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Lecture Note (Session 4) Can India Match China in Manufacturing Sector Performance?

Theme of the Note: China has emerged as the worlds major exporter of manufacturing goods since 1990. India is not yet a major exporter of manufactured products to the world. Significantly, Chinas industrial growth rate has been consistently higher than Indias by about one and half times, and the gap seems widening. The worlds economic super power United States (US) now feels that Chine will inevitably tilt global trade and technology balances in its favor, ultimately becoming an economic, technological, and military threat to it. Business and political leaders in the US now fear that China's growing share of world exports, especially of high technology and industrial goods, signals the rise of yet another mercantilist economic superpower in northeastern Asia. In this context, this lecture note traces the factors explaining Chinas higher productivity and competitiveness in world market for manufacturing bases; and discusses the sustainability of Chinese model of economic growth. 1. India and China in the World Economy: Today, China and India together account for 40% of the worlds population. Since 1980 Chinese economy has been growing at the average rate of over 9%.1 India is following behind China, with an average growth rate of close of 6 per cent a year since 1980, with some evidence that growth is accelerating and can be sustained at 8 per cent a year in the coming decades. Whereas China has emerged as a predominantly industrial economy (share of industry in GDP was 46% in China and 27% in India in 2006), India became a service economy (share of services in GDP was 41% in China and 52% in India in 2006). The worlds economic super power United States (US) now feels that Chine will inevitably tilt global trade and technology balances in its favor, ultimately becoming an economic, technological, and military threat to it. Business and political leaders in the US now fear that China's growing share of world exports, especially of high technology and industrial goods, signals the rise of yet another mercantilist economic superpower in northeastern Asia. With populations of 1.3 and 1.1 billion respectively in 2003, the two giant economies of China and India present a huge and fast growing domestic market (demand side) for a range of goods and services, and thus export opportunities for producers in the rest of the world. This is evident from the fact that in 2003 Chinas vast manufacturing industry has consumed 20-30% of world trade in aluminium, copper, iron ore, stainless steel and zinc. These percentages are expected to rise in the future, assuming of course, Chinas rapid growth is not a bubble but will be sustained. This means that foreign raw material suppliers depend to a greater extent on Chinese demand. Any disruption in Chinese demand in the short-run can be costly for them. The market potential of India and China is also evident from the large flows of FDI to these countries, both for production for the domestic market, but also to use exports to the rest
Not so long ago, in the 1950s and 1960s, Japanese GDP grew at a rate of about 9% a year for nearly 25 years.
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of the world. The fact that India has attracted far less FDI, is not because of the lack of potential opportunities in India, but largely because of policy hurdles and other constraints on investment. Besides being a major demand market, India and China influence world economy as major exporters (supply side). Foreign users who depend on Chinas exports of goods/merchandise for a sizeable share of their total use, could be faced with the prospect of having to search for alternative supply sources if Chinese exports are disrupted for whatever reason.2 Similar argument holds for Indias exports of services. Therefore, shocks to these two countries import demand (and export supply) are sources of risk for foreigners. All these simply imply that both India and China have become increasingly integrated with the world economy. But China has gone much farther in this regard. China has attracted and continues to attract far more foreign capital (FDI and FII) than India. A major portion (above 70%) of foreign investment inflows into China consists of FDI. In case of India, foreign investment inflows are mainly in the form of FII (above 70%). 2. Performance of India and China in manufacturing sector: China has emerged as a major exporter of manufacturing goods since 1990 (Table 1). India is not yet a major exporter of manufactured products to the world. Significantly, Chinas industrial growth rate has been consistently higher than Indias by about one and half times, and the gap seems widening. In India, the traditional hubs of manufacturing such as Ahmedabad, Chennai, Kolkata and Mumbai are reasserting themselves as centres of industrial development. But, they are no where near the urban/coastal cities/zones like Shanghai, and Guangzhou in China. China has a significant share of world markets for iron and steel, office machines and telecommunications equipment and textiles and clothing. Moreover, its share has increased significantly over the years. Indias share in global market with respect to these commodities is no where near Chinas. What is worrisome is that Indias global shares are not growing including the much touted textiles and clothing (see APPENDIX for a detailed analysis of Indias comparative performance in textile and clothing sector).

According to Morgan Stanley, low-cost Chinese imports (mainly textiles, shoes, toys, and household goods) have saved U.S. consumers (mostly middle- and low-income families) about $100 billion dollars since China's reforms began in 1978. Cheaper baby clothes from China helped U.S. families with children save about $400 million between 1998 and 2003. U.S. industrial firms such as Boeing, Ford, General Motors, IBM, Intel, and Motorola also save hundreds of millions of dollars each year by buying parts from lower-cost countries such as China, increasing their global competitiveness and allowing them to undertake new high-value activities in the United States. In an effort to save 30 percent on its total global sourcing costs, Ford imported about $500 million in parts from China last year. General Motors has cut the cost of car radios by 40 percent by building them from Chinese parts.

Table 1: Worlds Leading Exporter of Manufacturers Top 5 (Share in World Exports) Country European Union China USA Japan Hong Kong, China India (Ranked 14) Brazil* Russia* * - Ranked above 15 1980 0.8 13 11.2 1.6 0.5 1.9 12.1 11.5 3.2 0.5 0.67 1990 2000 42.8 4.7 13.8 9.6 4.1 0.7 0.67 0.53 2007 44.7 11.9 9.6 6.7 3.5 1 0.80 0.73

It appears that China took advantage of the elimination of textile quotas in the US and EU markets in a phased manner (under the Multifibre Arrangement (MFA) since 1995) by rapidly increasing its share in the two markets (see APPENDIX).3 India failed to capture this opportunity because of domestic constraints: reservation of garments for production by SSIs which restricts scale of production (the reservation was lifted only three years ago); high cost of inputs like energy, dyes and chemicals; low labour productivity and restriction on textile imports. In fact, we are not in a position to compete with China particularly on price. However, ample opportunities still exist for building lasting competitive advantage based on creativity in production, skill formation, technological innovation in marketing and distribution, and the creation of supporting institutions to help firms and workers adapt continually to volatile markets. The potential growth of China and India as suppliers of industrial chemicals is also high, with both having nearly doubled their share in global exports of chemicals. With India emerging as an inexpensive and attractive place for trials of new drugs, and also the rising confidence of major Indian pharmaceutical companies in their ability to innovate and compete in the post-TRIPS era, India could emerge as a significant pharmaceutical hub. In case of automobiles industry, both India and China are emerging as major players in global ancillary automotive products or auto parts component market.4 Field
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In fact, this has triggered safeguard actions by US and EU. In case of India this was made possible due to entry of foreign players in the automobile sector in the post-liberalization period. As part of reforms, India removed entry barriers against foreign automobile producers and doubled capacity licensing. Prior to reforms there were only three private firms producing passenger cars in India and their capacity was heavily constrained by govt. through licensing. Foreign players started developing local ancillary manufacturers and gave them the technological assistance for

surveys reveal that current standards of supplier quality in regard to auto components are at, or close to, world standards. In both countries auto component exports are driven equally by multinational and domestic firms: of the top 10 component exporters in China and India, half are domestic firms. In fact the growing dominance of India and China in this segment has been putting competitive pressure on established auto parts firms in industrial countries. (Example: Delphi, the component maker from US has become bankrupt) 2. Factors Explaining Chinas higher productivity and competitiveness in world market for manufacturing bases: (i) China welcomed large-scale FDI: In contrast to Indias homegrown entrepreneurship dependent growth strategy, China followed FDI-dependent approach. The differences in the strategy are functions of history (see Box 1). Chinas Communist Party came to power in 1949 intent on eradicating private ownership, which it quickly did. Although the country is now in its third decade of free-market reforms, it continues to struggle with the legacy of that period. Developments at the microeconomic level in China reflect these historical and ideological differences. China has been far bolder with external reforms but has imposed substantial legal and regulatory constraints on indigenous, private firms (see Box 1). The restrictions were designed not to keep Chinese entrepreneurs from competing with foreigners but to prevent private domestic businesses from challenging Chinas state-owned enterprises (SOEs). A report issued in 2000 by the Chinese Academy of Social Sciences concluded that, Because of long-standing prejudices and mistaken beliefs, private and individual enterprises have a lower political status and are discriminated against in numerous policies and regulations. The legal, policy, and market environment is unfair and inconsistent. Some progress has been made in reforming the bloated, inefficient SOEs during the last 20 years, but Beijing is still not willing to relinquish its control over the largest ones, such as China Telecom. Instead, the government has ferociously protected them from competition. In the 1990s, numerous Chinese entrepreneurs tried, and failed, to circumvent the restrictions placed on their activities.
BOX1:WhyChinachooseFDIasthepreferredinstrumentofchange? Giventhecompulsionstogrowfastandestablishthelegitimacyofitsdecisiontobreak out of old ideological moorings (i.e. introduction of economic reforms), the political regime in China had to choose an effective and efficient instrument of change. Though stateowned enterprises (SOEs) were by far the dominant sector in the Chinese economy on the eve of reform,withabout30millionworkersandaccountingforfourfifthsofoutputowningthevast majorityofthemachinery,equipmentandotherphysicalassetsemployedinmanufacturing,it couldnotbecounteduponforaleadershiproleinbreakingintotheworldeconomy.Overtime SOEshadbecomevirtuallybankrupt,borrowinglargesumsofmoneyfromstateownedbanks
them to become world class. Soon India started exporting ancillary automotive products to the developed world. Interestingly some domestic players took advantage of this situation and start developing their own models. For instance, Telco, capitalizing on the existence of world-class suppliers of ancillaries in India, started producing a state-of-the-art, indigenously-designed car, the Indica.

