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CROUCHING TIGER
HIDDEN DRAGON
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Introduction
One heartening feature of the evolution of the world economy during the last two to three
decades has been the outstanding economic success of China and India two of the worlds
most populous and hitherto extremely poor countries. Starting out with the worlds largest
absolute numbers of people living in poverty, in narrow economic terms the two countries
have achieved impressive growth.
China has undoubtedly been the fastest growing country in the world over the last quarter of
a century, achieving historically unprecedented, almost double-digit, growth rates since1980.
Similarly, although not as fast as China, Indias economic growth has nevertheless also been
one of the highest in the world since 1980, its per capita growth rate tripling between 1950-80
and 1980-2005 (Kelkar, 2005). India was among the ten fastest.
China and India have both made remarkable progress since about 1980, when each embarked
on economic reform, though under wholly different circumstances. In China, the end of the
1970s marked the emergence of a pragmatic, outward-oriented economic and political regime
under the aegis of the communist party. It was closely associated with the rise within the
party of Deng Xiao Ping and his open door policy. Over the following 20 years, Chinas
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economic growt averaged nearl 10 percent taking into account a recent upward revi ion of
Chinas GDP statistics.
In India, the 1980s marked a different kind ofturning point as the country began to undertake
deregulation ofinternalinvestment activity and regional decentralization of economic
decision-making.4 This policy shift helped raise the rate of growth from the so-called Hindu
rate of 1.5 percent annual growth of GDP per capita to about 4 percent.This acceleration in
economic growth continued into the 1990s and the data suggests thatis has increased further
during the new century and, forthe lastthree years, the annual GDP growth rate has averaged
nearly 8 per cent a rate never achieved before in India.
There are two important points to note about Indias and Chinas overall economic
development that relate to the world economy. First, China has emerged as the second
largest economy in the world afterthe US, having overtaken Japan. While the Indian
economy is not quite as large, serious students ofthe subject suggestthat India is likely to
grow fasterthan China overthe nexttwenty to thirty years and to have overtaken it by 2050
.This claim is based on a number of assumptions, one ofthe more important of which is that
India is thoughtto have a higherlevel of institutional development than China. The second
pointis that, notwithstanding this projected fast economic growth, even in the year 2030
Chinas GDP per capita in terms of constant purchasing power parity will still be a fourth of
that ofthe US, and the corresponding figure for India will be less than one seventh. In
considering the future evolution ofthe world economy, this point deserves proper
consideration.
We will continue to see both these economic powerhouses develop and reform as their
respective models or stages of growth evolve as they create wealth and see their
demographics change. The drive and dynamism both these economies provide to the world
has and will become ever more important as they continue to develop and engage more
intricately with the global economy.
This report provides some terrific insights into that evolution and the longer-term
comparative factors driving the success of both economies. We now increasingly have a
genuine double act from China and India in terms of dynamic economic growth engines
willing and enthusiastic to engage with the global economy. This can only be beneficial for
the continued growth and stability ofthe region and the world economy as a whole.
INDEX
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Number Content
1
Introduction to both the economies.
2What type of economies are India and China?
3When did both the economies get liberalized?
4
The phase of liberalization in both economies.
5What different policies were used during
liberalization in both economies?
6Strengths and weaknesses of both the
economies.7
Current scenario of both the economies.
8Flaws of both the economies.
9Which economy is stronger and why?
10Future of both the economies.
INDIA AND CHINA AT A GLANCE
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INTRODUCTION TO INDIA
India is a country with a rich history and culture. Home to the Indus
Valley civilization and a region of historic trade routes and vast empires,
the Indian subcontinent was identified with its commercial and cultural
wealth for much of its long history. Four major world religions, Hinduism,
Buddhism, Jainism and Sikhism originated here, while Zoroastrianism,
Judaism, Islam and Christianity arrived in the first millennium AD and
mingled into the regions diverse culture. India became a modern nation-
state in 1947 after a struggle for independence that was marked by
widespread nonviolent resistance. The history of India can be divided into
four major segments, the ancient era, the medieval era, the modern era
and the post-independence era. On 26 January 1950, India became a
republic and a new constitution came into effect.
