COMPARISON OF ECONOMIES OF INDIA | CHINA | USA

A Business Environment Project

Date:November 2nd, 2011 BBS Finance 3F-B Rahul (8125) Ishan Luthra (8135) Cyril Thomas (8136) Achint Singh Gulati (8165)

TABLE OF CONTENT

Topics Acknowledgement Introduction Economy of India (Brief Overview) Objectives Indian Economy History Indian Economy Present Scenario India & China India & USA A Multipolar C-I-A World Conclusion

Page No 2 3 4 5 6 11 16 21 30 39

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ACKNOWLEDGEMENT

We would like to express our heartiest gratitude to our Business Environment Professor, Dr. Amar N. Gupta. Without his constant, untiring & unfailing support and guidance, we would not have been able to complete this project. We wish to acknowledge all the authors and experts whom we extensively referred to, as without their researches and analysis, this project would not have come to fruition.

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INTRODUCTION

Economic Growth & development are two different terms used in economics. Generally speaking, economic development refers to the problems of underdeveloped countries and economic growth to those of developed countries. The term economic development is far more comprehensive. It implies progressive changes in the socio-economic structure of a country. Viewed in this way economic development Involves a steady decline in agricultural shares in GNP and continuous increase in shares of industries, trade banking construction and services. Further whereas economic growth merely refers to rise in output; development implies change in technological and institutional organization of production as well as in distributive pattern of income. In the words of Prof. Amartya Sen "Development requires the removal of major sources of unfreedom poverty as well as tyranny, poor economic opportunities as well as systematic social deprivation neglect of public facilities as well as intolerance or over activity of repressive states."

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ECONOMY OF INDIA (BRIEF OVERVIEW): India is developing into an open-market economy, yet traces of its past autarkic policies remain. Economic liberalization, including reduced controls on foreign trade and investment, began in the early 1990s and has served to accelerate the country's growth, which has averaged more than 7% per year since 1997. India's diverse economy encompasses traditional village farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of services. Slightly more than half of the work force is in agriculture, but services are the major source of economic growth, accounting for more than half of India's output, with only one-third of its labor force. India has capitalized on its large educated English-speaking population to become a major exporter of information technology services and software workers. An industrial slowdown early in 2008, followed by the global financial crisis, led annual GDP growth to slow to 6.5% in 2009, still the second highest growth in the world among major economies. India escaped the brunt of the global financial crisis because of cautious banking policies and a relatively low dependence on exports for growth. Domestic demand, driven by purchases of consumer durables and automobiles, has re-emerged as a key driver of growth, as exports have fallen since the global crisis started. India's fiscal deficit increased substantially in 2008 due to fuel and fertilizer subsidies, a debt waiver program for farmers, a job guarantee program for rural workers, and stimulus expenditures. The government abandoned its deficit target and allowed the deficit to reach 6.8% of GDP in FY10. Nevertheless, as shares of GDP, both government spending and taxation are among the lowest in the world. The government has expressed a commitment to fiscal stimulus in FY10, and to deficit reduction the following two years. It has increased the pace of privatization of government-owned companies, partly to offset the deficit. India's long term challenges include widespread poverty, inadequate physical and social infrastructure, limited employment opportunities, and insufficient access to basic and higher education. Over the long-term, a growing population and changing demographics will only exacerbate social, economic, and environmental problems.

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OBJECTIVE OF THE STUDY:

This comparative study is aimed at determining the position of India in the scale of economic development and to analyze the current status of India compared to other countries.

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INDIAN ECONOMY HISTORY The 12th largest economy in the world in terms of the market exchange rate, the Indian economy has come a long way to become one of the fastest growing economies. In order to have an idea of the various economic stages, one needs to make an analysis of the Indian economy history. The pre colonial era of Indian economy India is one of the world's oldest civilizations. The main source of economy and income for the people in the ancient ages was agriculture. The fertile plains, rivers and water bodies and a favorable climate provided a wonderful scope for agricultural produce in the country. The ancient civilizations of India like Indus Valley, the Aryan civilization, Mauryan Empire, Gupta Empire and most other dynasties had a planned economic system. In some dynasties, even coins were issued. However, the chief form of trading in those times was the barter system. According to the economic rule, the farmers and villagers were required to provide a part of their crops or produce to the kings or the landlords. Even in the Muslim rule, the economy of India was mainly based on agricultural produce. Towards the later part of the Mughal period, some trade relations were established between the Mughal Empire and the British, French and Portuguese merchants. Eventually, after the Battle of Plassey, the British East India Company eventually came into power. Thus the colonial rule in India started. The colonial era of India is a significant part of the India Economy history. It brought a considerable change in the process of taxation from the revenue taxes to the property taxes which resulted in large scale economic breakdown. In fact a number of industries like the Indian handicrafts industry suffered huge losses. During India's freedom struggle, the Indian Nationalists advocated for the Swadeshi Movement in which the British products were boycotted. However, the British rule also developed the country to a great extent. The financial and banking system as well as free trade was established, a single currency system with exchange rates was brought into being, standardization of weights and measures took place and also a capital market came into existence. Stress was also given to the development of infrastructure and new telegraph lines were laid, railway lines were constructed and roads were made.
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Post Independence to the 1990s After India gained independence, stress was given to stabilize the economic system of the country. Wide scale development was made in sectors such as agriculture, village industries, mining, defence and so on. New roads were built, dams and bridges were constructed, and electricity was spread to the rural areas to improve the standard of living. In the subsequent Five Year Plans, a number of economic reforms and policies were formulated. Public and rural sectors were developed, emphasis was given to increase the quantity and quality of the export items, making the country self sufficient and minimize imports and other related reforms. The political leaders also put stress on business regulations, central planning and nationalization of the industries in mining, electricity and infrastructure. Another major economic reform that was initiated in the 1960s was to make India self sufficient in food grain production. In this regard, the Green Revolution' movement was initiated for aforestation, more irrigational projects, improved seed usage, better farming techniques and use of fertilizers and lots more. In the 1980s, the first step towards market liberalization was undertaken by the then government headed by Rajiv Gandhi. In his tenure, restrictions on a number of sectors were eased, pricing regulations were abolished and efforts were made to improve the GDP of the country. From 1990s to the present times India's economic condition in the initial stage of the 1990s was dismal. The main trading partner, Soviet Union ,was dissolved and India faced huge balance of payment problems. The loans kept on increasing and the IMF asked for a bailout loan. In this situation, Manmohan Singh, the then Finance Minister initiated the liberalization plan. This is one of the milestones in the history of Indian Economy. In the liberalization plan, foreign direct investments (FDI) were welcomed, public monopolies were abolished and banking, service and tertiary sectors were developed. Boost was also given to develop the money and capital market.
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Since the open market plan in the 1990s, India has experienced favorable economic growth. Today it has become one of the fastest growing economies in the world with a GDP growth rate of around 6-7 %. To complement the growing GDP, the country has also experienced growth in per capita income, standard of living and industrial development.

