure including electricity, roads, and sea and air ports as well as government regulation
and corruption. Despite these obstacles to growth, electrical and electronic components
manufacturers ABB, Honeywell, and Siemens and automotive manufacturers DaimlerChrysler
and Toyota Motor have started operations in India. Their incentives for starting production in
India are low labor costs and the availability of high levels of technical expertise. Industry trends
show an increase in skill-intensive manufacturing sectors. Approximately 50% of U.S. offshore
is manufacturing in skill-intensive sectors, and this number is expected to increase to 70% by
2004 (Luthra, Mangaleswaran and Padhi 2005). Industry growth alone will not continue to attract
multinational companies to India. If lessons learned from China’s success are applied to India, it
becomes evident that India mimics China’s success in developing human capital and providing
some preferential treatment. However, India needs to continue to take steps to improve its
infrastructure and government regulation in order to increase FDI flows. A further examination
of the electronic components and automotive manufacturing sectors will provide insight on what
factors are spurring growth in these sectors and what government regulations need to be leveraged
to increase growth.

INDIA’s KEY MANUFACTURING SECTORS:


Electronics and Automotive Components.
The ten key manufacturing sectors in India includes engineering, electronics, automotive, textiles,
chemicals, leather, metals, machine tools, food processing and gems and jewelry.
Of these ten sectors electronic and automotive components have had some of highest rates of
growth.

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FACTORS LEADING TO INDIA’s SUCCESS IN MANUFACTURING:

While there are certain similarities in India and China that encourage growth of the manufacturing
sectors, there are key differences that can account for why China has been more successful in
manufacturing than India. As mentioned in the section above, China has been successful in
manufacturing because of preferential government policy, foreign investment, infrastructure
investment, and human capital. Preferential government policy and human capital have also
played a role in India’s new growth in manufacturing, but other factors such as reliable suppliers,
low cost of materials and labor, and a large domestic market have also encouraged the recent
growth of manufacturing in India.

 PREFERENTIAL GOVERNMENT POLICY:


In order to encourage growth of the manufacturing sector the government has
implemented reductions in import and customs duties. In the electronics sector the
government has removed customs duty on raw materials and inputs for the manufacture
of electronic components. In the automotive sector the government has reduced customs
duties on raw materials and inputs for manufacture of automotive components from 20

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– 15 percent (IBEF 2006). 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 (IBEF 2006).

 HUMAN CAPITAL:
India has an abundance of skilled engineers and technical experts. The U.S. and
Singapore are the only countries the outrank India in the availability of skilled-
workforce. In addition, India’s employable skilled workforce is predicted to grow for the
next 20 years, but China’s skilled workforce will begin to decline in 2010. In 2003, India
also had the lowest hourly labor costs among its major competitors at US$0.74. India’s
competitors followed at the following rates: China US$0.90, Thailand US$1.20 and
Mexico US$1.68 (IBEF 2006). 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 (IBEF 2006). Eight
percent of the Indian population between the ages of 25 and 34 receives tertiary education
compared to only 5% of the Chinese population in that same age cohort. High levels of
education not only lead to engineering and technical capability, but also strong
managerial capability.
 LARGE DOMESTIC MARKETS:
India’s rising incomes and growing consumerism are the main factors aside from lower
costs that make India appealing to foreign investment. As income rises, there is also an
increase in domestic consumption. Between 2005 and 2006 domestic consumption was
forecasted to increase by 8.7% (EIU 2006). While a large domestic market creates a good
incentive for initial investment in India, companies need to realize that this is a limited
source of growth and they need to be poised to export from India in order to truly expand.
 QUALITY AND TRADE STANDARDS:
India’s adherence to quality and trade standards makes exporting from India a viable
option. India manufacturing companies have quality management programs in place
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

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advantage of these opportunities to expand India’s manufacturing sector to serve
international markets.

FACTORS SLOWING INDIA’s GROWTH IN MANUFACTURING:


Lower Levels of Foreign Investment than China Since the beginning of the 1990’s, India has
improved its manufacturing environment. In the first half of the 1990’s, manufacturing exports
grew 30% higher than the world export market, but during this time China’s exports grew at a
rate of 57% higher than the world market. One main factor that contributed to China’s higher
rates of growth was that during that time China averaged US$40 billion in foreign investment
annually while India averaged foreign investment was only US$3 during the same period of
time. The main obstacles preventing investment were the regulatory quality and corruption, and
provision of infrastructure (World Bank, 2004). According to the World Bank 2004 Doing
Business in India report, it is harder to do business in India than China. One supporting example
of this fact is that in 2004 it took 89 days to start a business in India, but it only took 41 days to
start a business in China. In addition, India also has stricter labor laws, which makes it much
harder to hire and especially fire workers. This is also cited as an impediment to growth by
businesses. Senior management at Indian firms also spends more time addressing regulatory
issues than management of Chinese firms (11.9% in India vs. 7.8% in China) (World Bank
2004). The government officials in India responsible for overseeing various regulations
including labor and tax provisions have more discretion over what rules and regulations they
enforce. This leads to higher levels of corruption than other developing countries.

