China vs India Intro

8/13/2019 China vs India Intro

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ECONOMIC GROWTH OF INDIA AND CHINA

INTRODUCTION

India and China are the fastest growing BRICS economies and are the main driving force

in the growth of Asia. China has become the second largest economy of the world whileIndia has shown significant growth in the last decade .Both India and china were able to

achieve significant growth due to reforms adopted by them that reduced the role of

government in both the economies and opened them to outside world. While China

adopted reforms in early 1980s, India was rather a latecomer in introducing reforms i.e

late 1980s. In India reforms were the result of crisis of 1991.While India always had a

strong private sector but was subject to restrictions until late 1980s, Chinas private

sector emerged in the last decade. China has shown remarkable growth after the

reform process; Indias growth performance has been modest.

In some aspects like life expectancy, literacy etc China has done better than India but

has also experienced a decline in health services. For example,The adult literacy rate in

China rose from 67% in 1980 to 93% in 2007. In India,adult literacy rose 41% in 1980 to

64% in2007.

In this article we have compared the economic growth of India and China. Firstly, we

have compared the growth of India and China during reform period, then we havegiven the sectoral comparison of both the economies and comparison of key

macroeconomic variables. We have also discussed about the challenges faced by both

the economies and their future economic prospects.

India and china entered reform process with different initial conditions .

China had a good basic public health and a wide range of industries. While Indiahad weak public health and many small firms.

In china production factors were misallocated; in India less misallocated. China had a relatively homogeneous society and there was little gender

inequality while India had a heterogeneous society and there was gender

inequality in labour force participation , education etc.

Prior to reforms China adopted policies that kept economy poor, centrally controlled,

stagnant, inefficient and globally isolated.


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CHINAS REFORMS SINCE 1980s

China introduced market oriented reforms and opened up the economy during the

reform period. It mainly focused on industry led growth and combined export oriented

policies while maintaining the role of government in allocating resources.

The government encouraged savings, managed exchange rate, underpriced key

industrial inputs, channeled cheap credit to industry which increased the share of

investment in GDP.

However, it is believed that Chinas growth model is not sustainable since it has led to

imbalances. The share of consumption in GDP has declined due to rise in savings rate.

Also, share of wage income in GDP has gone down. Industry led growth resulted in

fewer jobs than service led growth would have created limiting absorption of surplusagricultural labour. The growth model has also affected the environment adversely.

Prior to reforms India adopted policies that emphasized on import substitution,

protectionism and government played the major role. As a result growth averaged at

3.5% from 1950s-1980s (Hindu rate of growth).

INDIAS REFORMS SINCE 1990s

Indias reforms included trade liberalization, domestic market liberalization and

integration, though Indias economy is less open to Chinas. These reforms were

reinforced in 1990s aftercrisis of 1991.

Indias growth model was less industry and export oriented as compared to China. The

country adopted the policy Liberalization, privatization and globalization (LPG). The

major drivers of growth since 1990s are growth in capital acquisition and TFP growth.

These reforms resulted in average growth rate of 6% from 1992-2002.


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Economic Strategies of India and China

China India

Policies (in reform period)

Steady opening up to global economy, Gradual opening up to global economy

emphasis on export promotion

Active government role mobilising

resources Less explicit role government

Explicit preference and encouragement Less explicit preference &

of industry and investment encouragement

Emphasis on infrastructure

Strength

Rapid supply side growth without Does not create international friction

macroeconomic tension

Weakness

Has led to economic, social, environ- Weaker supply side growth;

mental and external imbalances macroeconomically less robust

COMPARISON OF INDIAS AND CHINAS MACROECONOMIC VARIABLES

The China-India comparison is central in Asia debate, and even to the rest of the

world. China has done better than India in terms of economic growth by wide

margins over the past fifteen years; but past is not always indicative of the future.


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A. Infrastructure Chinas infrastructure is far better developed than that ofIndia. Aspects like manpower and Labor development, healthcare,

communication etc. are well developed and contribute to its economy.


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D. Rates of investmentThe investment rates in China have fluctuated between 35

per cent and 40 per cent over the past twenty five years, whereas in india it has

hung at twenty to twenty six per cent only.

E. Trade patterns Indias pattern has been that of lower rate of export growth

with relatively cheap labour due to low absolute wages rather than the public

provisions and poor infrastructure development. Thus, exports do not contribute

much to growth of india except in the services.

China has followed rigorous export growth policies on world market shares based

on the relocative capital attracted by cheap labour and heavily subsidized

infrastructure.


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G. Poverty reduction Indias poverty ratio is much higher and persistent. It varies

between twenty six per cent and thirty six per cent depending upon the

interpretation of the data.

Whereas only four per cent of Chinas population lives under the poverty line,

and unofficially twelve per cent.