How the Indian economy changed in 1991-2011 Manmohan Singh is not a renowned orator. He delivers his public speeches in a monotonous undertone that one associates with college lecturers and bankers and India's prime minister has been both. But one of Singh's speeches, made exactly twenty years ago, will go down in the annals of Indian history as the one that changed India.

In his maiden budget speech as the finance minister of India, Singh presented the finances of a country that was nearly bankrupt and slayed the licence raj, thereby changing the lives of not just India's 84 crore citizens then but those of another 36 crore citizens who have been born since.

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How much has India changed since then? Since 1991, India's GDP has quadrupled, its forex reserves have surged from $5.8 billion to $279 billion, and exports from $18 billion to $178 billion. But these are just numbers. The change in our lives and lifestyles is a lot more fascinating. Back in 1991, owning a Maruti 800 (Rs 1.48 lakh in Delhi) was a middle- class status symbol.

Scooters like Bajaj Chetak and Lambretta accounted for more than half of the two-wheelers sold in the country. A bottle of soft drink, be it desi versions like Gold Spot or Thums Up, cost just Rs 4.50.
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Challenges before Indian economy

Population explosion: This monster is eating up into the success of India. According to 2001 census of India, population of India in 2001 was 1,028,610,328, growing at a rate of 2.11% approx. Such a vast population puts lots of stress on economic infrastructure of the nation. Thus India has to control its burgeoning population. Poverty: As per records of National Planning Commission, 36% of the Indian population was living Below Poverty Line in 1993-94. Though this figure has decreased in recent times but some major steps are needed to be taken to eliminate poverty from India. Unemployment: The increasing population is pressing hard on economic resources as well as job opportunities. Indian government has started various schemes such as Jawahar RozgarYojna, and Self Employment Scheme for Educated Unemployed Youth (SEEUY). But these are proving to be a drop in an ocean. Rural urban divide: It is said that India lies in villages, even today when there is lots of talk going about migration to cities, 70% of the Indian population still lives in villages. There is a very stark difference in pace of rural and urban growth. Unless there isn't a balanced development Indian economy cannot grow.

These challenges can be overcome by the sustained and planned economic reforms. These include

Maintaining fiscal discipline Orientation of public expenditure towards sectors in which India is faring badly such as health and education. Introduction of reforms in labour laws to generate more employment opportunities for the growing population of India. Reorganization of agricultural sector, introduction of new technology, reducing agriculture's dependence on monsoon by developing means of irrigation. Introduction of financial reforms including privatization of some public sector banks.

