India & China

Complementing Competencies

Project Report by Tarun KSG (DM-162) Vishal Aggarwal (DM-176) Vidu Rastogi (HR-044) Srikanth Konduri (FN-109 ) Saurabh Thadani (FN-102) Varun Joshi (FN-117)

Table of Contents

Introduction ................................................................................................3 Economic Indicators Fast facts ...............................................................4 Manufacturing Competitive Index.............................................................5 Bilateral Trade ............................................................................................7 Determinants of Competitiveness ............................................................ 13 Mutual Presence ........................................................................................ 15 Few Macroeconomic Comparisons between India and China...........................................................................................16

Conclusion....................................................................................................22

Reference......................................................................................................24

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INTRODUCTION

The sharp growth of Asia in recent decades suggests that the center of economic gravity is now shifting westward again, across the Pacific Ocean and back to Asia. In particular, the two most populous nations in the world, the Peoples Republic of China (PRC) and India, are experiencing a resurgence of economic activity. However, until recently there was little trade between Asias two giants. That is now changing rapidly. In this context, it is useful to examine the dynamics of trade between these two countries and the role that changes in trade costs are playing in the process. The economies of the Peoples Republic of China and the Republic of India have captured a great deal of attention among Multi-National Corporations (MNCs) due to their rapid growth. According to the projections of the World Bank, China will overtake Japan as the second largest economy in the world in 2010, while India is expected to rank eleventh. Near-term projections by the Organization for Economic Co-operation and Development (OECD) anticipate annual growth for China averaging over 10% through 2011, which will make it the worlds second largest economy by 2010. Growth rates in India of over 8% are also expected. Long-term projections for both these economies anticipate robust growth through 2040, with China becoming the worlds largest economy by 2030. In this report, we analyze the growing competitiveness between India and China by looking at various economic parameters like Determinants of Competitiveness, Trade Statistics, areas of Imports & Exports, corporate Income Taxes, Real Estate & Labor Rates, etc.

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ECONOMIC INDICATORS FAST FACTS

ECONOMIC INDICATOR Gross (Sub, 2009) Domestic Product INDIA 1296.09 8.9% 17.5% 437 139th 232 2nd 12th 500 6.59% CHINA 4909.28 9.6% 21% 2561 104th 10 5th 3rd 250 7.64%

GDP Growth rate Total Population in Global terms Global Trade (US$bn, 2008) World Per Capita Income Ranking Total Number of English Speakers (in millions) Global Ranking fastest Growing Economies terms Number millions) CAGR of Workers (in among

Size of the Economy in global

Year 2030 projected GDP

Source: National Statistical Data http://www.tradingeconomics.com

Observing the data we find that while GDP of China is almost 4 times that of India and global trade almost 6 times more, the number of workers in India far outnumber those of China by 100% and the future holds more promise for India as its growing with a greater rate.

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MANUFACTURING COMPETITIVENESS INDEX

A report from Deloittes Global Manufacturing Industry group and the U.S. Council on Competitiveness indicates that access to talented workers capable of supporting innovation is the key factor driving global competitiveness at manufacturing companieswell ahead of classic factors typically associated with competitive manufacturing, such as labor, materials, and energy. Further, difficulties accessing the right kind of talent are likely to contribute to the United States becoming less globally competitive in the next five years. The 2010 Global Manufacturing Competitiveness Index is based on the responses of more than 400 chief executive officers and senior manufacturing executives worldwide to a survey conducted in late 2009 and early 2010. It also draws on select interviews with key manufacturing decision makers. At its broadest level, the study confirms that the global competitive landscape for manufacturing is undergoing a transformational shift that will reshape the drivers of economic growth, high-value job creation, national prosperity, and national security, according to Deborah L. Wince-Smith, president and chief executive officer of the U.S. Council on Competitiveness. A key finding of the report was that talent-driven innovation ranked the most significant driver of competiveness in most markets. The top three drivers viz. talent-driven innovation, cost of labor and materials, energy cost and policies, remain relatively stable across all geographic regions, with the most notable differences being Mexico and South America, where quality of physical infrastructure outranked talent. China and India claim the worlds first and second most competitive manufacturing industries, respectively, and it will remain that way for at least the next five years, according to the new global manufacturing competitiveness index published in a joint report by Deloitte LLP and the U.S. Council on Competitiveness in 2010.