H. Imports & Exports Indias imports have grown over the past year and are

much- much more than that of China. Few facts and figures are shown below:


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CHINA AND INDIA IN NEAR FUTURE

1. Percentage of world income:In the year 1820, the contribution in share of

world income of India and China was 49% (33% for China and 16% for India). A

hundred and thirty years later, the share was down to 9%. Nevertheless, by 2025,it is predicted that there would be a partial restoration in the share of India and

China to 36%. China is ahead of India in terms of per capita income. Over the last

quarter century its per capita income growth has been at least twice that of India.

2. Emphasis on demographics:India hopes to reap benefits out of its

demographic dividend when compared to an ageing China. The positive

externalities of this are

a) The younger population is more productive.

b) The younger people save and the older people dissave.

However in so far as China is concerned, it compensates the quantity by quality oflabour force. In terms of savings by the younger population, particularly in India,

people start saving at a later stage in life. Hence, saving from the demographic

dividend would come later in India. To suffice, in India the population is younger

in relatively less economically developed states than in economically well

developed states, which the speaker pointed out as another qualification. It was

also pointed out that the saving age population will not peak so soon in China and

will happen only in the 2030s. However, both countries are high saving countries

even though there are differences in per capita income. This is due to lack of full

social security system.

3. Economic Growth:Economic growth of countries in the long run depends on

rate of technological progress. In that context, China has surged ahead of India in


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R&D and education. In the 1990s, India was ahead of China in the number of

science and technology articles published in peer reviewed international journals,

but now that number is also going down. With regard to higher education, two

Chinese universities rank in the top 50 universities in the world, there are no

Indian Universities.

As far as the composition of growth is concerned, India is predominantly service

oriented economy driven by the IT sector doing really well. However, the number

of people employed in IT and ITES is less than one half of 1% of the Indian labour

force. China on the other hand is considered to be the manufacturing hub of the

world. However, from a value added perspective, it is not the leading

manufacturer as it accounts for only 15% of the total manufacturing output in the

world.

With respect to foreign trade, though many say, the economic growth in China is

export driven, but in reality it is domestically driven, largely through domestic

investments. In India also the economy is not export dependant, but depends on

domestic investment and consumption.

4. Poverty and Inequality:The extent of poverty alleviation in China and India

over a time span of 25 years from 1981-2005. The statistics show drastic poverty

alleviation in China from 73.5% to 8%, while that of India from 42.1% to 24.3%.

The common causal factor for poverty alleviation is considered to be the

integration of both the economies with the rest of the world. However ,in

addition to globalization, Chinas agrarian reforms have led to a shift from the

commune system to household and to an individual, which has impacted poverty

alleviation in its own right. This has not been the case in India wherein land

reforms have not been successfully implemented. This is attested by the fact that

most of the people have either very less land, or are completely landless.


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In the context of social indicators, economic growth does not seem to be a

comprehensive indicator of development. According to National family Health

Survey conducted in China, the percentage of malnourished children (betweenthe age of 0-6) in China is between 0-8% which is much less than that of India,

that is 44-45%. After economic reforms, basic health and education system in

China became increasingly privatised due to the decline of commune system.

Consequently, we can see for example that most of the poor people are not being

able to afford to access the facilities even of the public hospitals, because of high

costs, leave alone private hospitals. However, inequalities in China are still lesser

than in India, as regards, inequality of opportunity in terms of social hierarchy, of

land distribution and in education.

The sex ratio in China is worse than in India. In spite of this shortcoming, the level

of female participation and female literacy is way ahead in China than in India.

There is a huge difference in the physical and social infrastructure of the two

countries, which includes health and education. It is because the Indian

government has comparatively less monetary resources and also suffers from cost

recovery problem. China does not have such a problem, because the system is

decentralized, which makes management easier and brings about efficiency in the

system.

5. Governance and Nature of Capitalism:The corporate sector in India is vigorous

than in China but accounts for only 2-3% of the total growth, and hence even a

big change in it will not have much of an effect on the potential growth rate of the

country. In case of China, many of the success stories are state funded.

The problem of crony capitalism is more severe in China than in India. In the

statistics of 2007, it was found that out of the 3500 millionaires, 3000 were high


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ranking party officials. Moreover, the composition of the Communist party has

also undergone a change. Out of 75 million people in the party, now only 29% are

workers and peasants and 71% of them are professionals. Authoritarianism is

neither sufficient nor necessary for development. China is ruled by technocrats

who take quick decisions, and hence the execution and implementation is quite

often more efficient than in the case of India.

CONCLUSION

The Indian political regime derives its legitimacy from democratic pluralism and

not from high growth rate as is the case with China. China appears to be strong

but actually there is a strong sense of insecurity and brittleness. However there is

a flip side to it that as this leads to excesses of capitalism in todays China in

different forms such as environmental pollution, and local inequalities. As regards

accountability, the local officials easily get away with capital excesses because

they do not have to contest elections and even if they are to do so, it is a one

party election. In India, in spite of democracy, the officials especially at the local

level lack accountability. In this context, what has to be seen is not the difference

between democracy and dictatorship, but the accountability mechanisms, where

India has failed. We can conclude that there are serious accountability failures in

both the countries, and cannot be interpreted and understood with a simplisticanalysis of democratic and totalitarian systems.

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China vs India Intro