The history of India is a mingle between the East and the West. India has
always been an invaders paradise, while at the same time its natural
isolation and magnetic religions allowed it to adapt to and absorb many of
the peoples who penetrated its mountain passes. No matter how many
Persians, Greeks, Chinese nomads, Arabs, Portuguese, Britishers and
other raiders had their way into this great country, many of them merged
into the society giving rise to a country full of diversity in terms of
culture, religion, language and architecture.
PROFILE
Geography
Area: 3.29 million sq. km. (1.27 million sq. mi.); about one-third the size
of the U.S.
Cities: CapitalNew Delhi (pop. 12.8 million, 2001 census). Other major
citiesMumbai, formerly Bombay (16.4 million); Kolkata, formerly
Calcutta (13.2 million); Chennai, formerly Madras (6.4 million); Bangalore
(5.7 million); Hyderabad (5.5 million); Ahmedabad (5 million); Pune (4
million).
Terrain: Varies from Himalayas to flat river valleys and deserts in the
west.
Climate: Alpine to temperate to subtropical monsoon.
People
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Nationality: Noun and adjectiveIndian(s). Population (2010 est): 1.17
billion; urban 29%.Annual growth rate: 1.376%.Density: 324/sq.
km. Religions: Hindu 80.5%, Muslim 13.4%, Christian 2.3%, Sikh
1.9%, other groups including Buddhist, Jain, Parsi within 1.8%,
unspecified 0.1% (2001 census).
Languages: Hindi, English, and 16 other official languages.
Education: Years compulsoryK-10. Literacy--61%.Health: Infant
mortality rate--49.13/1,000. Life expectancy--66.46 years (2009 est.)
Work force (est.): 467 million.
Agriculture--52%; industry and commerce--14%; services and
government--34%.
Government
Type: Federal republic.
Independence: August 15, 1947.
Constitution: January 26, 1950.
Branches: Executivepresident (chief of state), prime minister (head of
government), Council of Ministers (cabinet). Legislativebicameral
parliament (Rajya Sabha or Council of States, and Lok Sabha or House of
the People). JudicialSupreme Court.
Political parties: Indian National Congress (INC), Bharatiya Janata Party
(BJP), Communist Party of India-Marxist, and numerous regional and
small national parties.
Political subdivisions: 28 states,* 7 union territories (including National
Capital Territory of Delhi). Suffrage: Universal over 18.
Economy
GDP (FY 2009 est): $1.095 trillion ($1,210 billion).
Real growth rate (2009 est.): 6.5%.
Per capita GDP (PPP, FY 2008): $3,100.
Natural resources: Coal, iron ore, manganese, mica, bauxite, chromite,
thorium, limestone, barite, titanium ore, diamonds, crude oil.
Agriculture: 17% of GDP. Productswheat, rice, coarse grains, oilseeds,
sugar, cotton, jute, tea.
Industry: 28.2% of GDP. Productstextiles, jute, processed food, steel,
machinery, transport equipment, cement, aluminum, fertilizers, mining,
petroleum, chemicals, and computer software.
Services and transportation: 54.9% of GDP.
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Trade: Exports (FY 2009 est)--$164.3 billion; engineering goods,
petroleum products, precious stones, cotton apparel and fabrics, gems
and jewelry, handicrafts, tea. Services exports $101.2 billion in 2008-09,
represent more than one third of Indias total exports.
Software exports--$35.76 billion. Imports (FY 2009 est)--$268.4 billion;
petroleum, machinery and transport equipment, electronic goods, edible
oils, fertilizers, chemicals, gold, textiles, iron and steel. Major trade
partnersU.S., China, U.A.E., EU, Russia, Japan.
INTRODUCTION TO CHINA
China, one of the countries that can boast of an ancient civilization, has a
long and mysterious history - almost 5,000 years of it! Like most other
great civilizations of the world, China can trace her culture back to a
blend of small original tribes which have expanded till they became the
great country we have today.
It is recorded that Yuanmou man is the oldest hominoid in China and the
oldest dynasty is Xia Dynasty. From the long history of China, there
emerge many eminent people that have contributed a lot to the
development of the whole country and to the enrichment of her history.
Among them, there are emperors like Li Shimin (emperor Taizong of the
Tang), philosophers like Confucius, great patriotic poets like Qu Yuan and
so on.