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Indian Economy Present Scenario India is one of worlds fastest growing economies. Apart from China, no other country has as high an economic growth rate as India. This country offers several economic advantages to its nationals as well as foreign investors. Indias economic boom has been made possible mainly through its information technology and outsourcing business. Indias rise as an Asian economic powerhouse has been quite remarkable. Economic conditions in India are now favourable for a wider cross section of people. While the situation of inflation is quite common for the developing economies and most of the people are well versed with problem of inflation and know its implications in general, the situation of deflation is rare. In developing countries, deflation has entirely different connotations than those of the inflation. In the common parlance deflation is an economic situation of falling prices, but in economic theory there is much more to it than just the reducing price level. In economic terms, deflation can be termed as a situation of declining prices, often caused by a reduction in the supply of money or credit. It can also be caused by the direct contraction in expenditure, including the public expenditure, personal spending or the investment expenditure. This is opposite of inflation and often leads to lower effective demand and increasing unemployment rate in the economy. According to economic theory, price level is the result of functional relationship between demand and supply. To put it simply, the supply being constant, if the demand of the goods and services increases in an economy, the prices are likely to go up and the economy is likely to encounter a situation of inflation. On the other hand, if the supply increases with demand being constant, or the supply increases more than the demand, the prices may fall and such a situation may be referred to as deflation. In addition to the above demand supply dynamics, the inflation or deflation can also be caused by the reasons of the adequacy or lack of money supply in the country. If the money supply is less, it is a situation of more money chasing lesser goods and services, leading to general rise in prices. On the other hand, if the money supply is more than the supply of goods and services, the situation of fall in prices is generally experienced and is referred to as deflation.
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Deflation caused by rapid growth of production and manufacturing in the country, causing the supply to go up is good for the economy, as with abundant availability of all goods and services in the economy, the prices go down, resulting in increase in the real income and wealth of all the consumers. Such a situation does not harm the producers also, as they gain by increasing sales volumes. The Great Depression of 1930s was associated with deflation and it is said that the recession coupled with deflation leads the economies to suffer. It is this very concern which is causing anxiety among the economists and the policy makers. But it must be clearly understood that deflation and depression are two different words and situations and should not be taken as synonymous. Effects on the Economy Temporary fall in prices is not deflation and it is the sustained fall for a considerably long period of time which is a matter of serious concern. It causes the aggregate demand to fall, as due to the falling prices the consumers try to delay the purchases, which in turn reduces economic activity in the economy, thereby accentuating the spiral effect of deflation. The result is that the existing manufacturing capacity of the economy becomes idle, leading to further reduction in aggregate demand and even more reduction in economic activity. If the process continues without any interventions from the government, the economies may move in to a situation of recession. Theoretically speaking, the situation of deflation may also lead to a peculiar economic condition known as the liquidity trap. Generally, the rate of interest in an economy is linked to the rate of inflation. But the situation of deflation may necessitate the interest rates to go down as low as zero. Deflationary times and zero interest rates reduce the economic viability of most of the projects due to tremendously reduced demand and the investors also tend to postpone their new projects. This worsens the situation further. Generally, the deflationary situation encourages people to hold on to their money, mainly because of the reasons like lower aggregate demand for newly produced goods and very low interest rates that discourage the people from keeping money in bank deposits. This causes substantial reduction in the velocity of money i.e. reduction in the number of transactions, dramatically reducing the money supply in the economy, as one
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mans expenditure is the income of another. Reduced velocity of money results in reduction of incomes. Deflation results in fall of availability of hard currency per person. This further results in increasing the purchasing power of each unit of currency, as the average price level goes down. Increase in purchasing power may sound beneficial to a layman but actually it may cause hardship to those people whose majority of wealth is kept in non-liquid assets such as real estate, land and buildings. It is thus evident that sustained deflation is a serious cause of worry to the policy makers, as it may lead the economies to recession and, more seriously, to a situation of depression. Indian Fears In India, the rate of inflation or deflation is measured on the basis of Wholesale Price Index (WPI) on weekly basis and then computed for the fiscal years for the purpose of policy monitoring, appraisal and decisions. WPI is an indicative and representative index of the wholesale prices of various commodities produced in the economy. Consumer Price Index (CPI), on the other hand, is an index of the consumer prices that give 46 per cent weightage to the food items, 15 per cent weightage to the domestic facilities, 6.4 per cent to lighting and fuel and 6.6 per cent to apparel and shoes. The inflation rate in India has suddenly fallen to a level of less than half a per cent and closer to zero in March 2009 onwards and the fears of the Indian economy slipping into a precarious situation of deflation have been expressed by many. But despite extremely lower inflation rate, the prices of food items are still experiencing reasonably higher increase in prices. This, while putting the economically vulnerable sections of society in a disadvantageous position, has also given a glimmer of hope to the policy makers because this phenomenon may gradually stabilize the economy and help it come out of the deflationary pressures early. The economists are in a fix and do not know whether to call this economic situation in the country as deflation or disinflation. While the deflation is persistent fall in price level, disinflation is a situation where the inflation rate goes down. The economic theory provides separate sets of solutions for both the
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situations and unless the situation is clearly identified and diagnosed, it would be difficult to resolve it. Government agencies in India vehemently deny that there is any fear of deflation in the near future. The International Monetary Fund has projected the annual inflation rate of 1.7 per cent for the Indian economy for 2009-10. This implies that for some part of the year, the economy may experience a brief spell of deflation. Whether or not to call such a situation a deflationary situation, is a matter of argument. As per Mr P.K. Padhy, Economic Advisor in the Ministry of Commerce and Industry, the current economic situation is that of disinflation in India. The basis for such a belief is that the economy has grown at the rate of 5.3 per cent in the third quarter of the previous fiscal. Economists like Suresh Tendulkar and Pranab Sen also argue on the same lines. In one of its reports on the Indian economy, the Citigroup has said that the deflationary patch in India is due to high base effect and supply side issues and is likely to be temporary and shortlived in nature. But persistence of such a situation may increase the problems of the economy in the months to follow. Many economists believe that the current situation can be termed as demand deflation. Both production and the prices are falling down. This would require more targeted fiscal measures, along with stepped up direct government purchases and increased scope of public distribution system. The situation in India may not be as grave as that of sustained deflation. The CPI is still positive and at around 10 per cent; the rural demand for FMCGs is robust and food items are in great demand. The resilience of our economy may not allow the typical deflationary situation to emerge and the current phase may turn out to transient and temporary. Despite the above, the situation needs to be tackled by the Government very carefully.

