Beruflich Dokumente
Kultur Dokumente
with China?
By
Mohan Guruswamy
Jeevan Prakash Mohanty
Ronald Joseph Abraham
CPAS
Centre for Policy Alternatives
94 Uday Park
New Delhi 110049
Website: www.cpasind.com
Email: cpasind@yahoo.co.in
Telephone: 51650995/7
Facsimile: 51650996
2
Introduction
The emergence of China as a major world player has so far been the
dominant geo-political event of the new millennium. In the last decade
China has emerged as the largest exporter of manufactured goods to the
USA with a merchandise trade surplus of about US$180 billion causing it in
the recent years to emerge as the biggest holder of US currency (US$721
billion) as reserves. This powerful ascent of China as a major global player
has also resulted in the world’s spotlight being focused, from time to time,
upon India as the other big Asian story. This has inevitably led to a number
of comparisons between the two.
The trend was set by the article “Can India overtake China”, in the
prestigious US journal Foreign Policy in 20031. International Business
magazine, BusinessWeek, also devoted a major part of its August 22, 2005
issue on the emergence of India and China and their comparison. The article
in Foreign Policy was co-authored by Yasheng Huang and Tarun Khanna.
Both come with impressive credentials. Huang is an associate professor at
MIT’s Sloan School of Management, and Khanna is a professor at the
Harvard Business School. These scholars on their own admission discount
the macroeconomic facts of higher growth rates and foreign investment in
China that give her an advantage over India. Instead, they opine that India
may edge past China in the future due to institutional reasons such as more
competent indigenous entrepreneurship in India, a sound capital market, an
independent legal system, respect for private property and a grass-roots
approach to development. They point out that these reasons ensured that
India’s growth rate is only 20% lower than that of China’s which they call a
“remarkable achievement”2.
However, is such optimism that India will better China warranted? When
analyzing growth rates, social indicators, industrial production and more, it
becomes clear that not only has China left India far behind but these gaps are
set to widen in the future. As this paper will show, even to come abreast with
China by 2050 will be an uphill task for India.
Even after tinkering about with PPP figures, it is a fact that both countries
still have stubborn problems with poverty. If we adopt the UNDP’s yardstick
of $2 a day to provide for basic human needs with a modest modicum of
quality in living standards, both China and India still fare poorly (see Tables
2 & 3 below). Again, India more so than China. While 47% of the Chinese
population lives with an income less than $2 a day, 80% of Indians are
below that line. However, even more worrying for the Indian leadership is
that the pace of economic growth in China will only better their already
improved poverty scenario. However, for India, national goalposts for
3
World Development Indicators, 2005, pp. 22-24. World Bank.
4
poverty alleviation are pushed further back all the with no definitive
timeframe attached to this cause.
Burnish or Varnish?
The “India Shining” campaign of the NDA government touting the 2003-4
growth rates of nearly 8% caused a self-laudatory mood among the Indian
elite, which has for long craved the West’s attention. We have finally caught
this attention because the West now sees a huge market in India – as the
recent purchases of commercial aircraft will testify. While 8% is good,
evidence suggests that the underlying basics of the Indian economy remain
unchanged. Nothing makes this more explicit than a comparison with the
economic and social indicators of China after the economic reforms. Far
from catching up with China, India seems to be falling well behind. We must
not forget that the year of shining came after a year of 6.7% in turn preceded
by three years of growth rates of 4.6%, 5.7% and 3.9%. This shows that the
average growth rate is still in a relatively low trajectory.
But even if we accept that India is indeed shining, how good is that shine? Is
it a burnish that reveals the quality of the metal beneath or is it a thin coat of
varnish that just puts a superficial gloss? To understand that, we must go
into how good the years after the so-called reforms have been. Very simply
put, the first decade after the launch of the so-called reforms has not been
very much better than the decade before it. GNP growth for the post reform
5
Of course some have benefited. As former BJP minister Sushma Swaraj had
famously told the Lok Sabha in 2003 that there are no queues for telephone
and gas connections. But with India’s teledensity a mere 5.2 per 100, and
with just 16.7% of India’s households having LPG connections (and that too
mostly in urban areas) clearly suggesting that most households are without
cheap and subsidized energy, we seem quite some way off from a
satisfactory distribution of benefits. Ironically enough, the lack of queues
should be a matter of grave concern given that an overwhelming majority in
India still doesn’t have telephones or gas connections. Such news is not
enough to warrant an outpouring of self-congratulation, for it is indices for
infant mortality (65 per 1000), life expectancy (65 years), literacy (65%), as
well as energy sufficiency (577 billion Kwh) and energy consumption (a
mere 379 Kwh per capita) that make the reality. However well we might
have done, we have fallen well behind China in these spheres and it will take
some effort to catch up. See Tables 4 & 5.