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Even the Global Competitiveness Index indicates that though in near future China has favorable statistics, in long term India, with its fast improving infrastructure and socioeconomic standards will prove to be more competitive. China, on the other hand, seems to be stagnant with its current progress. The factors responsible for the rise of India, according to the report, are following: 1. India is a home to rich talent pool of scientists, researchers, and engineers. 2. It has large, well-educated English speaking workforce. 3. The robust democracy makes it an attractive destination for manufacturers. 4. Research and development capabilities paired with engineering, software, and technology integration abilities the essential ingredients for manufacturing enterprisesare available in India. 5. India is also viewed as a place where manufacturers can design, develop and manufacture innovative products for sale in local as well as in global markets.

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BILATERAL TRADE
Bilateral trade between India and China has been growing significantly since 2005. While international trade has been growing at around 15% on an average, India-China trade has increased by more than 50% annually in the last five years. In 2008, China became India's largest trading partner and the bilateral trade between the two countries touched US$ 51.8 billion. India has emerged as the 7th largest export market of China and 10th largest trade partner. If the current growth rate continues the bilateral trade between the two most populous countries may cross US$ 100 billion by 2015. Even if the growth rate in India-China trade slows down to 25% annually (a conservative projection) from the current rate of over 50%, bilateral trade between them is expected to be almost US $75 billion in 2012. Since it is projected that, by 2050, India and China will be the two leading economies in the world, it is inevitable that bilateral trade between the two countries will be among the most important economic relationships in the world. The targets of bilateral trade set by the Prime Ministers of the two countries during the visit of Premier Wen Jiabaos to India in 2005 as US$ 20 billion by 2008 and US$ 30 billion by 2010 were met much ahead of the deadline. The target fixed during President Hu Jintao's visit to India in 2006 to increase the bilateral trade to $40 billion by 2010 was achieved in early 2008. In 2008 the target was again revised to US$ 60 billion by 2010, which is likely to be met by this year-end.

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The trade relations between India and China have not been very promising due to various political as well as trade reasons. China and India are the 2 hubs for outsourcing for the rest of the world. While China leads the goods market, India specializes in the service area, though both have substantial standing in both the arenas. Hence the low value of bilateral trade between the two countries. The above figure shows that in order to achieve a bilateral trade of US $100 billion by 2015, the CAGR of 21.78% will be required, which is high.

TRADE GAP WITH CHINA

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Indias trade deficit with China has been steadily increasing over the years. Growth rate of Indias trade deficit with China (around 70%) has overtaken the increase in bilateral trade between the two countries (more than 50%). Between January 2008 and December 2008, India had a trade deficit of US$ 11.2 billion with China.

Composition of Trade

Indian exports to China: It constitutes primarily of basic raw materials. Ores & Minerals constitute a share of more than 50% in Indias total exports to China. Out of Ores & Minerals, iron ore is Indias major export item to China with a share of more than 40% in Indias exports to China. Indian imports from China: It is mostly high value added products, capital goods like electronic & electrical machinery, non-electrical machinery and project goods. Capital goods together constitute for a share of about 46% in Chinas total exports to India. Apart from capital goods, other important imports from China include iron and steel, iron and steel products, fertilizers, plastic, organic & inorganic chemicals etc.

Imports
Indias major exports include iron ore, cotton, organic chemicals, copper and precious stones etc. Chinas major exports to India include electrical machinery, machinery, organic chemicals, iron & steel and steel products. India typically imports medium priced finished products, while it exports raw materials. The inequality of trade has led to a tension as Indian manufacturers have a tough time competing with cheap Chinese produced goods.

The following figure shows the trend of imports between India and China. Indian imports have been gradually declining relatively. Both the countries were hit by recession in 2009 and hence recorded negative growth in imports.

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Being the producer economies, both India and China are export oriented countries. This can be very well observed in the falling graph of their imports as they move towards indigenous production of goods and services.