Chinese society has progressed through five major stages - Primitive
Society, Slave Society, Feudal Society, Semi-feudal and Semi-colonial
Society, and Socialist Society. The rise and fall of the great dynasties
forms a thread that runs through Chinese history, almost from the
beginning. Since the founding of the Peoples Republic of China on
October 1st, 1949, China has become a socialist society and become
stronger and stronger.
PROFILE
Geography-
Total area: 9,596,961 sq. km. (about 3.7 million sq. mi.).
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Cities: CapitalBeijing. Other major citiesShanghai, Tianjin, Shenyang,
Wuhan, Guangzhou, Chongqing, Harbin, Chengdu.
Terrain: Plains, deltas, and hills in east; mountains, high plateaus, deserts
in west.
Climate: Tropical in south to subarctic in north.
People
Nationality: Noun and adjectiveChinese (singular and plural).
Population (July 2010 est.): 1,330,141,295.
Population growth rate (2010 est.): 0.494%.
Health (2010 est.): Infant mortality rate--16.51 deaths/1,000 live births.
Life expectancy--74.51 years (overall); 72.54 years for males, 76.77
years for females.
Religions: Officially atheist; Daoist (Taoist), Buddhist, Christian 3%-4%,
Muslim 1%-2%.
Language: Mandarin (Putonghua), plus many local dialects.
Education: Years compulsory--9. Literacy--93%.
Labor force (2009 est.): 812.7 million. Labor force by occupation (2008
est.): Agriculture and forestry--39.5%, industry--27.2%, services--
33.2%.
Government-
Type: Communist party-led state.
Constitution: December 4, 1982; revised several times, most recently in
2004.
Independence: Unification under the Qin (Chin) Dynasty 221 BC; Qing
(Ching or Manchu) Dynasty replaced by a republic on February 12, 1912;
Peoples Republic established October 1, 1949.
Branches: Executivepresident, vice president, State Council, premier.
Legislativeunicameral National Peoples Congress. JudicialSupreme
Peoples Court.
Administrative divisions: 23 provinces (the P.R.C. considers Taiwan to be
its 23rd province); 5 autonomous regions, including Tibet; 5 municipalities
directly under the State Council.
Political parties: Chinese Communist Party, 76 million members; 8 minor
parties under Communist Party supervision.
Economy-
GDP (2009): $4.814 trillion (exchange rate-based).
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Per capita GDP (2009): $3,678 (exchange rate-based).
GDP real growth rate (2009): 8.7%.
Natural resources: Coal, iron ore, petroleum, natural gas, mercury, tin,
tungsten, antimony, manganese, molybdenum, vanadium, magnetite,
aluminum, lead, zinc, uranium, hydropower potential (world s largest).
Agriculture: ProductsAmong the worlds largest producers of rice,
wheat, potatoes, corn, peanuts, tea, millet, barley; commercial crops
include cotton, other fibers, apples, oilseeds, pork and fish; produces
variety of livestock products.
Industry: Typesmining and ore processing, iron, steel, aluminum, and
other metals, coal; machine building; armaments; textiles and apparel;
petroleum; cement; chemicals; fertilizers; consumer products, including
footwear, toys, and electronics; food processing; transportation
equipment, including automobiles, rail cars and locomotives, ships, and
aircraft; telecommunications equipment, commercial space launch
vehicles, satellites.
Trade: Exports (2009)--$1.194 trillion: electrical and other machinery,
including data processing equipment, apparel, textiles, iron and steel,
optical and medical equipment. Main partners (2008)--United States
17.7%, Hong Kong 13.3%, Japan 8.1%, South Korea 5.2%, Germany
4.1%. Imports (2009)--$921.5 billion: electrical and other machinery, oil
and mineral fuels, optical and medical equipment, metal ores, plastics,
organic chemicals. Main partners (2008)--Japan 13.3%, South Korea
9.9%, Taiwan 9.2%, U.S. 7.2%, Germany 4.9%.
The Pinyin System ofRomanization
On January 1, 1979, the Chinese Government officially adopted the pinyin
system for spelling Chinese names and places in Roman letters. A system
of Romanization invented by the Chinese, pinyin has long been widely
used in China on street and commercial signs as well as in elementary
Chinese textbooks as an aid in learning Chinese characters. Variations of
pinyin also are used as the written forms of several minority languages.
Pinyin has now replaced other conventional spellings in China s English-
language publications. The U.S. Government also has adopted the pinyin
system for all names and places in China. For example, the capital of
China is now spelled Beijing rather than Peking.