andburdeningthebankingsystemwithhugenonperformingloans.Alsotheywerefunctioning onthedictatesofthepoliticalregime.Inthesecircumstances,itwouldhavebeenadisasterif theywerepushedtofendforthemselvesinthecompetitiveglobaleconomyunlessfundamental reforms could be implemented in the fiscal system, banking institutions and enterprise governance.Understandably,tohaveembarkedonsuchmajorinstitutionalreformsthatwould haverequiredthestateandthepartytosurrenderagreatdealofeconomicandpoliticalpower couldhaveledtounpredictableconsequences,threateningthestabilityoftheregimeitself. Most importantly at the beginning of the reform process, there was no indigenous privatesectortoturnto,asitwasvirtuallynonexistentinChina.Forlong,Chinawastakinga stepmotherlyattitudetoindigenousprivateenterprise,acknowledgingonlythepropertyrights of individual enterprises, defined as selfemployed business. Domestic private firms faced discrimination from the banking system in the matter of availability of credit. Such financial discriminationwastheoutcomeofawellentrenchedandinstitutionalizedideologicalhostility towardsprivatefirms,makingitdifficult,ifnotimpossible,exceptwiththecourtesyofpolitical connections, to access resources from the banking system. This kind of credit restraints for private firms was in place not because private firms were inefficient, but because they were private. In1988theConstitutionwasamendedtoincludeaclausethatpermitestablishmentof private companies with more than eight employees. But discrimination against private firms continued.Forinstance,until1998largestChinesebankswereunderinstructionsnottolendto privatefirms.Asofthelate1990s,morethantwodozenindustries,includingsomeofthemost importantandlucrativesectorsoftheeconomybanking,telecommunications,highways,and railroadswere still offlimits to private local companies. However, from March 1999, the privatesectorwasaccepted,asacomponentof,ratherthanasasupplement,to,theChinese economy.However,itwasonlyinJuly2001,aftertheannouncementofpresidentJiangZemin, thatthecommunistpartywouldwelcomeprivateentrepreneurstojointheirranksthatthings easedsomewhatforthedomesticprivatesector. Given the fact that the institutional foundations for the growth of indigenous enterprises(bothSOEanddomesticprivatefirms)werevirtuallynonexistentduetothereasons mentionedabove,therulingpoliticalregimefounditselfinanunenviablepredicamentwhenit decided to launch economic reforms. Acutely conscious that as China did not possess capabilities in many modern industries, it had to look for ways to encourage an investment regimethatcouldgiveitthebenefitofanunsurpassableedgeinscaleeconomies,marketreach andtechnologicalleadership.Withnoviableandcredibleindigenouseconomicagenttoturnto, it accepted, in recognition of ground realities, that FDI could be deployed as a kind of change agent. Most importantly, due to the absence of a strong indigenous business groups within China,Chinesepoliticalregimedidnotallowanykindofsensitivityaboutaforeignpresence to cloud their judgment about the limited capability of the domestic entrepreneurs in accessingthekindsoffinanceandmarketingskillsthatwererequiredinaglobalmarket.

Foreign investors have been among the biggest beneficiaries of the constraints placed on local private businesses. One indication of the large payoff they have reaped on the back of Chinas phenomenal growth: In 1992, the income accruing to foreign investors with

equity stakes in Chinese firms was only $5.3 billion; today it totals more than $22 billion.5 In China, FDI relaxations came in phases, though in fairly quick succession. The measures announced during the 1980s were limited in their scope and range. FDI was, to start with, accorded a legal status superior to that enjoyed by indigenous private firms. The 1982 constitution offered protection (Article 18) to the legal status of foreign enterprises operating in China. They were permitted to invest in China and enter into various forms of economic cooperation with Chinese enterprises and other Chinese economic organisations Article 18 also vows to protect their lawful rights and interests. As these produced encouraging results, the government removed in 1992 a number of sectoral and regional restrictions on FDI, shifting simultaneously the investment approval authority from the central government to local governments. This had momentous implications for the Chinas growth scenario. The creation of SEZs, which exempts foreign investors from regulation applicable elsewhere in China (particularly relating to hiring and firing and foreign ownership), helped in attracting huge FDI into China. Moreover, excellent infrastructure facilities, particularly power, road, and communications also played a crucial role in attracting FDI. Over the two decades of reform, FDI has emerged as a significant source of investment financing. It amounted to 6 per cent of GDP in the early 1990s, falling to 3.5 per cent since 2000, though the absolute amount increased during this period [OECD 2005]. Since it launched reforms in 1978, China has taken in $500 billion in FDI, ten times the total stock of FDI Japan accumulated between 1945 and 2000. U.S. firms have invested more than $40 billion in more than 40,000 projects in China. Notably, a major part (92% of the total) of the FDI flow occurred after 1992. Between 1993 and 1997, foreign investments [both FDI and FIE (i.e. firms funded by foreign investment/FDI] accounted for over 53 per cent of the fixed asset investment by non-state firms. FDI has contributed significantly to Chinese GDP and productivity growth. The contribution of FDI to annual GDP growth through capital deepening was on an average 0.4 per cent in the 1990s and the contribution to long-term total factor productivity growth on an average was 2.5 per cent over the same period. Hence the total contribution of FDI to GDP growth during the 1990s is estimated at about 3 per cent a year. This positive link between FDI and GDP has been found at both national and provincial levels. (ii) Dominant role by Chinese Diaspora: China has a large and wealthy diaspora that has long been eager to help the motherland. Its money (in the form of FDI) has been warmly received. During the 1990s, more than half of Chinas FDI came from overseas Chinese sources (Hong Kong, Macao and Taiwan). To overcome rising wage costs domestically, to overcome limitations of domestic technology to produce for the world market and to overcome growing competition from the other Asian economies non-resident Chinese in Hong Kong, Macao and Taiwan invest in China. Conscious of the absence of a strong domestic entrepreneurship, Chinese authorities have been very hospitable to non-resident Chinese entrepreneurs.
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This money does not necessarily leave the country; it is often reinvested in China.

By contrast, the Indian diaspora was, at least until recently, resented for its success and much less willing to invest back home. New Delhi took a dim view of Indians who had gone abroad6, and of foreign investment generally, and instead provided a more nurturing environment for domestic entrepreneurs. Until now, the Indian diaspora has accounted for less than 10 percent of the foreign money flowing to India. With the welcome mat now laid out, direct investment from nonresident Indians is likely to increase. The Indian diaspora has famously distinguished itself in knowledge-based industries, nowhere more so than in Silicon Valley. Now, Indias brightening prospects, as well as the changing attitude vis--vis those who have gone abroad, are luring many nonresident Indian engineers and scientists home and are enticing many expatriate business people to open their wallets. With the help of its diaspora, China has won the race to be the worlds factory. With the help of its diaspora, India could become the worlds technology lab. (iii) No protection for domestic industry: China did not give protection to domestic firms, something both Japan and South Korea did during their periods of rapid growth. Instead, it has allowed foreign firms to develop new markets for their goods and services, especially high-value-added products such as aircraft, software, industrial design, advanced machinery, and components such as semiconductors and integrated circuits. In fact, many Chinese firms resist protectionism, because they need to import critical components for their domestic operations and fear retaliation against their exports (by other countries in case protectionism is followed by China). Also, Chinese domestic consumers act as a powerful domestic coalition against protectionism. They, especially urban consumers, pride themselves on driving foreign-brand cars and using mobile phones and computers with circuits that were designed and manufactured abroad. The result: in the Chinese market domestic manufacturers of appliances, motorcycles and TVs, to name a few goods, have been able to successfully compete with those from Japan, Korea, etc. (iv) Critical role played by Township and Village Enterprises: Most of the industrial units producing lower-end manufactures are not state owned. Nor are they all owned by individual capitalists. A large proportion of Chinas explosive industrial growth took place in what are known as Township and Village Enterprises (TVEs). TVEs are collectively owned industrial enterprises, owned by the respective township or village. Their surpluses accrue not to individual capitalists but to the township or village authority. These TVEs, have a number of advantages. They are located on land owned by the local authority itself, and thus do not have to pay any rent for land on which factories are situated, resulting in a substantial price advantage. Also, a part of Chinas savings is held by TVEs, thereby lessening the dependence of the TVEs on costlier bank credit for working capital. However, the TVEs cannot subsidise losses through recourse to the public exchequer. They have to stand on their own financially and cannot exist for a long while making losses. TVEs commanded about 25 per cent of
But now there has been a change in the attitude towards nonresident Indian. This was officially signaled in 2003 when the government held a conference on the diaspora that a number of prominent NRIs attended. Since then the practice has been continued every year in the form of Pravasi Divas.
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Chinas total export earnings and joint ventures by 1991, increasing to 36 per cent in 1996. What contributed to the success of TVEs? First, the dramatic and demonstrative impact on the growth of the small and medium industries in rural areas was facilitated through extensive decentralisation of power to regional authorities for improving efficiency in the planning and utilisation of local resources and development of local industries. Second, the local governments had a strong incentive to promote TVEs as these contributed substantially to revenues which the local governments could retain for themselves under the revenue sharing arrangements. Third, FDI came to be favoured in the development of TVEs. The impressive development of TVEs was primarily due to their connections to the international market. The presence of FDI became pervasive in labour-intensive and export-processing TVEs such as electronics and telecommunications, garments and footwear, leather products, printing and record processing, cultural products and plastics. In the TVEs the areas of highest growth were also the areas of deepest foreign penetration. The connection with FDI brought TVEs in competition with SOEs and stimulated the latter to increase productivity and unit scale. Fourth, major agricultural boom coming in the wake of economic reform in agriculture, with better prices and better land tenure, with the farmers acquiring fixed term land use rights in the late 1970s and moving towards full property rights in recent years. (v) Export-led industrialization or Production for exports: China followed a export-led growth model. Export units, in addition to catering to the international market, produce for and compete in the national market as well. Managers and workers from the export units also move on to set up other producing units, taking their skills and production knowledge with them. Most of the lower range of manufactures available in many parts of the world today carry the Made in China label hall mark of Chinas export-led industrialisation. China has been producing these goods for international markets for more than 20 years now. The policy of dualism in product quality played a significant role in promoting Chinese products abroad. In China there are two sets of firms one producing high quality products and the other producing low quality products. A lot of shoddy goods are Produced in China, often with no attention to safety Standards. Firms producing poor quality goods cater to the needs of the lower end of the market such as Nepal, Bangladesh and India. Chinese experience shows that lower quality is not always a liability, particularly when the trade-off is between quality and price. For example, in case of toys they are anyway not going to remain useful for very long (whether it is because they break or because children want something new) you do not need very high durability. However, competition has helped weed out units producing the worst goods. For instance, in electrical fans the number of manufacturers went down from a few thousand to a few hundred. The units that remain produce on a fairly large scale and for a wide market, including the export market. (vi) Higher labour productivity: One of the factors contributing to Chinas competitiveness is the dynamic advantage of higher labour productivity. This is made possible by the following factors.