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Over the past Jan 2009- Jan 2010, both India and China have experienced linear growth rates in imports.

Exports

Ores, Slag, Ash; Cotton + Yarn, Fabric; Copper + Articles Thereof; Precious Stones, Metals; Artificial Flowers, Feathers and hides and skin account for US$ 11229.57 million, which is 76% of the total exports to China. This means majority of exports are still low end products. Organic chemicals, iron and steel, plastics, machinery, inorganic chemicals, electrical machinery account for only US$ 2203.592 million, which is 15% of the total exports to China. This means export of value added products is still to pick up.

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GDP PER CAPITA (IN US $)

India and China were almost on the same level as per the GDP per capita measure for almost 30 years since 1960, but owing to Chinas heavy investment in infrastructure and a drastic control in their population size in past two decades, it has attracted huge amount of foreign trade and increased its GDP per capita by almost 600%. While India, owing to its late liberalization policy and political instability and low investments, hasnt been able to progress that well.

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DETERMINANTS OF COMPETITIVENESS
Now we look at the various determinants of competitiveness of both the nations. There are several factors over which both nations are at warheads, which ultimately leads to the growing competitiveness. DETERMINANT Politics INDIA CHINA

Religions, Pakistan, Political Stability (+), Frequent Changes (-) Communist partys Monopoly(-) Young people allow for Ageing Population intensive growth provided Challenges Social education (+) Security System (-) Expansive Fiscal Policy (-), Relatively Low Debt Restrictive Monetary Policy & Deficit (+), Fixed (+) Exchange rate regime (-) Trade Balance Deficit (-) Huge FDI Inflows (+), Trade Balance Surplus (+) 104th

Demographics

Fiscal & Monetary Policy

External Relations

World Per Capita Income 139th Ranking Labor Market

Pressure on Labor markets Employment in is rising (-). Unemp. Rate Public Sector has 4.2% in 2008 fallen (-), Unemp. Rate 5% in 2008 High dependence on Services Includes high share Sector (-) of high technology exports (28% in 2008) Ranks 89 out of 183 in 2010 Small share, early Stage (-) Ranks 133 out of 183 in 2010 Large Share of High growth expectation (+) Primary is main

Industrial Structure

Business Environment Entrepreneurship

Education

High priority on Education, Securing Consistent programs (+) Education task (-)

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Each of the countries has their own positives and negatives which promote and affect their competitiveness. While India gets the advantage of its young and educated population along with its restrictive monetary policy which helps in accumulating foreign reserves, but still it is fighting with Trade balance deficit, unstable political scenario, non-promotive Fiscal Policy and entrepreneurial ventures at a nascent stage. China on the other hand benefits from its political stability, Huge FDI Inflows, Trade Balance Surplus, high share of high technology exports and Large Share of High growth expectation entrepreneurial ventures. But it is hindered by Communist partys Monopoly, Ageing Population Challenges, Social Security System and Human Rights violations, Fixed Exchange rate regime, Falling Employment in Public Sector and Securing Primary Education. One determinantand only one among many othersfor future competitiveness is socioeconomic characteristics of both countries. The short summary above has shown that economic reforms were able to induce a process of astonishing growth and catching up; yet they relied on the respective cultural framework.

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MUTUAL PRESENCE

These are some examples of the companies which have been able to establish themselves in the other country as well. But, a remarkable fact about almost all of them is that, though they are a very big name in their native country, they are yet to find a substantial standing in the other country. This is mainly due to each countrys policy to protect its indigenous companies while the foreign companies pay a huge part of their profits and ownership to the natives in form of taxes and partnerships. Indian business presence in China is in a range of operations including manufacturing (pharmaceuticals, refractories, laminated tubes, auto-components, wind energy etc.), IT and IT-enabled services, trading, banking sector (major Indian banks from the public and private sector are present in China), and trade and industry associations including CII and FICCI. Air India also has an online station in China. The vehicles for the presence of Indian companies in China are joint ventures with the Chinese partners, wholly owned foreign subsidiaries or through contract manufacturing. Some of the prominent Indian companies in China include Ranbaxy, Orchid Pharmaceuticals, Dr. Reddy Laboratories, Aurobindo Pharma, NIIT, Bharat Forge, Infosys, TCS, Satyam Computers, APTECH, Orind Refractories, etc. The total number of Indian companies is slightly over 100. Many large Chinese State-owned companies in the field of machinery and infrastructure construction have won projects in India and most of these companies also have a presence in India. These include Sinosteel, Shougang International, Baoshan Iron & Steel Ltd, Sany Heavy Industry Ltd, Chongqing Lifan Industry Ltd, China Dongfang International, SinoHydro Corporation etc.