Population Policy
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With a population officially over 1.3 billion and an estimated growth rate
of 0.494%, China is very concerned about its population growth and has
attempted with mixed results to implement a strict birth limitation policy.
Chinas 2002 Population and Family Planning Law and policy permit one
child per family, with allowance for a second child under certain
circumstances, especially in rural areas, and with guidelines looser for
ethnic minorities with small populations. Enforcement varies, and relies
largely on social compensation fees to discourage extra births. Official
government policy prohibits the use of physical coercion to compel
persons to submit to abortion or sterilization, but in some localities there
are instances of local birth-planning officials using physical coercion to
meet birth limitation targets. The governments goal is to stabilize the
population in the first half of the 21st century, and 2009 projections from
the U.S. Census Bureau are that the Chinese population will peak at
around 1.4 billion by 2026.
INDIA AND CHINA AS A DEVELOPING
ECONOMY
India is a low income developing economy. One fourth of its population
lives in condition of misery. Poverty is not only acute but is also a chronic
malady in India. At the sane time there exist unutilized natural resources.
Following are some reasons for it be ing a developing economy:
LOW PER CAPITA INCOME.
INDIA-----The per capita income of an Indian in 2008 was $1040. It is the lowest in
the world. During 1960-80,developed economies grew at a rate faster than the Indian
economy, but during 1990-2009, Indian economy has grown at a faster rate than the
developed countries.
CHI -According to an International Monetary Fund analysis, the growth rate of the
Chinese economy hit a five-year low in 2008. From an impressive double-digit rate of
12.7% in 2007, Chinas economic growth plummeted to 9.6%. The IMF also revealed
that Chinas per capita income in 2008 was equivalent to $3,180.The Gross
Domestic Product (GDP) estimates based on Purchasing Power Party totaled $7.8
trillion. Owing to this, China became the second -largest economy in the world.In
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1990, Chinas average per capita national income was around $350. Within a
decade, there was a threefold increase, taking the figure to $1,000. At the end of
2008, the figure tripled yet again and Chinas average per capita national income
reached another high of $3,000. If Chinas average na tional income continues to rise
at an annual rate of 8%, the countrys per capita income will reach $8,500 by 2020
and will touch the $20,000 mark by 2030. Hence, Chinas average per capita income
will exceed the current income of Taiwan and Korea and the country will qualify for
an OECD membership.
China has experienced a high rate of economic growth (see Table 1).
Except for a couple of years in the beginning of 1990s when the Chinese
government urged reform of the state-owned corpora- tions, the annual
growth rate of GDP reached upto 10%.
OCCUPATIONALPATTE N:
INDIA-primary producing. One of the most important characteristic of a
developing country. A very high proportion of working population is engaged in
agriculture, which contributes a very large share in the national income. In
India in 2008, about 58% of the population was engaged in agriculture and its
contribution to national income was 17.5%. we can say that agriculture
continues to be a depressed industry as the productivity per person engag ed
in it is very low.
CHINA-The rapid economic growth has brought out many changes in the
composition of industrial sectors. And it has affected the occupational
structure, which in turn resulted in the development of a new class structure in
China. According to the distribution of GDP, the portion of sector (Agriculture,
Forestry, and Fishing) had dropped from 50.5% in 1952 to 28.1% in 1978. In
2001, the portion consisted of 15.2% of the total GDP. Meanwhile, because of
industrialization, the portion of the Secondary (Manufacturing) and Tertiary
(Services) sector had expanded. In 2001, the portion of the Secondary sector
held 51.2% and that of the Tertiary sector composed 33.6% of the total GDP.
Heavy population pressure.
Ticking Population Clock
INDIA-The main problem in India is the high level of birth rates coupled with a falling
level of death rates. The rate of growth of population which was about 1.31% per
annum during 1941-40 has risen to 1.93% during 1991-20001. The chief cause of
this rapid spurt is the steep fall in death rate from 49 per thousand during 1911-20 to
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7.4 per thousand in 2008. To maintain a rapidly growing populati on the requirements
of food,clothing,shelter,medicine,schooling etc. all rise imposing greater economic
burdens. Moreover a rising population leads to n increase in the labor force,
according to the Tenth Plan labor force is expected to rise by about 35 mi llion
leading to more unemployment.