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 Some economic facts about India India GDP (purchasing power parity) stood at around $2965 billion, as per CIAs 2007 estimates, of which services accounted for maximum percentage, followed by industry and agriculture. As per CIA estimates, total Indian exports totalled $140.8 billion and total imports totalled about $224 billion. India inflation Inflation in India rose to more than 11 percent in July 2008. But due to government measures and role played Reserve Bank of India, inflation was brought down to about 6 percent. Earlier in 2007, average inflation was around 5.3 percent. Foreign direct investment With economic liberalization of India in 1990s, this nation began to generate a lot of interest among foreign investors. A rapidly developing economy coupled with national governments favourable attitude towards foreign investors, have generated a lot of revenue for India vis--vis foreign direct investments. Foreign direct investment data In 2007-08, foreign direct investment in India touched $25 billion. In previous time period, this figure was around $15.7 billion. As of May 21, 2008 Indias foreign exchange exceeded $341 billion. Ministry of Commerce and Industry projections indicate that India is slated to attract more then $35 billion as foreign direct investment. Ernst and Young had carried out a survey in June 2008, which identified India as fourth most attractive investment destination of world. All this augurs well for economic condition of India.

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India & China Comparison of two Asian Giants In the Indian cricket team, both Sehwag and Gambhir are prolific opening batsmen. But, when Sehwag is on the song, Gambhirs performance is almost over-shadowed by his partners fast-paced innings. But, both the players gel-up very well while running between the wickets and mutual understanding. They set the tone of the Indian innings by showing controlled aggression between themselves and a building a firm base for the Team India. However, Gambhir immediately joins the party once he settles down and gets the measure of the wicket. Furthermore, this provides opportunity to Sehwag to calm down post power-play session and pace his innings for a longer haul. This is how Indo-China relationship is currently stacked up. China led the way (like Sehwag) with its decade of scorching growth rate; over-shadowing Indias slow and steady growth prospects (like Gambhir). However, just when the Chinese economy was getting over-heated, the Peoples Bank of China slammed the brakes on its scoring rate; thus, passing on the baton of illuminating the world economy to India by taking over the drivers seat. In a nutshell, both China and India have to gel-up to emerge as two giants that will firmly buttress the worlds economy in the coming century by preparing themselves for a second wave of growth in aftermath of the global financial crisis, says a report on China-India Comparison An examination of 2011 Direction and Developments. Key Findings of the Comparison Report between India and China India catching up with Chinese economy India is currently in the phase of growth as explained by Gambhirs position above. The country has just started to come in lime-light and its growth patterns have mirrored that of Chinas at an average of about 8% annually until the financial crisis hit. Indias economy currently is in 12 th position, and is likely to break into global top 10 in terms of size. By 2030, India will have overtaken China both in terms of population and GDP growth rates.

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The Indo-China bilateral trade has grown significantly since 2005, except for the crisis-hit year 2009. Chinese imports of Indian goods fell 26.6% more than Indian imports of Chinese goods. The inequality of trade has led to tension as Indian manufacturers have to surpass the rout of low-cost Chinese goods. Tax Structures Both India and China have done fairly well when it comes to tax structures and other central and regional levies within the country. Moreover, India is on the cusp of landmark tax reform, especially in indirect taxes through introduction of GST.

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While China did away with preferential tax incentives largely available to foreign investors in free trade zones, with unification of tax base in 2008; India has shored-up tax incentives in special economic zones to gives its infrastructure sector a much-needed boost. The Manufacturing Hub Morgan Stanley had reported that Chinas rapidly aging population, followed by its one-child policy, is set to dramatically shrink its workforce and effectively pass the baton to India as the worlds manufacturing hub. Moreover, China is becoming a consumer market to sell to, rather than a global manufacturing hub.

Also, the World Banks prediction that Chinas GDP growth will fall to 7.7% in 2015 and by 6.7% by 2020, highlights the cause of concerns that could slowdown the dragons growth. Morgan Stanley expects Indias growth to surpass Chinas growth two years from now. The Government Intervention While a vast majority of Chinas growth comes from state-owned companies, Indias economic miracle can be largely attributed to its private sector story. Having said this, even Indias state-owned companies are gradually logging change from its conventional business model hit by red-tapism.

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Chinas state-owned and subsidized model has led to unfair competition and frequent government interventions paving way for difference in decision making and executive talent within the two countries. The City to reckon with The stage is set where India-China comparisons are inevitable in any form of demographic analysis. The report finds that though Shanghai is referred as Chinas financial center, it seriously lags Mumbai in terms of financial maturity, profitability, and ability to deliver dividends to shareholders.

The Business Environment In China, the business hubs are already established and running with efficient administration in place. However, India isnt up to China standards yet when it comes to development and execution of large-scale projects including infrastructure solutions. But, on the other hand, even China is facing certain headwinds such as increase in labor unrest and strikes due to protectionist policies. The same also applies to social media and internet interventions administered by the Chinese government. Even the levels of corruption is different in both the places with that at China being more of disguised as favors and connections; rather than in the form of baksheesh that is prevalent in India.

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When the business people and economists make the inevitable comparison of India vs China economy, the two rising giants of Asia, it is always China that holds the top position. The economy of China has always outpaced the economy of India in almost every measure. The Chinese government is very prompt at making and implementing new effective policies whereas the government of India always lags behind. The Indian political system always appears to be chaotic and sluggish in this regard. A contrast in the airports of Beijing along with Delhi and Mumbai would give you the practical visuals of the infrastructure of these two countries. Wide freeways and shiny new airport in Beijing have set the modern development models. On the contrary, the sagging infrastructure of Mumbai and New Delhi shows a sharp contrast. With the emerging global economy after the recession, India comes second to China. According to the trade reporters, the leadership quality and well-planned economic strategy of China during the crisis period have helped the entire Asian region to lift up from the economic downturn. If you are interested to know China economy facts, you must go back to check its history in the 18th century when its economy was the largest in the entire world. At that time, 25% of global output came from China. However, it came to be known as the the poor man of Asia in the first half of the 20th Century. In 1949, Chinas population was quarter of the worlds population and hence, it could produce only 5% of global output. With agricultural technology which was developed about 1000 years ago, China helped about half a billion people in the year 1850. About 89% of the population of China lived in the countryside in the year 1949 and the agricultural product accounted for 60% of the economy output in total. The economy of China had the tendency to double its size every eight years since 1978. The GDP of China grew 9.6% every year between 1978 and 2005. China has seen explosion in the international trade between 2000 and 2007 with growth of imports about 425% and increase in exports almost 490%. The comparison between India vs China economy 2011 has proved that China is far ahead of India. India would really have to work hard on its policies and strategies to reach or attain what China has achieved. The huge growth of Chinas economy helped its people to come out of poverty.