(a) The high level of education of Chinese workers. The virtually universal literacy of Chinese workers enables higher productivity than Indias current 65 per cent or so literacy. (b) The TVEs model does not lead to the same accumulation of profits in the hands of a few individuals. Also the workers are not made to suffer the consequences of adjustment, as in the usual privately-owned enterprises.7 As a result, workers would develop closer attachment with such enterprises which, in turn, stimulates higher productivity. On the other hand, where workers only bear the burden of adjustment, with no attention being paid to its social costs, the only result can be a high level of alienation of workers from the enterprises. (vii) Rapid transformation in workforce distribution: The relatively faster industrial growth in China is also reflected in a quicker decline in the proportion of workforce dependent on agriculture. Around 1980, the proportions in China and India were close to 69 per cent. After two decades, the ratio for China came down by 20 percentage points, while the decline in India was half of that (10 percentage points) (Table). Given that output per worker in developing countries in nonagriculture sectors is three to four times that in agriculture, Chinas superior industrial output performance is largely on account of its ability to bring about rapid transformation of its workforce distribution.
Workforce Composition in India and China (Percentage of workforce)

(viii) Importance to agriculture: China and India have taken different reform paths. China started off with reforms in the agriculture sector and in rural areas, while India started by liberalizing and reforming the manufacturing sector. These differences have led to different growth rates and, more importantly, different rates of poverty reduction. From the trend growth rates of agriculture and the incidence of poverty in the preand post-reform periods in China, it is clear that the acceleration in agricultural growth during 1978-2002 (4.6 per cent a year as opposed to 2.5 per cent a year over 1966-77) was the primary factor influencing the sharp drop in poverty, from 33 per cent of the
For instance, when Huaxi village decided to switch its textile production line from synthetics to higher value woollens, it carried this out without laying-off any workers, not even migrant workers. This should be contrasted to the continued opposition of coir workers unions in Kerala to mechanisation, leading to the shift of these processing units across state borders to Tamil Nadu.
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population in 1978 to 3 per cent in 2001 (Table). The better part of this decline occurred in the first reform phase of 1978-84 when agricultural gross domestic product (GDP) jumped to 7.1 per cent a year and rural poverty dropped from 33 per cent to 15 per cent. In India, the most rapid poverty reduction occurred from late 1960s and the late 1980s. This is the period of the so called green revolution and agricultural growth was high due to the use of modern technologies and the strong policy support to agriculture. In contrast, agriculture was not a major factor behind poverty reduction during the era of reforms.
Agricultural Growth and Poverty Reduction in China Period Growth Poverty (as % of population) 1966-77 2.5 33 (1978) 1978-2002 4.6 3 (2001) 1978-84 (First reform phase) 7.1 15

By making agriculture the starting point of market-oriented reforms, a sector which gave majority of the people their livelihood, China could ensure a widespread distribution of gains and build consensus and political support for the continuation of reforms. Reform of incentives resulted in greater returns to the farmers and in more efficient resource allocation, which in turn strengthened the domestic production base and made it more competitive. Besides, through favoured demand conditions, prosperity in agriculture favoured the development of a dynamic rural non-farm sector (TVEs), which provided additional sources of income outside farming. As rural incomes rose, the demand for non-agricultural output increased proportionately. The rapid development of the rural non-farm sector also encouraged the government to expand the scope of policy changes and put pressure on the urban economy to reform as well, since non-farm enterprises in rural areas had become more competitive than the state-owned enterprises (SOEs). Reforms of the SOEs in turn triggered macroeconomic reforms, opening up the economy further. The major elements of farm sector reforms in China are: (1) Individual farmers secured an incentive to produce more than their obligation to plan, which they could sell in open market (2) Land reforms (land distribution & tenure system, limiting the number of landless) (3) Health and education provided free (4) Heavy govt. investment in power (5) Rural electrification (6) State procurement system dismantled everywhere except for main grainproducing regions (7) Food rationing system was abolished in early 1990s (8) Private agriculture trade promoted

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Of these the measures 2, 3, 4 and 5 were initiated by China before the introduction of economic reforms starting from 1978. The measures 6, 7 and 8 encouraged diversification. (ix) Contribution by indigenous entrepreneurship: With the benefits of FDI inflow accruing to the economy, the regime felt encouraged to introduce steadily the concepts and institutions of (domestic) private property into the Chinese economy. As a result, there has been an upsurge of indigenous entrepreneurship. Increasing confidence that the state will not confiscate ones property and greater access to funds via banking system led to an upsurge of new businesses across almost all industries, from tissue paper production to semiconductor chip manufacturing. As a result, the domestic private sector has increased output fivefold from 1998 to 2003. During this period it created 18 million jobs while SOEs shed 22 million and added nine million last year. Subcontracting and export processing operations undertaken by private firms increased 82-fold from 1996 to 2000. In the garment industry the share of FDI declined from 7.8 per cent to 4.5 per cent. For a country that had no privately owned companies before 1980, this remarkable achievement would not have been possible but for the catalytic role and the demonstrative impact that FDI had produced all over that country. (x) Reform of PSUs in China: FDI flow, when it started pouring in a massive way, was mainly restricted to the collectives and joint ventures in provinces and selected regions. As benefits started flowing from FDI, with the surge of domestic entrepreneurship, the regime could afford to shift gear: in the 15th Party Congress in 1997 president Ziang Zemin declared that the state did not have to dominate every sector or have majority ownership in every enterprise in order to maintain broad control of the economy and decided to focus only on a few enterprises and privatise those that did not fall in this key category. The government announced its policy of grasping the big and letting go the small: grasping the big meant restructuring and consolidating Chinas largest SOEs and letting go the small meant that the government committed itself to support privatisation of small SOEs. The focus is now on the sanctum sanctorum of the command economy, heavy industries, mining and defence oriented, some 500 or so key SOEs. Recently, a State Owned Asset Supervision and Administration has been established in order to strengthen their management autonomy and financial performance. In several cases, management of specific assets for securing better efficiency is being arranged, as a face saving way, through the instrumentality of joint ventures, with restrictive rights for foreign investors. (xi) Absence of a land market: In fact, in China as a whole, land is not yet a commodity, not yet real estate. This was a major advantage the country had in its march towards industrialisation (this is especially the case of TVEs). Of course, a lease market is growing in China and this is likely to put an end to the advantage it has in land not being a commodity. (xii) Cheap capital: Capital in China is substantially cheaper than in India. Chinas savings rate is more than 40 per cent compared to around 28 per cent (in 2003-04) for India. The savings 11

are deposited with the state-owned commercial banks in the closed financial system, which has little autonomy but to follow political guidelines in its investment decisions. A part of this savings is held in the TVEs, lessening their dependence on costlier bank credit for working capital. (xiii) Trial and error approach: China follows trial and error approach in implementing reforms. The adoption of new measures through experimentation rather than a predetermined blueprint increased the likelihood of the success of reforms since it implied a learning by doing approach or, in the words of Deng Xiaoping, one of crossing the river while feeling the rocks. This was peculiar to the Chinese reform process in which the government made sure that each new policy was field-tested at length and determined to be successful in selected experimental districts before it could be applied nationwide and the next measure introduced. (xiv) Centralisation of decision making: In both Indian and China there was political will to carry out reforms, but in practice outcomes were shaped by the different patterns of governance. India is a debating society where political differences are expressed freely. Policymaking is exposed to the pressure of various interest groups and there are long debates before decisions are taken. The lengthy bureaucratic procedures, intended to ensure checks and balances in the system, often delays decision-making and implementation. This exercise is compatible with the needs of a free and dynamic polity but in practice is a key reason for Indias slow pace of economic reforms. China, on the other hand, is a mobilising society where decisions are taken faster and state power is backed by mass mobilisation. As a result, implementation of decisions is more effective although there is lack of more elaborate debate in China on major reforms. Another key factor in the effective implementation of reforms in China was the ability of the leadership to set both clear objectives and time frame for transition to the reformed regime. This is made possible due to centralization of decision making.8 On the other hand, in the context of a highly pluralist society like India, consent is more difficult to achieve, and so neither clear objectives nor time frames for transition can be set. 3. Future challenges facing Chinas Growth Story: The infirmities in Chinas microeconomic, institutional and entrepreneurial bases seem to raise many doubts on the sustainability of its superior performance. The infirmities are as follows: (a) Growth of labour and savings is expected to slowdown in future: In China, the share in population of persons in prime working age (15-59) is projected to fall to 53.3% by 2050 from the present (2005) level of 67.7%. Also the
However, as the economic system opens up further and prosperity increases, it will become harder and harder to reconcile the centralised political set-up with the more liberal economic system. Indeed, this is one of the most important challenges before China today.
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dependency ratio is projected to rise, from 57% to 88% by 2050.9 Analysts say this is the outcome of (a) draconian and coercive one-child policy instituted in 1979 and (b) decline in fertility in the decade before. Chinas high savings and investment rates (42% and 39% of GDP respectively in 2004) are also unlikely to be sustained indefinitely into the future due to the expected fall in the working age population. But, Indias position on this front is more favourable than Chinas. The share of population in the age group 15-59 in Indias total population is projected to rise slightly from 60% in 2005 to 61% in 2050.10 Also dependency will fall slightly from 67% to 64% during the same period. Indias saving and investment rates (around 30% in 2004-05) are likely to increase further for life cycle as well as other reasons. (b) High capital out ratio: The incremental capital-output ratio for China is much higher than in India. This evidently means poor utilisation of capital resources or low productivity of resource use or misallocation and wastage of capital resources. The best and widely acknowledged evidence of wasteful capital expenditure is the oversupply (or excess capacity) of infrastructure services, housing and consumer goods in the urban areas in China. Reasons for the over investment are: (i) (ii) One reason for this is high rate of urbanisation in China, which requires capital-intensive physical infrastructure. With the introduction of fiscal decentralisation in 1984, local governments were made responsible for economic development of their regions without fiscal assistance from the national government. This strategy was to encourage local governments to earn revenue via tax and non-tax revenues by promoting the industrial sector (including TVEs) with a sound infrastructure provided by them. Accordingly, local governments expanded industrial activity by building infrastructure with the help liberal bank credit.11 But one major problem with this industrial expansion was that the local officials and party cadres expanded industrial activity beyond meeting the tax targets set for them by the higher authorities. This happened because of two reasons: (a) to keep open unemployment under check to avoid a potential political threat to the regime and avoid social unrest; (b) party officials at the local level discovered the advantages of industrial promotion, as their incomes and career prospects