CHINA-As the worlds population surpassed 6 billion (6,000,000,000) in
October 1999, Chinas population represented more than 1/5 of this total
(20.8%) one out of every five people in the world lives in China.
Today, Chinas population exceeds 1.25 billion (1,250,000,000), a
number that continues to increase minute-by-minute on Beijings official.
Chinas population increases each year by approximately 12 -13 million people, a
number that exceeds the total population of individual countries such as Belgium,
Greece, Cambodia, or Ecuador. Annual population growth in China actually exceeds
the current population ofOhio, Illinois, or Pennsylvania. Both the crude birth rate and
the crude death rate declined significantly betw een 1949 and 1997, except for the
early years of the 1960s.the combination of rising population pressure and stalled
economic growth can be destabilizing for China in the future .
PREVALENCE OFCHRONICUNEMPLOYMENTAND
UNDEREMPLOYMENT.
INDIA- In India labor is an abundant factor and consequently it is very difficult to
provide gainful employment to entire population. Unemployment is structural and is
the result of a deficiency of capital. The Indian economy does not find sufficient
capital to expand its industries to such an extent that the entire labor force is
absorbed. Moreover, in the agricultural sector of the Indian economy a much larger
number of laborers are engaged in production than are really needed. Accordingly
the marginal product of labor in agriculture is often negligible. Thus, there exists
disguised or concealed unemployment in agriculture.
CHINA-According to the 2008 estimates by Chinas National Bureau of
Statistic, the total number of the urban unemployed was 8.30 million. The
countrys total unemployment rate stood at 4.0%.
Year-on-year estimates of Chinas unemployment rate
Year Unemployment Rate 2004 10.10% 2005 9.80% 2006 9.00% 2007
4.20% 2008 4.00%
Source: Central Intelligence Agencys World Fact book
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Over the past five years, the Chinese government has succeeded in controlling its
unemployment situation. The Chinese government has also provided basic life
support facilities to workers who were laid-off by state-owned enterprises. It even did
justice to its ambitious unemployment insurance policy.
STEADILY IMPROVINGRATE OFCAPITALFORMATION.
INDIA-During the fifties and sixties of the 20 th century, basic characteristic of the
Indian economy was the existence of capital deficiency which is reflected in two
ways- firstly, the amount of capital per available was low; and secondly, the rate of
capital formation was also low. An important indicator of low capital per head
available in underdeveloped countries is the consumption of energy. Energy use of
India was 529 kg of oil equivalent per capita in 200 7 as compared to USA, which
was 7766.
CHINA-In 2009, capital formation contributed 8 percentage points, or 92 percent, of
Chinas GDP growth, according to the latest date released by the National Bureau of
Statistics (NBS) February 2 .A penny saved may be a penny earned, but in China a
penny saved is usually invested in an infrastructure project or an increase in
manufacturing capacity. Chinas gross domestic savings rate, after averaging 40% or
so of GDP for most of the 1990s, has grown over the past couple of years to close
to 50% of GDP. This is an unprecedented number, and while a portion of this saving
has been invested abroad in US Treasury bonds thus funding the US current
account deficit and keeping US interest rates low the vast majority has been
invested in the domestic Chinese economy. Gross capital formation was around 45%
of GDP last year, and it powered an economic expansion that saw GDP rise by
9.5%.
1961-77 1977-98
Saving rate 30 37.4
Investment rate 18.5 26.8
Rate of capital formation 12.6 22.2
MALDISTRIBUTIONOF WEALTH/ASSETS
INDIA- inequality in asset distribution is the principal cause of unequal distribution of
income in the rural areas. It also signifies that the resorce base of 50% of the
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househols is so weak that it can hardly provide them anything above the
subsistence level of income, it is also revealed that 60% of the poor rural
households owned only 9.3% of area operated, they had only 14% of cattle heads
and just 10% of wooden ploughs.
CHINA-Before reforms began, China had a planned economy where the
means of production and some means of livelihood were nationalized. To
minimize income inequality, govern- ment adopted policies on income
distribution and re- distribution that carried distinctive planning and ad -
ministrative features. In the urban economy, workers wages were
centrally planned and administered, with the central government setting
unified wage standards and scales. To pursue industrialization, the
government invested substan- tial funds in urban industries and regarded
rural areas as a base for the supply of grain. To accumulate more funds
for industrialization, authorities deliberately suppressed the price of grain
and other farm products, aggravating the urban-rural income gap. In
1978, ur- ban per capita income was 2.6 times rural per capita income.32
At the time, Chinas overall level of economic and social development was
low: Approximately 250 million rural people lived below the poverty line.