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India & USA, A Brief Comparison Interestingly, these two different economies are following divergent monetary policies trying to solve their economic riddlesone is aiming to control high levels of inflation and the other is trying to move accelerate from stall speed (it currently stands on the precipice of economic recession) and an unacceptably high level of unemployment. The former is India; the latter is the U.S. While the Reserve Bank of India (RBI) has been tightening the monetary screws (12 rate hikes in the past 18 months) more than ever before, the U.S. Fed is following ultra-expansionary monetary policy. However, success has been steadfastly eluding both. So, what gives? Even at the cost of sounding clichd, I am tempted to invoke a much abused phrase: this time its different. Past sins are clearly catching up now, rendering the monetary policy actions ineffective, when ordinarily they could have had an impact. To add to the woes, external factors are conspiring against success. First lets focus on India, where the average inflation since January 2010 is 9.6%. Figure 1: Inflation and Monetary Policy

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Source: Office of Economic Advisor (GoI), RBI The very fact that such a long tightening phase has failed to affect prices to the extent desired clearly indicates that inflation in India is mainly structural in nature (not cyclical). Years of neglect suffered by the agriculture sector are evident from the excessively low level of investment in the sector (Figure 2). Figure 2: Gross Capital Formation (GCF)

Note: QE = quick estimate Source: Economic survey, GoI For a sector that supports about 65% of Indias population, there is a high price to be paid for such neglect. Not surprisingly, agriculture productivity levels in India are among the lowest in the world, as is evident from the yields shown in Figure 3. Figure 3: Comparison of Yields (hectogram per hectare)

Source: FAO
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Hugely inadequate physical infrastructure in agriculture (be it irrigation, cold storage facility, transportation, etc.) not only leads to low levels of productivity, but also to a huge loss of foodgrain due to improper storage. In India, more than 10% of foodgrain production gets wasted every year. As per the report of the 11th Planning Commission, preventable post-harvest losses of foodgrains are estimated at about 20 million tonnes a year, which is nearly 10.5% of the total production. To put things in perspective, India wastes close to 50% of Australias annual foodgrain production. Even a bumper crop is a problem for India and the country has had to resort to exporting foodgrains this year to tide over the storage problem, while every day millions of Indians go to bed hungry. Not surprisingly, food inflation has remained persistently high in India, which has started to feed into overall inflation (Figure 4). Figure 4: WPI/Food Inflation (%, y/y)

Source: Office of Economic Advisor Moreover, as I have said in previous posts, inflationary pressures are also coming from the trade channel, as a result of the persistently high prices of oil and other commodities. The problem has been further compounded by the recent depreciation of the rupee (Figure 5), mainly on account of a perceptible retreat of FX flows due to the decreasing appetite for emerging market risk assets, as the European sovereign debt crisis continues to boil.
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Figure

5:

USD/INR

Source: Bloomberg

This is leading to imports becoming even costlier (negating the effect of some of the recent softening in commodity prices), further adding to inflationary pressures and thereby rendering the RBIs monetary policy efforts futile. All this, despite clear evidence of demand destruction in India. At the other end of the monetary policy spectrum lies the U.S. Fed.

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Figure 6: Fed Funds Rate

Source: Fed As the global crisis erupted, the Fed acted quickly and eased money policy as fast as it could (Figure 6). However, with the Fed Funds rate at as close to zero as possible (and having been so for a longish period of time), the Fed has no more policy bullets, except for continuing to keep rates low, which is what it is doing. Here again, an extended period of ultra-low interest rates has not ratcheted up the economy. With house prices yet to bottom out and unemployment levels remaining stubbornly high, the excessively leveraged U.S. consumer seems to be thoroughly down and out. The Conference Board Consumer Confidence Index stagnated at a two-year low in September (Figure 7), indicating that consumers are deeply worried about the state of the economy, and hence about their income and employment situations.

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Figure 7: Conference Board Consumer Confidence Index

Source: Bloomberg With consumers retreating and the crisis of confidence becoming all pervasive, the low interest rate regime has simply failed to spur the economy. The policy limitation that close-to-zero interest rates entailed forced the Fed to go for QE. Unfortunately, even this did not help much. Credit growth did not perk up materially and all that QE resulted in was rising excess reserves (rather than further lending), as credit-worthy borrowers refrained from borrowing and lending institutions also preferred to hold tight (Figure 8), given the crisis of confidence and the fear of tighter regulations.