However, the other side of the story is that China still has more than half of people of working age employed in agriculture and rural activities. It this section of the workforce could be successfully redeployed in non-farm activities (say through technological improvement) then there would be productivity gains. Perkins (2005) estimates that Chinas non-farm workforce could be increased by another 70 to 100 million in the next decade through this process depending upon the expansion of senior secondary and university education. 10 Moreover, with a much larger share of the workforce employed in agriculture and other low productivity activities, India has greater potential than China to experience significant productivity gains from intersectoral shift of labour. 11 Though the local governments faced a hard budget constraint, they apparently had informal access to liberal bank credit, as the banking system is ultimately subservient to the party and the higher bureaucracy.

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were closely tied to the record of economic development achieved during their tenure in a particular bureaucratic and party position.12 (c) Lack of efficient financial sector: China doesnt have a well-functioning and efficient financial sector consisting of commercial banks, markets for debt, equity and insurance and a strong regulatory agency. High domestic savings are deposited with the state-owned commercial banks, which has little autonomy but to follow political guidelines in its investment decisions. In the early 1990s, when China was registering double-digit growth rates, Beijing invested massively in the state sector.13 This not only promoted many commercially unviable projects, but also created excess capacity (see point above), leaving the banking sector with a huge number of nonperforming loanspossibly totaling as much as 50 percent of bank assets. At some point, the capitalization costs of these loans will have to be absorbed, either through write-downs (which means depositors bear the cost) or recapitalization of the banks by the government, which diverts money from other, more productive uses. This could well limit Chinas future growth trajectory. The soft budget constraint faced by the banking system manages to survive as (a) the financial sector is still closed and (b) government repeatedly writes down bad loans with fresh infusion of capital. As regards the other arms of the financial sector, bureaucrats remain the gatekeepers, tightly controlling capital allocation and severely restricting the ability of private companies to obtain stock market listings and access the money they need to grow. These policies have produced enormous distortions while preventing Chinas markets from gaining depth and maturity. It is widely claimed that Chinas stock markets have a total capitalization in excess of $400 billion, but factoring out non-tradeable shares owned by the government or by government-owned companies reduces the valuation to just around $150 billion. By contrast, Indias domestic financial system has far greater depth and wider international linkages. This is despite the low gross domestic saving rate in India. Though, like China, Indias commercial banking system is still dominated by public ownership of nearly three quarters of its assets, nevertheless it has become more efficient with increasing competition from dynamic new domestic private banks and also foreign banks (Discuss separately). For instance, compared to Chinas bad loans estimated to be in the range of 20-50 per cent of its GDP, the commercial banking sectors gross NPAs were minuscule at 2.8 per cent of GDP in 2002-03 and have declined during the past decade. Indias capital markets operate with greater efficiency and transparency than do
The cadre evaluation system (an overlooked aspect of the political reform in China), put in place in 1979, powerfully shaped local official behaviour by linking both the remuneration and advancement of local leaders to performance on economic as well as socio-political norms (Susan Whiting, 2001). Economic norms centred on the promotion of industrial development [Provincial and local officials were no longer judged on their political loyalty alone, but also on their ability to develop local industry (OECD, 2002)], while socio-political norms mandated the financing and provision of public goods. Interestingly, both tasks require higher revenue in the hands of the local governments. 13 Indeed, Beijing has used the financial markets mainly as a way of keeping the SOEs afloat.
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Chinas. Indian stock and bond markets generally allow firms with solid prospects and reputations to obtain the capital they need to grow. In a World Bank study published in 2002, only 52 percent of the Indian firms surveyed reported problems obtaining capital, versus 80 percent of the Chinese companies polled. Indias National Stock Exchange is becoming one of the worlds most efficient (comparable to the New York Stock Exchange) in terms of transaction costs and transparency. Indeed, the large inflow of portfolio investments, particularly from foreign institutional investors in response to higher returns in India is in part a testimony to the vibrancy of Indias stock market. (d) Neglect of indigenous domestic industry: Chinas export-led manufacturing boom is largely a creation of FDI, which effectively serves as a substitute for domestic entrepreneurship. Few of the Chinese these products are made by indigenous Chinese companies. During the last 20 years, the Chinese economy has taken off, but few local firms have followed, leaving the countrys private sector with no world-class companies to rival the big multinationals. China forestalls the rise of a politically independent (domestic) private sector. The economic reforms in China strongly favored state-owned enterprises (SOEs), granting them preferential access to capital, technology, and markets. The reforms also favored foreign firms/investment, which enabled them to claim the lion's share of China's industrial exports and secure strong positions in its domestic markets. The end result is that Chinese economy/industry was left with inefficient but still-powerful SOEs, increasingly dominant foreign firms14, and a domestic private sector as yet unable to compete with either on equal terms. China's private firms are not yet significant global players. Despite more than two decades of economic reform, China's leading domestic industrial and technology companies are still primarily SOEs, which remain inefficient and dependent on government-subsidized loans, and foreign firms.15 Among SOEs and foreign firms, the later wield strong influence over Chinese economy than former.16 These claims are corroborated by the following facts: Foreign-funded enterprises (FFES) accounted for 55 percent of China's exports in 2003. The share of exports of computer equipment produced by FFES rose from 74% to 92% over the last decade. Today, wholly owned foreign enterprises (WOFES)17 (as opposed to joint ventures) which account for 65 percent of new FDI in China, dominate high-tech exports from China. Between 1998 and 2002, FFES increased their share of total domestic high-tech sales from 32% to 45%, while the share of that market held by SOEs, fell from 47% to 42%. Also, in the same period, the share of exports of high-tech products (e.g. pharmaceuticals, aircraft, electronics, and computers) produced by FFES increased from 74% to 85%.

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China's high-tech and industrial exports are dominated by foreign, not Chinese, firms. In spite of this, SOEs account for the bulk of advanced industrial production in China, boast the country's best research and development (R&D) capability, and spend the most resources to develop and import technology. 16 This is because the SOEs have failed to invest in the type of long-term technological capabilities that their Japanese, South Korean, and Taiwanese predecessors built during the 1970s and 1980s. 17 In the 1990s, China permitted a new FDI trend to develop: a shift away from joint ventures and toward wholly owned foreign enterprises.