The Chinese lead in electricity production and consumption is not the full
story. That China has almost three times India’s generation capacity is
understandable. However, its far superior power distribution is really telling.
The transmission & distribution losses in China are just 6.8% while India
loses 23.4%, much of it to simple old-fashioned theft. It is little wonder that
the average electricity tariff in China is US $3.20 per 100 Kw lower than
that of India. Despite the high tariffs in India last year the cumulative loss
made by the power sector was Rs 22,013crores4. See Table 9.
4
‘Push for power reforms’, Tribune News Service, 26th February, 2005, www.tribuneindia.com
9
once in the recent months the Chinese oil industry has bid out Indian
attempts to buy into international oilfields for an assured share of the output.
China’s CNPC outbidding India’s bid for PetroKazakhstan, a company that
accounts for 12% of Kazakhstan’s oil, is the most recent example. Quite
clearly in the years to come India and China will begin to compete more
rigorously for international oil and markets for their goods to have the
money to pay for it. Commercial rivalry between India and China seems
inescapable. So far China seems better placed. See Table 10.
Table 10: Energy Outlook of India & China (2004-05) (million metric tonnes)
Domestic Import Value
Country Consumption Import
Production (billion $)^
*India 133 34 99 42.87
** China 325 180 145 62.78
^ Calculated assuming that international prices of crude oil apply identically to both.
Source: Press Information Bureau, Ministry of Statistics and Programme
Implementation, Government of India & Basic Statistics on Indian Petroleum and
Natural Gas, 2003-04, Economic Editors Conference, 18th November 2004, Ministry of
Petroleum and Natural Gas, GoI, & Energy Intelligence Agency, Govt of USA.
Other indicators that illustrate the vast chasm that distances India from
China are the production of steel and cement. China now produces over five
times as much steel and six times as much cement as India. Despite its
higher steel production China has also been in recent years a large importer
of Indian steel. While coal still accounts for 60%5 of India’s electricity
production, its production in India has been languishing. Not least among the
causes for this is the fact that the Indian coal industry has largely come
under the control of the state and this has been inimical to more efficient
mining. China produces four times as much coal as India. India on the other
hand has begun to import coal, despite having huge reserves. See Table 11.
5
“Background Note”, India – International Energy Agency (IEA) joint conference on coal and electricity in
India, 22-23 september, 2003
10
billion. The gross output of the manufacturing sector in GDP of China was
39%, which was more than double of India (16%) in the year 2003. The
output of the services sector as percent of GDP stood better for India with
51% in the year 2003, whereas China’s gross output in the services sector
remained 33% in the same year. Moreover India saw greater value addition
in this sector, mainly due to the burgeoning government administration
which is growing at 32% and the IT sector which only employs 0.8% of the
workforce and yet has exports worth $ 9.2 billion. See Table 13.
More Globalized
With significantly higher exports, the Chinese economy has registered a
positive trade balance of US $79.2 billion, whereas India has a negative
trade balance of US $32.4 billion. When the Chinese trade figure factors in
Hong Kong we see a still more dramatic picture emerging with a combined
current account surplus of US $87.2 billion, whereas India has a current
account deficit of US $4 billion. Though the reform years in India have seen
a significant growth of foreign reserves, it still remains at US $127 billion in
July 2005, while for China and Hong Kong together it was US $833 billion.
See Table 14.
12
The lower tariff structure in China has boosted its imports and as a
consequence added much value to exports. It has also ensured higher
investment in the last decade. The simple mean tariff in case of all products
in China was 40.4% in 1992, which has come down to 9.8% in 2004. In
India’s case there has been a decrease but not as marked as China’s.