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Figure 8: Bank Credit (%, SAAR)

Source: St. Louis Fed With corporate profits moving to record-high levels, most companies, especially the nonfinancial ones, have preferred to use their cash to deleverage. The same has gone for credit-worthy consumers. Even the tax breaks and transfers have been, to a great extent, used to reduce debt. They have helped to arrest the slide in consumer spending, but have not stimulated an increase. Even the vast sum of money used for the cash for clunkers scheme or the second home buying scheme helped the economy to perk up only in the short term and the positive multiplier effect soon faded away. Of course, it did not help that Europe was hurtling faster and deeper into trouble. The fact also remains that both the RBI and the Fed have not necessarily always taken the right decisions (though these been debated enough in the public domain and are beyond the scope of this article). Moreover, the politicians of both countries have played an important role in spoiling the partyin the U.S. through one-upmanship, and in India through sheer inertia (policy paralysis for some). This reminds me of what Charles Dickens wrote in A Tale of Two Cities (it was the age of wisdom, it was the age of foolishness), though in a slightly altered form: When the world needed wisdom, foolishness was more readily on display)
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American Indian Economy stats Economy stats Business efficiency 59.053 Ranked 33rd. Economic freedom 1.5 Ranked 123rd. Economic importance 2.1 Ranked 25th. 100 Ranked 1st. 69% more than India 3.2 Ranked 7th. 113% more than India 197.9 Ranked 1st. 93 times more than India $13,060,000,000,000.00 Ranked 2nd in 2006. 2 times more than India 3.2 annual %

GDP

$4,164,000,000,000.00 Ranked 5th in 2006.

GDP growth > annual % 9.23 annual %

Ranked 14th in 2005. 188% Ranked 119th in 2005. more than United States GDP (per capita) $3,751.99 per capita Ranked 121st in 2006. $43,680.67 per capita Ranked 3rd in 2006. 11 times more than India $1,287.00 Ranked 5th. 142% more than India $4,096.00 Ranked 3rd. 6 times more than India $9,573.00 Ranked 1st. 15 times more than India $16,607.00

GDP per capita in 1820

$531.00 Ranked 24th.

GDP per capita in 1900

$625.00 Ranked 38th.

GDP per capita in 1950

$597.00 Ranked 49th.

GDP per capita in 1973

$853.00

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Ranked 50th.

Ranked 2nd. 18 times more than India $11,628,083,000,000.00 Ranked 1st. 2 times more than India $9,780,000,000,000.00 Ranked 1st. 20 times more than India

GDP > PPP

$3,362,960,000,000.00 Ranked 4th.

Gross National Income

$477,000,000,000.00 Ranked 12th.

Gross National Income $14.37 per $100 (per $ GDP) Ranked 160th.

$83.23 per $100 Ranked 20th. 5 times more than India 0.944 Ranked 10th. 57% more than India High income: OECD

Human Index

Development

0.602 Ranked 128th.

Income category Income distribution Poorest 10% >

Low income

3.5%

1.8%

Ranked 22nd. 94% more than United Ranked 85th. States Income distribution Richest 10% > 33.5% 30.5%

Ranked 38th. 10% more than United Ranked 54th. States Technological achievement 0.2 Ranked 59th. 0.73 Ranked 2nd. 3 times more than India

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A Multipolar C-I-A World

C-I-A (China, India and America) are compared to understand relative strengths of emerging powers. To be a global or a regional power depends on three factors: a strong economy, a powerful military and a deep rooted political capacity. Metaphorically, any global or regional power is three legged. Three legged stools on one (Pakistan) and two (China) legs by nature are unstable. With three relatively stable legs India at best an aspiring global power. In a unipolar world, since the end of the Cold War in 1989, America became uncontested super power standing on three powerful legs. American supremacy in 21st century is challenged by two emerging powers. America has a deteriorating economy compared to peaks in the Clinton (1992 2000) and the Bush (2000 08) eras. Important factor to note is that these three nations are achieving sustained growth through peaceful competitive process, not through imperial designs. Until mid-20th century, some Western democracies and Islamic dictatorships were engaged in building imperial powers through extraterritorial expansions and colonization. Muslim invaders colonized South Asia for about 900 years (950 to 1857). Proselytizers and religious fanatics seeking to build an Islamist Caliphate were looters and plunderers seeking riches in lands of non-believers. Industrializing European nations for about 500 years (16th to 20th century) colonized many poor nations of Middle East, Africa, Latin America and South and East Asia rich in commodities supplies. India was a British colony from 1857 to 1947. The blog presents select data on the growth of India relative to other two nations. In my opinion contrary to projections otherwise China is not likely to match or surpass America in less than two decades and in same period India is likely to be closing in on China. Comparison of select parameters for C-I-A Commentaries on China: China accounts for up to 60% of most and 90% of some industrially important globally produced commodities. Some hard facts about China touting its economic strength follow:

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1. Chinas 19% of the worlds population; it consumes the worlds 53% of cement, 48% of iron ore and 47% of coal and the majority of just about every major commodity. By March 2011, China had accumulated US$3.04 trillion in foreign currency reserves the largest stockpile on the entire globe. 2. China set several new records: in 2010, China produced 11 times more steel than the US; it made and sold 18 million vehicles and for food supply it had more pigs than in the next 43 pork producing nations combined. 3. In industrial sectors, China has the worlds fastest train and the largest high-speed rail network; it is worlds number one producer of wind and solar power and it controls more than 90% of the total global supply of rare earth elements. 4. In technology and intellectual property, China possesses the fastest supercomputer on the entire globe and in the past 15 years, it has moved from 14th to 2nd place in the world in published scientific research articles. 5. It also has dubious distinctions, e.g., Chinese consume 50,000 cigarettes per second. Listed in references and notes are several recent commentaries on the impacts of Chinas growth on global powers. The analysts are Fareed Zakaria (moderator of the GPS, a CNN weekly program), Ian Bremmer (an executive at Microsoft), Robert J. Herbold (WSJ, Op-ed) and Dr. Vikram Dalal (Professor of electrical and computer engineering, Iowa State University). Collectively, these authors present a picture of China that evaluates Chinas progress and how it compares to that of America. As China continues to grow and the US continues to decline economically, speculators ask: when will China match or surpass American global dominance? All analysts are well intentioned. Individually they presented a skewed picture of Chinas growth. There is a need to develop a comprehensive picture that compares progress, or lack of it, by each of three nations. To put it in relative context the following data were assembled using Google searches.