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India, on the other hand, developed a softer brand of socialism, which aimed not to destroy capitalism but merely to mitigate the social ills it caused. For democratic, postcolonial India, allowing foreign investors huge profits at the expense of indigenous firms is simply unfeasible. It was considered essential that the public sector occupy the economys commanding heights, to use a phrase coined by Russian revolutionary Vladimir Lenin but popularized by Indias first prime minister, Jawaharlal Nehru. However, that did not prevent entrepreneurship from flourishing where the long arm of the state could not reach. While China has created obstacles for its entrepreneurs in the post-reforms period, India has been making life easier for local businesses during the last two decades or so. As a consequence, entrepreneurship and free enterprise are flourishing in India.18 Indian industrial growth and exports have high domestic content and local ownership. As India provided a more nurturing environment for domestic entrepreneurs, it managed to spawn a number of companies that now compete internationally with the best that Europe and the United States have to offer. Further, entrepreneurship is spreading to newer groups of firms whose strength lies not in accumulated wealth or political patronage but mastery over production technologies which are rapidly spreading overseas Infosys, Wipro, Ranbaxy, Dr. Reddys Labs, Bharat Forge, etc. Not only is entrepreneurship thriving in India; entrepreneurs there have become folk heroes. Nehru would surely be appalled at the adulation the Indian public now showers on captains of industry (e.g. founder of Infosys Narayana Murthy). These success stories never would have happened if India lacked democracy, a tradition of entrepreneurship, decent capital market and a decent legal and property rights systems to support Murthy and other would-be moguls. (e) Adverse consequences of high business risk: In China, Chinese Communist Party (CCP) controls all aspects of organized business life, including industry associations, leaving few avenues for firms to work together for legitimate common interests. CCP officials exercise wide discretion in defining, implementing and changing those rules which were developed in the postreforms period, especially at the local level. CCP officials manipulate economic policies to pursue particular local goals. Some engage in this manipulation because they are corrupt, others because they directly own or operate firms. Most, however, do it because the political elite encourage them. Rules constantly shift under manipulation by government officials. To survive or work within such a business environment Chinese firms have developed over the past two decades what is called industrial strategic culture. The following are the salient features of this culture.
A measure of the progress: In a survey of leading Asian companies by the Far Eastern Economic Review (FEER), India registered a higher average score than any other country in the region, including China (the survey polled over 2,500 executives and professionals in a dozen countries; respondents were asked to rate companies on a scale of one to seven for overall leadership performance). Indeed, only two Chinese firms had scores high enough to qualify for Indias top 10 list. Tellingly, all of the Indian firms were wholly private initiatives, while most of the Chinese companies had significant state involvement. Some of the leading Indian firms are true start-ups, notably Infosys, which topped FEERs survey. Others are offshoots of old-line companies. Sundaram Motors, for instance, a leading manufacturer of automotive components and a principal supplier to General Motors.
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(i) The business risks inherent in this business environment (or China's unreformed political system) have motivated/encouraged many Chinese managers to seek short-term profits/gains. Most industrial firms in China have not increased their commitment to developing new technologies. This is despite their increasing operational efficiency, sales revenues, and profits. Their total spending on R&D as a percentage of sales revenue has remained below one percent for more than a decade. R&D intensity (R&D expenditure as a percentage of value added) at China's industrial firms is only about one percent, seven times less than the average in OECD countries. (ii) Most Chinese firms focus on developing privileged relations with officials in the CCP hierarchy and the bureaucracy and forgo investment in long-term technology development and diffusion. (iii) Chinese firms routinely focus on obtaining "exceptional" treatment from key officials: special access to markets or resources, exemptions from rules and regulations, or protection against predation by other officials. (iv) To maximize these exceptional benefits, as well as to avoid entanglements with other firms and their patrons, many Chinese companies avoid associating/networking with each other, risk sharing and collective action within their industry. This has been prompting Chinese firms to run their R&D projects in relative isolation. In the national R&D census in 2000, Chinese industrial firms reported that they spent 93 percent of their $2.7 billion total R&D outlay in-house, but only 2 percent on collaborative activities with universities and less than 1 percent on projects with other domestic firms. (v) Chinese firms tend to engage in excessive diversification. Often such excessive diversification produces damaging results. For example, many of China's most famous firms have made unsuccessful forays into ancillary businesses: Haier (from household appliances into computers, mobile phones, and televisions), Fangzheng (from computers into tea, steel, software, and financial services), and Shougang (from steel into banking, auto assembly, and semiconductors). Huawei, China's best technology firm and maker of network equipment, has recently made a questionable entry into the mobilehandset market, where sales prices and margins have fallen dramatically for the last five years and 37 licensed vendors produced excess inventories of 20 million phones last year. (f) Reliance on imported foreign technology: Chinese firms continue to rely heavily on imported foreign technology and components. Chinese industrial firms are deeply dependent on designs, critical components, and manufacturing equipment (hardware) they import from the United States and other advanced industrialized democracies. Import of soft technology licensing (i.e. licenses for the use of imported equipment), know-how services, and consulting - account for a smaller proportion of imports. This is severely limiting the country's ability to wield technological or trading power for unilateral gains. Most importantly, there have been few efforts in indigenising (i.e. absorbing and mastering the knowledge embodied in the imported equipment) the imported technology. This is in contrast to the practice of firms in South Korea and Japan in the 1970s and 1980s. During these times firms in these countries tried to catch up with the West by absorbing and

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indigenising the technology embodied in the hardware. Chinese firms remain weak in this respect making it unlikely that they will rapidly emerge as global industrial competitors. (g) Incredible legal system/rule of law: Chinas developing capitalism is not solidly based on law, respect for property rights and free markets. The business climate in China remains capricious and often corrupt (see above discussion). Local governments protect their own counterfeiting operations as a source of local revenue. The Chinese government continues to be the policy maker as well as the judiciary. As long as this continues there is no way the legal system will be credible. Chinas intellectual property right protections, although strong in theory, are in fact impossible to enforce in much of the country. On the other hand the property rights regime is firmly entrenched in India. The protection of private ownership is certainly far stronger in India than in China. The rule of law, a legacy of British rule, generally prevails. Moreover, India developed much stronger legal infrastructure to support private enterprise. Indias legal system, while not without substantial flaws, is considerably more advanced. Corporate governance has improved dramatically in India. In a survey of 25 emerging market economies conducted in 2000 by Credit Lyonnais Securities Asia, India ranked sixth in corporate governance, China 19th . (h) Ill-effects of FDI: FDI replaced many independent business units in China that were earlier carrying out contract production for foreign firms. In some of the indigenous industries par excellence, such as ivory and jade sculptures, carpets, personal ornaments, silk, handicrafts, porcelain and so on, domestic entrepreneurs had excelled for hundreds of years; for many it was worrying that a sizeable presence was permitted for foreign firms. The increase of FDI was being accompanied by a continuing decline in contractual arrangements that indigenous entrepreneurs had earlier worked out with foreign buyers. A trend sharply different from what has been observed in other developing countries (for example, what indigenous firms did in the 1960s and 1970s in Taiwan and Korea). In these countries, in the production of labour-intensive export products, local investors learned the skills and crafts and displaced the foreign producers. What happened in China is the reverse of what has been happening in many other developing countries where there had been strong FDI alliances through technology licensing and marketing arrangements with local entrepreneurs. (i) Limited product innovation: China's institutions and the industrial choices of local firms have restricted the ability of Chinese firms to develop new products and services. The share of total sales revenues accounted for by new products at Chinese industrial firms was flat, at about 10 percent, throughout the 1990s. In contrast, new products account for 35 percent to 40 percent of sales revenue for industrial firms in OECD countries. Chinese firms lag behind firms in other developing countries as well: in 2000, for example, new products accounted for about 40 percent of total sales revenues in Brazil's electrical machinery industry. And because of overlapping investments, fragmentation, and the weakness of industry associations, even those firms in China that make new products often find 18

themselves engaged in vicious price competition, which prevents them from reaping high returns from their innovations. (j) Weak domestic technology supply base: Chinese firms have also failed to develop strong domestic technology supply networks. In 2002, Chinese firms devoted less than one percent of their total science and technology budgets to purchasing domestic technology. China's best firms are among the least connected to domestic suppliers. China's homegrown mobile telephone standard, tdscdma, has received central government support, but thus far none of China's major telecommunications operators have agreed to commit to it, preferring a foreign standard, wcdma, instead. Thus Chinese technology suppliers do not enjoy a strong "demand pull" from the best domestic firms to stimulate their own innovative capabilities (k) Possible social upheaval: The rapid economic growth achieved in the last 25 years has generated political tensions and distributional conflicts in China.19 If this aggravates in the course of further economic growth and if political reforms do not materialize, it could lead to a violent collapse of the government. Although the ruling party appears to be firmly in control, and has enough muscle to put down forcibly the growing number of localised protests, and prevent them from escalating into an organised nationwide opposition to communist party rule, without political reforms towards a participatory democracy, force alone cannot stop such an opposition from emerging. Even todays modest slowdown is causing unrest. Many people feel that too little of the countrys spectacular growth is trickling down to them. Land grabs by local officials are a huge source of anger. Unrestrained industrialisation is poisoning crops and people. Growing corruption is causing fury. And angry people can talk to each other, as they never could before, through the internet. As The Economist magazine has recently put it peace and prosperity may depend on the very sort of political reform the [communist] part has tried so hard to avoid. Although India is also experiencing distributional conflicts arising from its sustained growth for 25 years, its vibrant participatory democracy offers non-violent means for resolving them through political compromises. Certainly, political compromises take time to bring about and the very fact that they are compromises often means that some desirable economic reforms are politically infeasible to implement. On the other hand, it also means that the implemented reforms would be far more sustainable.

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Remember Tiananmen square incident in 1989? The student revolt for democracy staged in Tiananmen Square was crushed because the Communist Party feared spiritual pollution, a euphemism for the dilution in legitimacy of authority. This had its roots in the decades of economic planning. [Subramanian Swamy, Political structure and economic reforms, EPW, March 5, 2005, p.935]

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(l) Slow down in economic growth: As a recent special report on China published by The Economist magazine explains, the first decade of the present century, with its relentless double-digit growth, may well have seen the peak of Chinas economic exuberance. A sudden crash is not impossible: there could be a botched attempt to tackle either the property bubble or what the prime minister calls the uncaged tiger of inflation. But an immediate upset is still unlikely: inflation is not yet out of control, still (5.5%) far below the 27.7% it reached in 1994. The danger is more in the medium term: growth will inevitably slow over the next decade, as China settles into its status as a middle-income country, and the burden of caring for an ever larger number of elderly people in a slower economy may make middle-class life far more uncomfortable. As a result of the impending slowing in economic growth, the love affair between a communist party that calls itself the vanguard of the proletariat and its actual, middleclass supporters is now under threat. To compensate, the party will have to usher in wrenching change. It is struggling to shift China away from the current unsustainable model, where growth is propelled by vast investment and export-led manufacturing. (m) Managing state-owned enterprises: Chinas state-owned businesses have an insatiable appetite for capital, which many of them waste. Curbing state companies means taking on all of the well-connected people who ride on their coat-tails, including parts of the middle class. The partys creed means nothing to most such people. The party is secretive about recruitment to its 80mstrong ranks. But an official report in 2008 said that, of new applicants for membership, by far the biggest category comprised university students over the age of 18. Although the decision by these young careerists to sign up shows the partys clout, they have very different ambitions from those of the old ideologues. (n) Sustaining urbanization: The party will also have to work harder to sustain the urbanisation that has fuelled the economy. China has done the easy part: attracting underemployed young rural residents to urban jobs. But the supply is beginning to slow. It would help if farmers could sell or mortgage their rural land and use the money to help gain a stronger foothold in the cities. But the party remains overly fearful of privatising farmland, partly for atavistic fears of a destitute peasantry, and partly for ideological reasons. Worse still, the system of household registration, or hukou, defines even longstaying urban migrants as rural residents, cutting them out of housing, education and other benefits (i.e. treating them as second-class citizens). No wonder that the migrants are increasingly restive. Of the tens of thousands of protests each year, most are still rural, typically by farmers enraged by inadequate compensation for land appropriated for development. However, urban unrest, such as recent riots by factory workers in the southern province of Guangdong, is now more common. If the party is to keep the peace in cities and if it is to continue to attract migrants in sufficient numbers, it needs to find ways to turn them into full-fledged city-dwellers, with the consumer power to match. Here it runs up against the middle class most directly. To give migrants the same housing and other benefits as urban hukou holders, and to build a proper social safety-net 20