While egalitarianism figured prominently in income distri - bution in cities,
it did not apply nationwide. There was considerable income inequality
within rural areas and a clear income gap between urban and rural areas.
33 This meant Chinas reform and transition did not begin from an
egalitarian pattern of distribution and that todays widening income
inequality is more or less tied to past income inequality.
POOR QUALITYOFHUMANCAPITAL.
INDIA-A glaring feature. Besides physical capital, training and knowledge
of the population also forms a part of capital. as a result the expenditure
on education,skill formation, research and development are all include in
it. The Indian public expenditure on primary to higher education and R&D
in 2002-04 was a 3.3% of GDP. The corresponding figure for the USA was
5.9% of the GDP. Moreover, India has been ranked at no 134 on the basis
of Human Development Index in 2007.
CHINA- The investment from governments at various levels in China
takes up 2.05 percent of the GDP (Gross Domestic Product) while that on
the material capitals 30 percent.As said earlier, these two figures in the
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United States are respectively 5.4 and 17 percent. This phenomenon is
caused by rate of return of the material capitals higher than that of labor
capital. However, the fact is that Chinas present wage policies lead to the
serious imbalance and distorted situation as mentioned above. Individuals
can not receive directly all the benefits brought about by education. For
instance, under the current policies, technical workers have relatively low
wages, but the aggregate return brought about by these workforces with
high skill to the society is considerable. As far as health is considered,by
1975, insurance coverage reached about 90% of the population (almost
all urban population and 85% of the rural population).
PREVALENCE OFLOW LEVELOFTECHNOLOGY.
INDIA-The Indian economy suffers from this basic weakness.the low
productivity per hectare in Indian agriculture and the low level of
productivity per worker in agriculture and industry are largely a
cosequence of technological backwardness. In India ,the vast majority of
farmers are too poor to buy even the essential outputs suh as improved
seeds,fertilisers and insecticides. However with the liberalisaton of the
economy,new technology is being adopted by a large number of
enterprises for their survival.
CHINA-The history of science and technology in China is both long
and rich with many contributions to science and technology. In antiquity,
independently of Greek philosophers and other civilizations, ancient
Chinese philosophers made significant advances in science, technology,
mathematics, and astronomy. The first recorded observations of comets,
solar eclipses, and supernovae were made in China. Chinas economic
boom and political ambition have fuelled unprecedented investment in
science and technology. Since 1999, the countrys spending on researchand development (R&D) has trebled, and it has now become the worlds
second largest R&D investor. Also,Chinas efforts in the food production
and agricultural field have been very impressive as compared to any other
country in the Asia Pacific region. China has continued to be a major net
exporter of agricultural products. This can be attributed to the concerted
focus on developing food sciences and technologies and using these
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technical advances to improve agriculture and food production. One good
example is the use of scientific and technological advances in Chinas Jilin
Province in the northeast, where more than 264 improved crop breeds
were developed, 80 of which have been used successfully in production.
According to the National Bureau of Economic Research, more than
220,000 farmers participating in training programs in this area, the
satisfactory results and community involvement in this region speaks for
the rest of China in the countrys sustained efforts in furthering
improvements and advances in agriculture and food production for the
nation.
LOW LEVELOFLIVINGOFTHE AVERAGE INDIAN.
INDIA-Failure to maintain a balanced diet manifest in India in the low
calorie intake and low level of consumption of protein. Nearly 28% of the
population in India lived below poverty line in 2004-05. Acording to world
development indicatos, 46 % of the child population In India sufers from
malnutrition. The average protein content of the Indian diet is only 59
grams per day as against more than double the level in developed
countries. Moreover as per 2001 census only 36% of the household had
access to safe drinking water. Hence all these are partly responsible for
the low level of efficiency of the workers.
I ia:Summa y
Table S00-011:DISTRIBUTIONOFHOUSEHOLDS BYTYPE OFCENSUS
HOUSESOCCUPIED
Total % Rural % Urban %
Total number of
households
191,963,
935
100.