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Comparison of Select Data for C-I-A In 2010 the populations of China at 1.3 billion and India with 1.2 billion were about 4 times higher than that of America at 310+ million, the third populous nation in the world. China also had largest workforce and America had the largest economy. Chinas labor force was more than 5 times that of America and 1.7 times of India. Additional select facts are compared in the following table. Select Facts for two emerging and one developed Global powers 0712 2011 Facts China (C) India (I) America (A)

2010 GDP (PPP), $ 9.71 Trillions.Bracketed are PPP estimates (22.6) for 2020 Per Capita GDP, $ NominalPPP $PPP 4,743 Factor (PPP/Nominal) 7,400 1.56 GDP Growth, % Inflation, % Labor Force, million Unemployment, % Fiscal Deficit, % of GDP Gold Reserves, tonnes Foreign Exchange Reserves 9.1 6.4 820 4.3 1.6 1,054 $3.2 trillion Index, 58th

4.07 (10.2) 1,265 3,339 2.65 8.5 8.7 478 9.4 5.5 615 $310 billion 88th

14.8 (28.1) 45,989 45,989 1.00 2.4 3.6 153 9.2 10.7 8,134 NA

World

Prosperity

1st

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position Mobil Users, million Internet Users Life Expectancy, years Literacy Rate, % Infant Mortality Rate,% Under 5 Mortality rate 896 420 73 96 20 21 840 81 65 74 50 66 303 240 79 99 6 8

Using nominal GDP numbers for each nation and its labor force in 2010 annually goods produced by each worker in China were worth $7,500, that for India $3,200 and Americans produced $96,730 per worker. For wealth generation Americans compared to Chinese were 13 times more productive and Chinese compared Indians were 2.3 times more productive. Health in India has improved, but compares poorly not only to China and America but also to some economic peers (Brazil and Russia) and neighbors (Sri Lanka and Bangladesh). Chinese are expected to experience a 30% demographic decline by 2050. Unless China improves its productivity by more than 30% and American suffers an additional significant economic decline it would be unlikely for China to catch up with American GDP by 2050. China India at a Glance The following data suggests that India may substantially narrow the gap with China in about two decades. Labor force of India in 2010 was about 58% of China. Since population of India and China are comparable and China is expected to experience a demographic decline in next few decades, India can narrow the economic gap by accelerating its economic growth rate. It will have to increase its labor force and improve productivity comparable to that of China by adding more skilled and highly skilled workers to its manufacturing and high value added product sectors. The following data sizes up India and China.
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China India at a Glance Source: Sizing up India and China, IIFL via Thomson Research, 1 November 2010 Parameters China to India ratio Indias lag in years 11.0 18.0

GDP Industrial output Steel production Car sales

3.8 8.0

12.3

18.0

5.0

6.0

Democracy vs Autocracy: A contention appears to be that a middle class dominated society has a tendency to become politically democratic. May be, there is no guarantee that in long term democratic societies are any more stable than autocratic societies.

Most of todays democracies were mostly autocratic societies; Europeans colonized many autocratic nations for part or all of last few centuries. Autocratic societies were mostly poor, up to 90% ruled by 10+% of ruling establishments of royalty, warlords, clerics and merchant/landedgentry classes. Collectively the ruling BACWAS (bureaucrats, army, clerics, warlords and scholars) establishment grew to be imperial powers through extra territorial expansions. European nations through colonization built imperial powers that lasted a few centuries and so did the Muslim Caliphates. Each of these societies to varying degrees managed with one or two of the three legs. In most cases they lacked adequate political capacity. Demise of a strong autocratic leader invariably led to political vacuum and chaos until the next savior arrived.

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Chinas GDP was around $5 trillion in 2010 and it was less than $1 trillion before 1980s. With a double digit GDP growth rates it took China three decades to have a $5 trillion economy by concentrating on low paid manufacturing jobs.

America: Dr Dalal in a diagnosis of the American decline offered a credible description of the economic activity cycle per decade. How likely is American economic decline to continue? According to Dalal the cycle has a life span of 10 years. With the market crash of 2007 08 the decline precipitated and it may last through most of current decade. The following are my observation on diminishing political capacity of America. It is interesting to note that America has technological capacity to reverse trends of its economic decline seen in last few years. However for next few years its economy is likely to decline due to shrinkage of its manufacturing base and high employment rates.