will be expensive. And if more tax is the solution, then the middle class could well begin demanding a greater political say. 4. Why India Lags behind China? Though India and China share some similarities (see box) in their development path, both are now at different stages of economic development. The reasons for the gap in economic development and other benchmarks between India and China are as follows. (1) Indias economic reforms began only in 1991, against late 1970s (1978) in the case of China. (2) India national savings rate is half that of Chinas. (3) The FDI level in India is 90 percent less than of China. (4) Despite substantial tariff reductions in the post-reforms period, India remains a relatively more protected economy. (5) Restrictive labour laws and onerous red tape have been spoiling Indias investment climate. (6) Sectoral caps/restrictions on FDI. Together with restrictive labour laws and poor infrastructure facilities this has hindered FDI inflows to India.
SomesimilaritiesbetweenIndiaandChina (a)ChinaandIndiaaretwoofthe largestagrarian economiesintheworldaccounting forthebulkoftheworldspoorestpeople. (b) Both countries started off with similar levels of living with wide geographical variations,andeconomicandsocialdiversities. (c)Bothcountriesembarkedonthecourseofplannedeconomicdevelopmentroughly aroundthesametime.But,ChinafollowedtheSovietmodelmuchmorecloselythanIndia. (d) Both countries opted at roughly around the same time, for the heavy industrialisationstrategyasthequickestroutetosustainedeconomicdevelopment. (e)Bothcountriesperiodicallyfacedfoodandforeignexchangeconstraintsinthecourse oftheirindustrialisationeffort. (f)BothChinaandIndiafollowedagradualistpolicyofareformprocessinresponseto emerging challenges, given domestic economic constraints and the demands of political stability.

(7) Growing inadequacy of Indias infrastructure constitutes a major obstacle to private investment and export potential. (8) Bankruptcy laws (strong exit barriers to manufacturing industries), judiciary system (slowliness in resolving commercial disputes) are inefficient in India. In this sense, China has not been hurt particularly by its having no conventionally defined legal system. (9) China has better investment climate than India. (10) SSI reservation in India has been hurting the progress of small business units. 21

(11) Availability of land for development has become a major issue in India. (12) India lags behind China in the educational attainment of its workforce. (13) India is a sprawling, messy democracy driven by ethnic and religious tensions, and it has also had a longstanding, volatile dispute with Pakistan over Kashmir. China, on the other hand, has enjoyed two decades of relative tranquility; apart from Tiananmen Square, it has been able to focus almost exclusively on economic development. (14) Poor performance of PSEs. Some of the areas in which India performed better than China include the following. (a) The spawning of internationally competitive homegrown companies. (b) India has a fairly successful regulatory structure that can enforce a fair balance between entrepreneurial initiative and market discipline. (c) Efficient and transparent financial markets This support private enterprise so that entrepreneurship and free enterprise are flourishing. Also Indias financial system is not discriminating as much against innovative domestic enterprises as compared to Chinas system. (d) A relatively entrenched legal system. (e) A stable democracy and freedom of speech. (f) A better score on corruption, rule of law and property rights. If, with all the assets that we possess, we are lagging behind China, the explanation has to be sought, not in the halting flow of FDI per se, but somewhere else. In a dynamic global economy, we cannot afford to have an investment regime (meaning FDI regime) with certain preset dos and donts. Unfortunately, this is exactly what India is trying to do. In China FDI has been positively encouraged to play in the rural sector for the development of TVEs and also in the restructuring of several SOEs in the second half of the reform decade. In a globally interdependent world, FDI shifts across the world in response to comparative advantages. These advantages vary and shift from time to time and from one country to another. To use the expression of Jagdish Bhagwati, it is a kaleidoscope where light and shade play truant. A country must have the agility and flexibility to reach out and work with FDI, wherever it suits its national interest. China has demonstrated the absurdity of armchair archaic conventional arguments against foreign investment. If China could manage a high rate of FDI inflow without compromising its sovereignty, it does not make sense for our political class to nurse all the time a kind of vague and unspecified apprehension that FDI could erode our security and sovereignty and that we would be a plaything in their hands. In our economy where public and private sectors have grown in partnership and taken together are striving to scale commanding heights, we have to shun any kind of about paranoia about FDI. If I were to point out a single lesson that our political regime has to learn from China, it is this quality of learning from experience and allowing different economic agents to exploit and develop the potential that we possess. While China has been over the years perfecting 22

that quality and pushing the country forward, we have on the contrary perfected the art of blunting whatever instruments of change we possess. Instead of seeking refuge in protection, as many Indian manufacturing associations are demanding, the better response is to upgrade productivity, so as to increase the quality and price competitiveness of ones own industry. Vietnam, for instance, which is even more liable than India to being swamped by Chinese exports, has been able to meet the challenge by improving its own quality in areas like beer, plastic goods and cycles. There is no other way than increasing productivity for Indian industry to meet the challenge posed by Chinese exports It is observed that Indias prospects for overtaking China depend on implementing difficult reforms in five pivotal areas: deregulation of labour markets and an end to the small-scale sector; revitalisation of agricultural growth; increased investment in infrastructure; reduction of fiscal deficits; and, finally, across-the-board privatisation and further trade liberalisation..

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APPENDIX WTO and the Indian Textiles and Clothing Sector 1. Importance of Textiles and Clothing sector for India: The textile and clothing (T&C) sector is an important one in the Indian economy. Textiles and clothing items have been significant in Indias export basket, accounting for nearly 20 percent of total exports during the 1990s. At present, the textiles industry accounts for nearly 12% share of the country's total exports basket. In addition, this sector is the second largest generator of employment (35 million or around 10 percent of the workforce), a significant earner of foreign exchange, and contributes 4 percent and 14 percent to GDP and value added in manufacturing, respectively. Since T&C industry employs semiskilled and unskilled labor, in terms of comparative advantage and employment generation the sector has special importance for India. India has a competitive advantage stemming from its large and relatively low-cost labor force, a large domestic supply of fabrics, and the industry's ability to manufacture a wide range of products. India has a very strong and diverse raw material base for manufacturing natural and artificial fibers. Furthermore, India also has capacity-based advantage in textile and spinning, and Indias textile industry covers the entire supply chain. 2. Agreement on Textiles and Clothing (ATC) under WTO: Before the ATC took effect, a significant portion of textile and clothing exports from developing countries to the industrial countries was subject to quotas (the major quota imposing countries were US, EU countries and Canada) under a special regime [called Multi-Fiber Agreement (MFA)20] outside normal rules of the General Agreement on Tariffs and Trade (GATT). Liberalization of the textiles and clothing sector was to be in four stages, with half of the integration to take place in the first three stages (1995-2005) and the second half to take place in the final phase in 2005.21 However, importing countries have had a great deal of flexibility over the elimination of quotas and items for which quotas were not binding were liberalized earlier. The removal of quotas on the most restrictive categories was back loaded (i.e. to differ to a later date) by importing countries until the end of the transition period. Only 20 percent of the products subject to quotas were integrated in the first three phases of the ATC. This implies that the removal of quotas on the remaining 80 percent in 2005 has the potential to lead to sharp shocks including job and income losses in some developing countries. For instance, the final stage, beginning on January 1, 2005, witnessed the removal of 701 quotas by the United States, 167 quotas by the European Union (EU) and 239 quotas by Canada.

Under MFA (1947-94) countries whose markets are disrupted by increased imports of textiles and clothing from another country were able to negotiate quota restrictions (WTO Glossary). 21 The starting point for an automatic liberalization process was MFA.

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The elimination of quotas on T&C is expected to have a significant impact on the production, exports, and employment in exporting countries in general. It is also expected to have positive impact on the welfare in importing or quota-imposing countries through reduced consumer prices and increased efficiency following enhanced specialization. Estimates of the gains as a result of the phasing out of the ATC quotas range from $23 billion to $324 billion. The estimates of the increase in welfare for the EU are around euros 25 billion. The welfare impact on the United States is estimated at $7.3 billion. For the major exporting developing countries, a WTO study concludes that although there will be increases in market shares for China and India, China will gain significantly while India will increase its market share only modestly. This study estimates that developing countries where quotas were not restrictive are likely to lose. For other developing countries and regions such as Mexico, Bangladesh, Indonesia, the Philippines, and Hong Kong SAR, simulations suggest that the quota elimination may lead to a decline in the U.S. market share. Latin American and sub-Saharan African countries are expected to reduce exports of clothing significantly. 3. India and ATC: In December 1994 in separate treaties with the EU and the USA, India agreed to a comprehensive liberalization of import policies for textiles as quid pro quo for the ATC (Agreement on Textiles and Clothing) which promised to phase out the Multifibre Arrangement (MFA) quotas in the US and EU markets. Accordingly, the reform process began in early 1995 with the removal of QRs on imports of many textile products (wool tops, synthetic fibers, textile yarn and some selected industrial fabrics). Selected textile fabrics, textile products and apparel items were made eligible to be imported against Special Import License (SIL) given to the exporters. It was also agreed that these products would be free from import licensing altogether at specified future dates (1998, 2000 or 2002), and tariff rates would be reduced to levels of between 20 and 40 percent by 2000. These moves are considered as Indias major commitment towards liberalisation of textile imports. The removal of quotas on textiles and clothing in 2005, under the Agreement on Textiles and Clothing (ATC) was expected to have a substantial impact on major exporting countries.22 A quota free regime represents an opportunity (as India has been constrained by quotas) as well as a challenge (as there will be increased competition and no guaranteed markets). Indias ability to benefit from the quota elimination will depend on the degree to which the existing constraints are removed. The structure of the global T&C industry renders some countries more competitive. The T&C industry employs semiskilled and unskilled labor, providing developing countries with a comparative advantage.23 However, in addition to labor costs, lead times and flexibility in production have become increasingly important. The mass retailers in developed countries, specially the United States, require flexibility and a fast turnaround. This implies that some developing countries are better poised to gain
22

It is also expected to have a substantial impact on major importing countries, in particular on consumer prices and employment 23 It is estimated that developing countries as a whole would have income gains of about $24 billion a year, export revenue gains of about $40 billion, and employment generation of 27 million jobs (IMF and World Bank 2002).