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FEW MACROECONOMIC COMPARISONS BETWEEN INDIA AND CHINA

1. WHOLLY FOREIGN OWNED V/S PRIVATE LIMITED COMPANIES

Though Income tax is more in India, discouraging personal accumulation of income, the overall taxes imposed by China are more varied and higher, which indicates the reasons, companies are more inclined in investing in India in current scenario.

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2. FOREIGN INVESTED COMMERCIAL ENTERPRISES V/S BRANCH OFFICES

Owing to the cheap availability of labour in India combined with low entry costs and restrictions, the long term prospects of the country are very promising, while China may suffer due to its demotivated and ageing workforce which has to pay more than half its salary in form of taxes.

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3. REPRESENTATIVE OFFICE V/S LIASION OFFICE

Here too India and China differ. In order to discourage use of Representative office for trade, China now levies taxes on RO, whereas India does not. In India, the liaison office is not permitted to perform any commercial activity and hence it earns no income and so is not taxed. But this is not the case in china.

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4. CORPORATE INCOME TAXES

We observe the following points: India does score better in the application of VAT refunds against exports. China does not permit refunds at all. China does not levy VAT on services while India does. While India wishes to develop SEZ and Free Trade Zones and so provides high attractive tax incentives. China is still a centrally planned economy and incentives are limited only to specific industries. China engages a calendar year audit cycle while India (Apr-Mar)

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5. COST OF LABOR

We observe that for all the categories of workers, be it the skilled workforce, technical experts, managers or the laborers, India can be favored by firms due to its fairly low level of wages, vast workforce and greater number of working hours. Chinese wages, though much lesser than US wages, are comparatively higher than India, and in the long run, its trade might be affected by it.

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6. COMMERCIAL REAL ESTATE RENTALS

Though both China and India have favorable rent scales as compared to US, Indian metros on an average are cheaper to live in rental apartments, thus facilitating transfer and transport economically. This data has been based on buildings built no longer than 1980. As we can see, China Property Market is more Speculative. Rentals in Mumbai are increasing and are expected to do so while demand outstrips supply in the next three to five years.

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CONCLUSION Fast Facts 2010 recap

Though currently, Indias global trade is 20% of Chinas, yet the future holds promise for the former, with its increasing number of workers. India possesses 800,000 sq. kilometers more of arable land and 10 times fresh water than China. If India manages these optimally, it can fast emerge as a competitive force on a global scale and even its agriculture sector will gain a lift with the advancement due to rise in domestic demand, benefitting its large farmer population and thereby raising their standard of living. Thus itll lead to economic as well as social advantages. But, it needs to invest more on the infrastructure, as the currently miserable 70,000 km of highway pales in front of Chinas 1.4 million. 22 | P a g e

THE FORECAST - Who will be the Winner in 2030?

Indias own infrastructure development curve can be expected to follow that of China in past two decades, for the next 20 years. By then, 2030, it can be predicted that India will have overtaken China in terms of population, and almost certainly in GDP growth rates. With double the amount of available workforce, a younger population and a consumer economy of its own of about half a billion people in its new middle class, Indias tortoise against Chinas hare will have caught up significantly and the two would have reached their place as global trading giants and regional partners.

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REFERENCES

1.http://www.business-standard.com/india/news/india-2nd-in-globalcompetitiveness/401028 2. http://www.tradingeconomics.com 3. indiachina.org 4. 2point6billion.com 5.http://www.deloitte.com/view/en_GX/global/industries/manufacturing/globalcompetitiveness 6. ADB economics Working Paper Series

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