Similarly, simple mean tariff on manufactured products in India during 2004
was 27.9%, whereas China’s tariff was one-third of India’s at 9.7% in the
same year. See Table 15.
and modernizing country with an average decadal growth rate of 5.52%. But
more important than this was its performance, by 1980, of reducing infant
mortality to 42 per 1000, elevating life expectancy to 67 years, and raising
adult literacy to 66%. India by contrast had a better growth rate of 5.7% in
the 1980s but came burdened with an infant mortality of 119 per 1000, life
expectancy of 59.2 years, and adult literacy of 48.41% (see Table 16 below).
Many reasons have been advanced for China’s stupendous performance.
Few are as valid as what Amartya Sen wrote: “China’s relative advantage
over India is a product of its pre reform (pre 1979) groundwork rather than
its post reform redirection.”
1200
1000
800
PCY
China
600
India
400
200
0
00
03
79
82
85
88
91
94
97
20
20
Years
Source: Central Statistical Organization, Govt. of India, China Statistical Year Book, 1997, 1998
15
China
10
India
5
0
1 2 3 4 5 6 7 8 9 10
Years
Source: Economic Survey (Various Issues), Ministry of Finance, Govt. of India, China Statistical Year
Book, 1997, 1998
But what did we achieve in the first decade of our reforms? In 1992, the first
year of its reforms, India’s per capita GDP was $ 331. This grew to $ 477 in
2001. In the same period the Chinese per capita GDP surged from $ 360 to $
878 in 2001. In the 1990s China grew at the rate of 9.7% while India grew at
5.9%. Quite clearly far from beginning to catch up, we fell well behind.
China’s GDP (1995 constant US$) has grown eight fold since 1979 and
stood at $1.4 trillion in 2003. Chinese GDP was lower than that of India in
absolute terms in 1978 but caught up with India in the very next year. The
size of the Chinese economy now is twice that of India’s. In 2003 India’s
GDP stood at a mere $ 601 billion with a population of 1.03 billion. We
seem to be catching up with China on the population front but China’s GDP
still remains a distant and difficult target. See Table 18.
A Study in Contrasts
It’s true both countries have transformed themselves after they embarked on
the path of economic reforms. But the transformations were entirely
different. In 1980 the sectoral break-up of China’s economy was as follows:
agriculture 30%, industry 49% and services 21%. As Table 18 below shows,
over the next 20 years until 2003, the share of agriculture fell while industry
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and the services sectors grew. Especially remarkable was the growth of
industry from 1990 to 2003; it grew from 42% to 53%.
The Indian sectoral picture makes for a study in contrasts. While the share of
agriculture fell from over 40% to 23% from 1980 to 2003, it was not
industry that took over this share; instead, the services sector became the
dominant sector contributing over half of India’s income. This is in sharp
contrast with China where over half the present income accrues from
industry.
6
Budget document 2005-06, Ministry of Finance, Government of India.
17
The impact of these sectoral growth rates is reflected in the job creation
patterns for the two nations. In 2003, China’s workforce is 705 million
(1999). About half of this workforce or 373 million is employed in
agriculture, 29% or 221 million in services, and 22% or 167 million in
industry. By contrast India’s total workforce is 482 million in 2004. The
major employer is still the agricultural sector with 60.0% or 289 million,
industry is a relatively small 17.0% or 82 million, services seems to be rising
but employs only 23% or 111 million. Many in India think of the IT sector
as the cause for the growth in Services. This is not so. Nearly half the
employment of the services sector is in unorganized retail. Government
employs another 20 million. By contrast the IT sector only employs 0.82
million or a paltry 0.8% of the total workforce in the services sector. Also, in
the coming few years, we can’t rely on the IT sector to create jobs. Even by
2008, IT will only employ 0.4% of the total Indian workforce! Therefore,
while IT will contribute over $50 billion in exports by 2008, it will remain a
minor employer. Quite clearly in terms of employment we are still an
agrarian society. See Tables 21 and 22.
Apart from the millions of new jobs created, the role of FDI in making
China a major manufacturing center of the world is seen in the contribution
of FDI enterprises to total exports, which rose from under 2% to 45.5% in
1999. In India at that time it was just 8%. Such disparity in investment in
exports shows up in the shares of world trade in the GDP’s of the two
countries. While trade accounts for as much as half (49%) of China’s GDP,
it accounts for less than a third (29%) of India’s GDP. Also while China
enjoys a 3.8% share of total world trade, India’s share in world trade is less
than one per cent.