 LACK OF INFRASTRUCTURE:
Infrastructure is often cited as the biggest impediment to growth of the manufacturing
sector in India. Gains made through low labor costs are often lost through bottlenecks in
power supply, telecommunication, and transportation.
The following chart highlights differences between China and India for three major
indicators.

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Each of these factors increases cost of business in India and deter investment. Problems with
lack of access to power supply are also exacerbated by frequent power outages. In terms of
transportation, India has the second largest railways system in the world, but the high duties
on transporting goods makes it an expensive way to move goods around the country. In
addition, India lacks an interstate linking its key economic zones. These inefficiencies in
transport lead to higher levels of inventory, which in turn leads to higher operating costs for
companies.

RECOMMENDATIONS FOR INDIA’s MANUFACTURING SECTOR


GIVEN CHINA’s SUCCESS:
Based on Key Lessons from China’s Success in Manufacturing and India’s Obstacles to Growth
in Manufacturing, it is quite evident that India needs to increase its FDI flows and improve its
infrastructure to increase growth in manufacturing.

RECOMMENDATION 1: INCREASE FDI INFLOWS

FDI inflows are one of the main factors that will enable India to improve its manufacturing sector.
Higher FDI will allow India to further develop its infrastructure, which will lead to business
development. To increase FDI, India needs to further liberalize FDI regulation. The one cultural
factor that makes that more difficult for India than China is Indian nationalism.
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Certain government parties are resistant to multinational investment in India.

Unless there is an acceptance in the role foreign investment can play in making India stronger,
this will continue to be a hurdle. Another main factor in increasing FDI flows in making it easier
to enter and exit the Indian market. Until these factors are addressed foreign companies will
continue to choose other destinations for their investment like China, Brazil, or Malaysia.

RECOMMENDATION 2: IMPROVE INFRASTRUCTURE

Making a serious investment infrastructure will help business grow and attract more investment
to India as well. While the Indian government is taking some steps towards developing
infrastructure through the Special Economic Zones, in order to truly be competitive they need to
allow for better access to power supply and transportation. Following China’s example of
developing preferential treatment for access to power supply and transportation would lead to
more investment in manufacturing.

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CONCLUSION:

Both the countries are making efforts to improve the relation with each other so that trade between
the two can be increased. Recently, India and China have decided to set up a working group that
will prepare a framework to resolve their decades-old border dispute. Although, India, is far
behind China in many respects, but it has a potential to achieve that level.
Going forward, from a global perspective, everybody knows that China has been the fastest-
growing economy, averaging 9.5 percent for the past 25 years, but not many people know that
India has been the eighth- or ninth-fastest-growing economy over the past 25 years. This is
because many people think that India’s reforms started in 1992 and that India has been lagging
by about a decade. The fact is that India’s reforms started around the same time as China’s (1980),
but its average growth rate has been slower (Virmani, 2005). The East and Southeast Asian
economies that have grown faster than India during the past 25 years are likely to slow during the
next decade. India, in contrast, has been on a rising growth rate trend since the reforms of the
1990s. It is therefore likely to be among the five fastest-growing economies (if not among the top
three) along with China. It will become one of the primary global growth drivers by the end of
the decade along with China. By 2010, it is likely to be the fourth-highest contributor to world
GDP growth after the United States, China, and Japan. The possibilities for trade and economic
cooperation between China and India will therefore continue to expand. Once the identified
barriers are removed (hopefully in a year or two), we should be in a position to start discussing a
comprehensive economic cooperation agreement.

Given the high reinvestment, “vent for surplus” approach of the socialist-owned part of China’s
economy, a free trade agreement is likely to benefit China more than India. So there has to be a
tradeoff. I think both sides need to recognize that you cannot have these special agreements unless
both sides can balance the gains and losses. There are already some special losses to certain
manufacturing sectors such as toys. However, India expects some gains in the services sector.
The agreement has to be a comprehensive one that includes trade in both goods and services.
Another area of economic cooperation that is very important for the future of Asia is that Indian
and Chinese economic cooperation be embedded in an Asian context. India and China have either
framework agreements or ongoing discussions for a Free Trade Agreement/Common Economic
Partnership Agreement with the Association of Southeast Asian Nations (ASEAN), Japan, and
Korea. We have to harmonize these by developing an East Asian community in which ASEAN,
China, Japan, and India are equal partners. In December 2005, there was a meeting of the East
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Asian Economic Community, in which both India and China were involved. China’s attitude
toward Indian inclusion will be closely watched by people in India and Asia as an example of its
general approach to hegemonic competition versus mutually beneficial cooperation.

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