0
138,271
,559 72.0
53,692,
376 28.0
L Permanent
99,431,7
27 51.8
56,829,
478 41.1
42,602,
249 79.3
L.
1 Semi permanent
57,664,3
27 30.0
49,401,
997 35.7
8,262,3
30 15.4
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L.
2 Temporary:
L.
2.
1
Total 34,815,6
19
18.1
32,009,
547
23.1 2,806,0
72
5.2
L.
2.
2 Serviceable
22,096,4
80
11.5
20,358,
391
14.7 1,738,0
89
3.2
L.
2.
3 Non-serviceable
12,719,1
39
6.6
11,651,
156
8.4 1,067,9
83
2.0
L.
2.
4 Unclassifiable
52,262
0.0
30,537 0.0 21,725
0.0
Source: Table H-4 (Appendix) India :
Census of India 2001
Source : Office of the Registrar General, India Created on 17 April 2003.
CHINA-Across China, there were over 400 million fewer people living in
extreme poverty in 2001 than 20 years previously. By 2001, China had
met the foremost of the Millennium Development Goals to reduce the
1990 incidence of poverty by half and it had done so 14 years ahead of
the 2015 target date for the developing world as a whole. Widespread
poverty, extreme income inequalities, and endemic insecurity of
livelihood. By means of centralized economic planning, the Peoples
Republic was able to redistribute national income so as to provide the
entire population with at least the minimal necessities of life (except
during the three bad years of 1959, 1960, and 1961) and to
consistently allocate a relatively high proportion of national income to
productive investment. Equally important to the quality of life were the
results of mass public-health and sanitation campaigns, which rid the
country of most of the conditions that had bred epidemics and lingering
disease in the past. The most concrete evidence of improved living
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standards was that average national life expectancy more than doubled,
rising from around thirty-two years in 1949 to sixty-nine years in 1985.
In 1987 the standard of living in China was much lower than in the
industrialized countries, but nearly all Chinese people had adequate food,
clothing, and housing. In addition, there was a positive trend toward rapid
improvements in living conditions in the 1980s as a result of the economic
reforms, though improvements in the standard of living beyond the basic
level came slowly. Until the end of the 1970s, the fruits of economic
growth were largely negated by population increases, which prevented
significant advances in the per capita availability of food, clothing, and
housing beyond levels achieved in the 1950s. The second major change in
the standard of living came about as a result of the rapid expansion of
productivity and commerce generated by the reform measures of the
1980s. After thirty years of austerity and marginal sufficiency, Chinese
consumers suddenly were able to buy more than enough to eat from a
growing variety of food items. Stylish clothing, modern furniture, and a
wide array of electrical appliances also became part of the normal
expectations of ordinary Chinese families.
LiberalizationINDIA
WHEN DID INDIA GET LIBERALIZED?
Globalization and liberation are directly linked with each other. The first
wake of globalization started in India when the economic liberalization
policies were undertaken in the 1990s by Dr Manmohan Singh, the then
Finance Minister of the country. Since then, the economy of India has
improved to a great extent and has significantly led to the rise in the
standard of living of the citizens. Even though the power at th e center has
changed hands, the pace of the reforms has never slackened till date.
Before 1991, changes within the industrial sector in the country were
modest to say the least. The sector accounted for just one-fifth of the
total economic activity within the country. The sectoral structure of the
industry has changed, albeit gradually. Most of the industrial sector was
dominated by a select band of family-based conglomerates that had been
dominant historically. Post 1991, a major restructuring has taken pl ace
with the emergence of more technologically advanced segments among
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industrial companies. Nowadays, more small and medium scale
enterprises contribute significantly to the economy.
Liberalization in the 1990s
It was in the 1990s that the first initiation towards globalization and
economic liberalization was undertaken by Dr Manmohan Singh, who was
the Finance Minister of India under the Congress government headed by
P.V. Narasimha Rao. This is perhaps the milestone in the economic
growth if India and it aimed towards welcoming globalization. Since, the
liberalization plan, the economic condition gradually started improving
and today India is one of the fastest growing economies in the world with
an average yearly growth rate of around 6-7%.