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than others. Many early studies concluded that China and India will be the major beneficiaries of the quota elimination while many other developing countries may lose their export markets. A few recent studies however find that India may lose in the aftermath of the liberalization. 4. Trends in Trade in Textiles and Clothing: Where does India Stand? Globally, Indias market share in world exports of textiles and clothing increased only marginally over the years (i.e. since 1980) whereas Chinas share increased significantly (see Table). Most importantly, after 2005, Chinas share in world textiles and clothing exports increased significantly by 5.9 and 6.2 percentage points respectively. In contrast, Indias share in world textiles exports increased only by 0.2 percentage points and in the case of clothing the share remained the same. China dominates US and Japanese markets for both textiles and clothing and EU market for clothing. China has gained significant new ground in the US and EU textiles and clothing market after 2005 (see Tables). Except the US textiles market, in all others India has a smaller presence. And, compared to China, Indias market share in Japan is negligible. Furthermore, after 2005, India could increase its share in the US and EU textiles and clothing markets only marginally. These trends clearly shows that China was able to successfully utilise the export opportunity opened by the removal of quotas on the textile and clothing products by the major quota imposing countries (US and EU). Most importantly, after the removal of quotas on majority of the textile and clothing products, which happened after 2005, China has gained larger access to these major markets. A study by the U.S. International Trade Commission predicts that China is expected to become the "supplier of choice" for most U.S. importers (the large apparel companies and retailers) because of its ability to make almost any type of textile and apparel product at any quality level at a competitive price. The same study also observes that other low-cost countries, particularly India, will benefit, as U.S. importers try to reduce the risk of sourcing from only one country.
Country EU Country-wise Share in World Textiles Exports (%) 1980 1990 2000 2005 36.2 33.5 2008 32.1

China
Hong Kong, China USA Japan

4.6
3.2 6.8 9.3

6.9
7.9 4.8 5.6

10.3
8.6 7 4.5

20.2
6.8 6.1 3.4

26.1
0.2 5.0 2.9

India

2.4

2.1

3.6

3.9

4.1

Source: International Trade Statistics, WTO (Various Issues)

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Country-wise Share in World Clothing Exports (%) Country 1980 1990 2000 2005

2008

China
EU Hong Kong, China Turkey Bangaladesh

4
12.3 0.3 0.0

8.9
14.2 3.1 0.6

18.2
28.4 12.2 3.3 2.6

26.9
29.2 9.9 4.3 2.3

33.2
31.1 0.8 3.8 3.0

India
USA Country China EU Canada India Mexico Pakistan Top 5 2000 12 17.4 12.5 7.4 10.2 59.5 2005 26.9 14 9.1 9 7.8 66.9

1.7
3.1
Country-wise Share in US Imports of Textiles (%)

2.3
2.4

3
4.4

3.0
1.8

3.0
1.2 2008 34.7 5.2 4.1 5.3 6.7 4.4 56.2

Country-wise Share in US Imports of Clothing (%)

2008 34.1 12.6 6.6 10.4 7.0 70.7

Source: International Trade Statistics, WTO (Various Issues)

Country 2000 2005 China 13.2 26.4 Mexico 13.6 8 Hong Kong, China 7.1 4.7 EU 4 Korea, Rep. of 3.8 India 3.1 4.2 Indonesia 4 Viet Nam Bangaladesh 3.3 3.2 Top 5 41.7 47.2 Note: Figures in italics indicate top 5

Country-wise Share in EU Imports of Clothing (%) Country 2000 2005 2008 EU 38.9 44.9 47.6 China 9.4 17.9 22.4 Turkey 6.4 7.9 6.7 Hong Kong, China 5.5 Tunisia 3.1 Romania 3.5 India 2.9 3.4 3.6 Source: International Trade Statistics, WTO Bangaladesh 2.8 3.4 3.9 (Various Issues) Top 5 63.4 77.6 84.2 Note: Figures in italics indicate top 5 Country-wise Share in Japanese Country-wise Share in Japanese Imports of Textiles (%) Imports of Clothing (%) Country 2000 2005 2008 Country 2000 2005 2008 China China 41.2 52.3 55.8 74.7 80.9 82.8 EU 13.9 12.4 9.9 EU 7.5 7.1 6.2 Indonesia 6.5 6 5.8 Viet Nam 3 2.7 3.3 Korea, Republic of 8.1 5.6 5.1 Korea, Republic of 4.8 1.9 0.9 Taipei, Chinese 5.2 5.3 US 2.4 1.3 US 7 Thailand 1.2 Top 5 76.9 81.5 81.8 Top 5 92.3 94 94.4 India 3.5 2.7 2.5 India 0.7 0.6 0.7

Country-wise Share in EU Imports of Textiles (%) Country 2000 2005 2008 EU 63.1 67.5 66.7 China 3.8 7.5 9.9 Turkey 3.9 5.3 5.8 India 3.7 3.8 3.7 Pakistan 2.3 2.6 US 3 Top 5 77.4 86.4 88.8

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The other performance indicators of Indian T&C sector are hardly encouraging. The growth of T&C exports has declined after 1995-96 (note the opening up of the Indian T&C sector began in 1995), whereas the growth of imports has increased (see Table). However, after 2005-06 (developed countries removed a major portion of their textile quota after 2005), export growth started picking up, but it is still much below the level achieved during 1987-88 to 1994-95.
Export and Import of Textiles - Growth (%) Period Export Import 1987-88 to 1994-95 11.79 6.32 1995-96 to 2004-05 5.62 16.96 1995-96 to 2007-08 7.14 18.07 2005-06 to 2007-08 8.45 9.41 1995-96 to 2002-03 4.98 14.22 Source: Instructor's calculation based on Handbook of Statistics of the Indian Economy, 2008-09 (RBI)

The growth of production of many of the T&C products has slowed down after 1995-96 (see Table).
Production of Textile Products (Growth %) Cotton Mixed/blended Man-made fibre cloth cloth fabrics 1990-91 to 94-95 3.54 10.20 1995-96 to 99-00 -0.91 9.23 11.68 2000-01 to 04-05 0.01 -1.39 6.89 2005-06 to 08-09 3.94 2.16 3.59 Source: Instructor's Calculation based on Economic Survey (Various Issues) Spun yarn 5.45 4.12 0.24 1.37

5. Constraints facing the Indian Textiles and Clothing industry: The (export) opportunities unleashed by the removal of the quotas at the end of 2004 are tempered in India by domestic policy constraints and business environment. In other words, Indias ability to maximize the gains from the abolition of the ATC quotas is constrained by certain factors. They include the following: 5.1. Structure of the industry: Indias T&C sector has been dominated by small producers, is fragmented, and there is little vertical integration in the apparel industry. Indian manufacturers set up several small plants instead of a single large one, to take advantage of labor laws. Consequently, the Indian T&C sector loses out on reaping economies of scale and therefore a lack of investment on modernization or to upgrade obsolete machinery with consequential impact on quality and standardization.24 Until 2001, most of the textile and clothing sector was reserved for the small-scale sector. An important policy change in recent years has been the progressive dereservation of woven readymade garment and

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As a result, they have on average 10 to 20 percent of machines that Chinese plants have. Only 3 percent of total cloth production is from the organized sector and 12,000 of the 14,500 are hand processing units.

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hosiery and knitted products from SSI sector. This should help to form an integrated supply chain. 5.2. Delay in delivery: In the absence of quotas, retailers will likely choose suppliers based on the reliability of delivery. Delivery times from India are longer than from other comparator countries. The minimum delivery time (transportation alone) from India to the United States is 24 days compared to 18 days from Thailand, 15 days from China, 12 days from Hong Kong SAR and 3 days from Mexico. It is estimated that an additional day in transport is equivalent to an extra 0.8 percentage point increase in applied tariff rates. China enjoys a 13 percent cost advantage in shipping garments from Shanghai to the U.S. East Coast, or in weighted terms an even larger advantage of 37 percent. While geographic location might explain the long delivery time from India, a major factor for the delays can be attributed to lower efficiency and smaller tonnage of berthing capacity at Indian ports. In addition, the price of electricity/power is higher in India than in Mexico, Taiwan Province of China and Korea. 5.3. Low technology intensive exports: Indias exports in T&C have been characterized as low technology intensive compared with many other competitors, where the improvement has been dramatic during the 1990s. 5.4. Low labour productivity: While labor costs in India are one of the lowest in the world, this is offset by low labor productivity.25 As a result, the labor cost per unit of production is higher due to the lower productivity of labor. For example, compared to 20.6 womens blouses that Hong Kong SAR manufactures per machine per day, India manufactures only 10.2. Similar figures for trousers for Hong Kong SAR and India are 19.3 and 16.8 and mens shirts are 20.9 and 9.1. 5.5. Quality of T&C products: The quality of the T&C products also constrains Indian exports. A study by World Bank demonstrates some challenges to Indian industry including perceptions about the low quality of Indias T&C products and quality inconsistency of large cotton-based Indian textiles and clothing products. Goldman Sachs (2004) surveyed about 30 major wholesalers, manufacturers, and retailers globally to examine the impact of the elimination of textiles and apparel import quotas in 2005. Both U.S. and EU respondents cited product quality as the top consideration in sourcing decisions post quota elimination, followed by product cost, production speed, working conditions, access to inputs, transportation speed, political stability, transportation cost, and geographical diversity.