In recent days there has been much speculation as to whether the FDI gap
between China and India is indeed as large as it is made out to be. One
problem is that the Chinese FDI data is overstated.7 Since the early 1990s,
researchers with the IMF, World Bank and other international institutions
have developed an evolving view that about a quarter or more of China’s
officially recorded FDI is in fact not FDI. Instead it is mainland Chinese
monies that have flowed out to access better financial, regulatory and legal
services and “round-trip” by returning to China as apparent FDI to access
the fiscal incentives and improved investor protection offered in China to
foreign investors.8 If this argument by IMF & World Bank holds, then the
total FDI inflows into China in 2003 spirals down to around $35 billion
instead of the $53.8 billion that the Chinese official figures show. Chinese
(and IMF) FDI figures include what are classified in India as Foreign
Institutional Investments (FII) in equity markets, loans etc.; whereas in
India, FDI implies only direct investment in industries9. Even if these
adjustments are accepted, FDI in China is still many times more than in
India. In comparison to Chinese FDI inflows, India’s FDI in 2003 stands at
0.72% of GDP whereas it is 3.8% for China.
7
Unless indicated otherwise, estimates of the overstatement of FDI inflows into China are from Geng
Xiao “Round-Tripping Foreign Direct Investment in the People’s Republic of China: Scale, Causes and
Implications” Asian Development Bank Institute Discussion Paper No. 7, June 2004.
8
The rise in China’s FDI: Myths and Realities, Erskine, Alex, Australia-China Free Trade Agreement
Conference, Sydney 12 – 13 August 2004, www.apec.org.
9
For detailed discussion on this see India’s Performance and Economic Reforms: a Perspective for the
Future. Dr. Subramaniam Swamy. Konark, 2000.
10
R&D in non-OECD economies, OECD, MSTI Database, May, 2003.
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stood at $85 billion (PPP). Though India ranked among the top ten spenders
worldwide it spent just a third ($30.62 billion) of what China invested in
R&D in 2003. Such huge Chinese investments in furthering knowledge
suggest that India will only fall back further in terms of industrial growth
rates and competitiveness.
65 64 64 64
% of Population
61
60 59
2000
2020
55
55 2050
50
china india
(15-60)
Defence Expenditure
The official defence expenditures of China and India in the year 2003 were
2.3% of the GDP. Both countries fudge these a bit and understandably China
more so than India. Just recently US defence secretary Donald Rumsfeld
22
100
in total expenditure(%)
80
share of central govt
60
expenditure
40
20
0
53
57
61
65
69
73
77
81
85
89
93
97
19
19
19
19
19
19
19
19
19
19
19
19
Years
60
50
Share of central
expenditure (%)
40
30
20
10
0
19 -61
19 -64
19 -67
19 -70
19 -73
19 -76
19 -79
19 -82
19 -85
19 -88
19 -91
19 -94
19 -97
0
-0
60
63
66
69
72
75
78
81
84
87
90
93
96
99
19
Years
must grow at 8.9% every year (see Table 29). Catching up with growth rates
is not good enough. If that were the game we are already doing much better
than the USA, Europe and Japan! However, a study by Goldman Sachs
projects that India’s growth rate over the next half-century will not reach
such high levels. India’s growth rate is set to peak at 6.1% in 2005-10 and
yet again at 2030-35 (see Table 30). However, the study also predicts that
India’s growth rate will come abreast with that of China by 2010 and
overtake it by 2015.
Despite this, according to Goldman Sachs, India will not catch up with
China even by 2050 (see Table 31). This is so because China has a much
larger base in GDP than India; therefore, even smaller relative increases in
income for China would mean a higher absolute increase than India. More
dismal is the fact that in 2050 China will be two times richer than India in
per capita terms, very similar to the present situation. Therefore catching up
with growth rates is just one swallow and that doesn’t mean that our season
in the sun is at hand. It remains to be seen whether India will manage to defy
the Goldman Sachs projections and grow at 8.9% to catch-up with China by
2050.
26
India and China are clearly set to emerge as two great economic powers.
They are also neighbors who will increasingly compete for resources,
markets and influence. It is unlikely that India and China will again become
mortal enemies. The likelihood of war and conflict is minimal. Yet the
economic circumstances will ensure that both countries will be competitors
and rivals. But to ensure that this does not turn into yet another Cold War,
India must ensure that the economic gap with China closes. That will also
27
largely close the strategic gap. Clearly India’s leadership has its job cut out.
But are they up to it?