Starting 2001, two wars in three Muslims heart lands (Iraq and the AfPak region of Afghanistan and Pakistan) have strained American economy. The decade long wars have cost America $4 trillion and it still has a few more years (2014 and beyond) to go to neutralize the hub of terrorism in the Af-Pak region by destroying the safe heavens protected by Pakistan army. Its economic growth is stagnating and may even be diminishing as it continues to struggle to extricate itself from the Af-Pak quick sand. America started shifting jobs to China during Reagan administration in 1980s. Did we have a steady economic activity decline for 30 years? Not exactly as America successfully replaced low paying jobs with high value added technology products and services. In last 30 years, technology and housing market bubbles appeared and were busted. With both bubbles there were associated financial activities bubbles. It all came crashing down in 2008. Given 9+% unemployment rates it is reasonable to assume a steady decline in American GDP. It would be interesting if Dr Dalal could or would predict Americas GDP, both annual rates and cumulative for a decade of 2011 21. In 2011 American economy is around $14.5 trillion.
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India: India built its political capacity over last 64 years and now it is focused on building strong economy. India with 7% 9% economic growth for two decades, overall as a global power is a distant third. For next few decades the best India can hope for is to be a regional power provided it effectively manages border disputes with China and Pakistan. It also needs to build economic interests with commodities rich nations, especially for an assured steady supply of energy and other raw materials to attain a double digit growth needed for augmenting capacity for steel, cement, technology and intellectual property based electronic industry.

India has been concentrating on building technology base and manufacture of high value added products. Indian economy being focused on high (up to 70%) internal consumption is less exposed to external political pressures. To sustain its supply chains for exports of technology and high value added manufactured products and imports of raw materials it is building up its navy to assert a dominance in waters all around India (Bay of Bengal, Indian ocean and Arabian Sea, etc). Except in software developments the growth of manufacturing of high value products has been slow but steadily rising. It has moved up from the out sourcing services provider to technology dominated R&D activities in many industrial products. In addition to being a major global generic drug provider its manufacturing industries include deployment of communications satellites and many advanced military products. With 20 operating nuclear plants (4,780 MW in 2011) and more than dozen large plants at various stages of constructions (20,000 MW by 2020 and 63,000 MW by 2032) for completion in about two decades, India is getting ready to export indigenous designed and developed 220 and 540 MW heavy water nuclear power plants. It is marketing Pratham series super computers. Its economy in two decades grew to about $1.5 trillion.

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India v. China: Both India and China have net job gains whereas America and Western nations have suffered job declines judging from near double digit unemployment rates.

Chinas projected to suffer a demographic decline from 1.4 billion (2020) to less than a billion from 2020 to 2050. India added 180+ million populations in first decade of 21st century and at this rate of population growth it will be most populous nation after 2030. America has maintained its population growth rates by allowing immigrants to enter. If jobs decline in America is not arrested in near future, it may not see technology savvy immigrants coming to its shores to help it continue on with its established business plan of attracting skilled foreign workers. For China demographic decline means its low paying jobs may disappear and to maintain production consistent with consumer demands it will be forced to improve productivity by offering better salaries to manufacturing workers. Without an edge in R&D, productivity can not rise. There may be all kinds of pressures and chief among it would be political capacity. As the numbers of middle class go up, its political structure may come under additional social pressures. In 25 years (1990 -2015) poverty in India is expected to decline by 22% or about 1% a year assuming a 7% to 9% annual GDP growth. The poverty data represents declining population of illiterate old people due to natural attrition and increasing level of literacy as more and more youth get educated. If the education system for youth is reformed to incorporate skills based education such as introduction to basic rural technology engineering, math, and agricultural science there is a possibility that with a rapid decline in poverty rate economic growth may accelerate. It is fallacious to claim that corruption and asymetric distribution of wealth is responsible for high poverty levels in India. Such claims ignore facts that generational cycle of poverty requires skilled based education for the poor to generate wealth. Issues like Lokpal bill may bring down corruption but it may not have much influence on poverty reduction as with implementation of RTE (right to education) by nature takes about a decade to show improved
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results. The RTE was implemented a few years ago and there are many states that have resisted implementing the RTE reforms.

It took India two generations (40 years) of IIT and higher education to reap benefits of wealth generation. RTE presumably will have same effect in helping those who want to get in job market as soon as they complete 7th to 10th level high school education.

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Conclusion
China and India have come a long way since they fought a brief border war in 1962. Both countries are not only developing economically at rapid speed, but they are also making extraordinary efforts to increase mutual trade and to improve bilateral relations. Chinese President Hu Jintao's state visit to India last November reflects the progress of bilateral dialogue on a range of issues over the past few years. Rapid economic growth and the expansion of bilateral trade have fuelled the development of closer relations. Trade between India and China reached 18 point 4 billion dollars last year -- up from only 338 million dollars in 1992. Both countries pledged to double trade to 40 billion dollars a year during talks in New Delhi between Indian Prime Minister Manmohan Singh and Chinese President Hu Jintao. Despite these developments, several analysts say India remains suspicious of China's relationship with its long-time rival, Pakistan. And China is concerned about New Delhi's growing ties with Washington, especially their landmark nuclear agreement allowing India access to civilian nuclear technology. Some expect the United States to deepen ties with India - a democracy it views as less threatening - as a counterbalance. However, Prof. Bottellier says concerns that the Chinese are worried about India's relationship with the United States are overblown: I am very pleased that the United States and India are developing good, constructive friendly relations. That is very important for both countries, says Prof. Bottellier. I do not think that the proposed civilian nuclear agreement between the United States and India is resented or rejected by China. In fact, the Chinese government has been remarkably silent on that subject. One would have expected the Chinese to have protested, but they have not done so. Even during the visit of Chinese President Hu to India in the latter part of last year, this was not the subject of discussion.

Although the vast majority of the rural population in both countries remains illiterate and impoverished -- and many structural and institutional problems lie ahead -- many analysts say there is no doubt about the enormous economic potential of China and India in the 21st century.

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