25

Survey results indicate that labor costs are not the major determinant for potential investors, implying that higher labor costs can be accepted if they are compensated by other factors.

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5.6. Regional trading agreements: The extent to which exports grow post-2005 will be tempered by the extent of the resurgence of protectionism. The United States and EU have signed preferential regional trade agreements containing tariff exemptions. These agreements and the Everything But Arms (EBA)26 provide quota free and duty-free imports in T&C with certain groups of countries.27 While quota-free access to the EU and U.S. markets is likely to benefit currently constrained suppliers, this preferential access will also continue to impinge on textile and clothing exports of countries without it, due to relatively high tariffs in this sector. 5.7. Fall in the prices: A major dampener to the higher volumes of exports is the reduction in prices. In 2002, when quotas under the third phase of integration were lifted, prices of apparel fell by an average of 34 percent. As a result of increased competition and the disappearance of quota rents, it is estimated that Chinas prices for apparel declined on an average by 53 percent between 2001 and June 2004. 5.8. Other factors: Absence of labor market flexibility, absence of an effective exit policy, low economies of scale (prevents requisite investment) and administrative/ bureaucratic hurdles (such as delays at customs and other red tape).28 6. Strategy for future: In a competitive environment, success will depend on quality, price, delivery schedules, and marketing skills. So far, Indias performance seems to have been modest; however with appropriate policy response and enabling environment, India may be able to increase its exports at a more rapid pace. The strategy should aim to overcome specific constraints that have been identified above such as low quality of products, fragmentation of the industry, concentration on low- to medium-priced apparel, long time-to-delivery, delays in customs clearance, low level of technology, unfavorable trend in labor productivity as compared to some competitors, lack of scale economies, and high costs of inputs and branding. Some sector specific policies that could foster growth in the T&C sector in India are: (i) Technological development: This will have a more dominant influence in the market in future. International experience shows that technological innovation has
Everything But Arms (EBA) (2001) is an initiative of the European Union under which all imports, with the exception of armaments, to the EU from the Least Developed Countries are duty free and quota free. 27 The United States has signed the Caribbean Basin Trade Partnership Act (CBTPA), the African Growth and Opportunity Act (AGOA), the North American Free Trade Agreement (NAFTA), and the Andean Trade Preferences Act (ATPA). The EU accords preferential access to Eastern European countries and countries in the Mediterranean rim. Its preferential trade agreements include the Euro-Mediterranean Association Agreements, and Africa Caribbean Pacific (ACP) Trade Agreement, and the Everything But Arms (EBA) Initiative with 49 least developed countries. 28 India does not seem to compare favorably in terms of customs processing where the mean delay is 10.3 days, compared to 7 days in Korea and Thailand.
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progressed in all levels of the supply chain from weaving to processing, to designing, packaging, patternmaking, cutting, inspecting, pressing, and packaging. Inroads have been made in the labor-intensive core of clothing manufacturing process. Hence, it would be preferable for the government to enable the import of existing technology, invest in research and development, technology transfer and diffusion of innovation. In this context, the Technology Upgradation Fund Scheme for textiles and jute industries is a significant step in the process of modernization and technology up gradation of the textile industry in India. The scheme provides a 5 percent interest reimbursement or 12 percent upfront subsidy on loans for investments in technology for specified sectors of the Indian textile industry. More than $1 billion has been disbursed under the scheme so far. However, many segments are yet to avail themselves of this fund as a majority of the loans have gone to the large mills. In addition, to prepare for a quota-free world, a few corporates have recently announced investment of 500 million. Other countries, such as China, have invested far greater amounts. (ii) Minimize lead times: To achieve this, India should further integrate the supply chain and develop strong textile clusters, capable of handling all stages of production in a coordinated manner. In particular, the weaving and fabric processing (dyeing and finishing) sector, considered to be the weakest link in the supply chain due to inadequate investment and lack of technology, should be strengthened. There needs to be integration from weaving to garment making to reduce lead time, cut costs, and improve quality. The problem arises from the small scale of operation of this sector. Foreign investment and transfer of technology would help the industry to be more technology savvy and improve quality and productivity. (iii) Focus on quality: India should focus on manufacturing high-quality and defect free processed fabric. Greater emphasis should be placed on quality certification and branding. (iv) Focus on manmade fibers: Market share has shifted to manmade fibers, and India needs to increase capacity and technology in this subsector. The share of cotton in world fiber demand declined from around 50 percent in the early 1990s to around 38 percent in 2003, while the share of man-made fiber has increased from 44 percent to 60 percent. Unfortunately, the growth of production of manmade fibre has been declining in India over the years (see Table above). (v) Improve cotton yield: While India is one of the largest producers of cotton yarn and fabric, the productivity of cotton as measured by yield is lower than in many countries, including China, Turkey and Brazil. Since it is not clear whether the shift in fashion to man made fiber is cyclical or structural in nature, efforts to improve the productivity and quality of cotton, which is Indias core strength should continue. (vi) Develop services related expertise: Developing services-related expertise in designing, marketing, retailing, financing and the gathering of market intelligence on foreign markets. To this end FDI flows should be encouraged. India has not permitted FDI in the retail segment, but to begin with, it may be appropriate to permit FDI in retail distribution services for textiles and clothing.

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(vii) Focus on technical textiles segment: Currently, technical textiles represent a significant proportion of the total textile activity in the world. Technical textiles are nonclothing items used in aerospace, marine, medical, civil engineering, and other industrial applications. Studies identify this segment as having the greatest growth potential. It is estimated that technical textiles are growing at roughly twice the rate of textiles for clothing applications and now account for more than one-half of total textile production in the world. The current growing demand is for packaging, sports textiles, medical and hygiene textiles, military textiles, geotextile, civil engineering markets, and environmental protection applications. The United States and Europe continue to be the major markets for technical textiles. As the production of technical textiles requires expensive equipment and more skilled labor, India should encourage diversification of established textile firms to capture this growing market. (viii) Reduce lead time and improve time-to-delivery of products: More firms internationally are expected to use air freight to tighten inventory and shorten delivery time, even if transport costs are higher. A policy approach of setting small textile clusterlinked airports with emphasis on freight and business traffic (like Canary Wharf in London) could be an option in the medium term until ports and other capacities are enlarged. Improving the infrastructure and removing the inefficiencies in the power sector leading to a low cost of power. Specifically, in the T&C sector this can be done by ensuring dedicated power delinked from State Electricity Boards, and better quality of power in textile parks.

Note: This lecture is prepared by the Instructor for the sole purpose of student learning. It is nothing but proper arranging/ordering of relevant parts from the sources indicated at the end of the note with the addition of data and pictures by the Instructor. Sources used for preparing this Note 1) George J. Gilboy (2004): The Myth Behind Chinas Miracle, Foreign Affairs, Jul/Aug. Vol. 83, Iss. 4; pg. 33 2) D.N. Ghosh (2001): Basis of Chinas Competitiveness, Economic and Political Weekly, February 17. 3) D.N. Ghosh (2005): FDI and Reform: Significance and Relevance of Chinese Experience, Economic and Political Weekly, December 17. 4) T.N. Srinivasan (2006): China, India and the World Economy, Economic and Political Weekly, August 26. 5) R. Nagaraj (2005): Industrial Growth in China and India: A Preliminary Comparison, May 21. 6) Yasheng Huang and Tarun Khanna (2003): Can India Overtake China?, Foreign Policy, July/August. 32

7) Shenggen Fan and Ashok Gulati (2008): The Dragon and the Elephant: Learning from Agricultural and Rural Reforms in China and India, Economic and Political Weekly, June 28. 8) Bishwanath Goldar (2005): Impact on India of Tariff and Quantitative Restrictions under WTO, ICRIER Working Paper No.172, November. 9) Prasad Ananthakrishnan and Sonali Jain-Chandra (2005): The Impact on India of Trade Liberalization in the Textiles and Clothing Sector, IMF Working Paper No.214, November. 10) World Trade Organisation: International Trade Statistics (Various Issues) 11) Samar Verma (2007): Indian Textile and Clothing Industry: Economic Policy Reform Experience During ATC Period, in Indias Liberalisation Experience: Hostage to the WTO?, Edited by Suparna Karmakar, Rajiv Kumar and Bibek Debroy. Sage India. 12) The Economist (2012): China and the Paradox of Prosperity, January 28February 3. 13) The Economist (2011): Rising Power, Anxious State, June 25.

Recommended Additional Readings Chun Liao (2009): The Governance Structures of Chinese Firms Innovation, Competitiveness, and Growth in a Dual Economy, Springer. Ashok Gulati and Shenggen Fan (2007): The Dragon and The Elephant Agricultural and Rural Reforms in China and India, New Delhi: Oxford University Press. China After 1978: Craters of the Moon, Essays from Economic and Political Weekly, Hyderabad: Orient Blackswan Private Limited. Tarun Khanna (2009): Billions of Entrepreneurs How China and India Are Reshaping their Futures and Yours, Penguin Books. Pallavi Aiyar (2008): Smoke and Mirrors An Experience of China, New Delhi: Fourth Estate.

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