Globalization and foreign investment
One of the main aspects of globalization is foreign investment. India today has
emerged as one of the perfect markets for foreign investors due to its vast market
base. More and more foreign companies are investing in the Indian market to get
more returns. The foreign institutional investments (FII) amounts to around US$ 10
billion in FY 2008-09, while the rate of Foreign direct investments (FDI) has grown
around 85.1% in 2009 to US$ 46.5 billion from US$ 25.1 billion (2008) .
PHASE OFLIBERALIZATION
Indias reforms have been piecemeal and incremental, giving the casual observer the
impression that nothing has been happening. If one takes the totality of reforms over
the last decade, however, the change is unmistakable. The analogy is with the hour
hand of the clock, which looks completely static, and yet completes a full circle every
12 hours.
Other industries were either subject to strict industrial licensing or reserved for the
small-scale sector. The tight control of the government on industry was aptly
captured by a leading cartoonist in a 1980s comic strip showing the industry minister
tell his staff, We shouldnt encourage big industry that is our policy, I know. But I
say we shouldnt encourage small industries either . If we do, they are bound to
become big.
The reforms of the last 10 years have gone a long way toward freeing up the
domestic economy from state control. State monopoly has been abolished in virtually
all sectors, which have been opened to the private se ctor. The License Raj is a thing
of the past. The small-scale industry reservation still persists but even here progress
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has been made. Apparel, with its large export potential, was recently opened to all
investors.
Imports were also subject to excessively high tariffs. The top rate was 400 percent.
As much as 60 percent of tariff lines were subject to rates ranging from 110 to 150
percent and only 4 percent of the tariff rates were below 60 percent. The exchange
rate was highly over-valued. Strict exchange controls applied to not just capital
account but also current account transactions. Foreign investment was subject to
stringent restrictions. Companies were not permitted more than 40 percent foreign
equity unless they were in the high-tech sector or were export-oriented. As a result,
foreign investment amounted to a paltry $100-200 million annually.
Today, import licensing has been completely abolished. This includes textiles and
clothing, which remain protected in developed countries through the multi -fiber
arrangement. The highest tariff rate has come down to 45 percent (including the tariff
surcharge and the so-called Special Additional Duty) with the average tariff rate
declining to less than 25 percent. The foreign investment regime is as liberal as i n
other developing Asian countries.
Progress has also been made in many areas that were previously off limits to
reforms. Insurance has been opened to private investors, both domestic and foreign.
Diesel oil and gas prices have undergone some increases. At least symbolic
reductions have also been made in fertilizer and food subsidies. The value - added
tax has undergone substantial rationalization.
These reforms have paid handsomely. The economy has grown at more than 6
percent coupled with full macroeconomi c stability. This compares with a growth rate
of 3.5 percent during 1950 -1980. The rate of inflation has been low and foreign
exchange reserves are sufficient to finance imports for more than eight months.
Rising incomes have helped bring down poverty. Acc ording to official figures, the
proportion of poor in total population has declined from 40 percent in 1993 -1994 to
26 percent in 2000.
But, perhaps, the greatest change in the last 10 years has been in the attitude
toward reforms. Whereas the vocal suppor ters of reforms within India were rare
during the 1980s, virtually every political party today recognizes the need for
continued reforms. Differences on which reforms to undertake first and at what pace
still exist, but few disagree that reforms must continue. Initial fears that changes in
governments will bring the reform process to a halt or even reverse it have proven to
be without foundation.
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China
WHEN DID IT TAKE PLACE?
The Chinese economic reform refers to the program of economic reforms called
"Socialism with Chinese characteristics " in the People's Republic of China (PRC)that were started in December 1978 by reformists within the Communist Party of
China (CPC) led by Deng Xiaoping. The goal of Chinese economic reform was to
transform China's stagnant, impoverished planned economy into a market economy
capable of generating strong economic growth and increasing the well -being of
Chinese citizens.
China had one of the world's largest and most advanced economies prior to the
nineteenth century, while its wealth remained average in global terms. The economy
stagnated since the 16th centuryand even declined in absolute terms in the
nineteenth and much of the twentieth century, with a brief recovery in the 1930s.
From 1949 to 1978, Mao's disastrous collectivization, Great Leap Forward and
Cultural revolution devastated the Chinese economy, resulting in the destruction of
much traditional culture and a massive drop in living standards. AfterMao's death,
his main leftist supporters, led by the Gang of Four, were ousted in a coup, and
reformists lead by Deng Xiaoping took power.
Economic reforms began in 1978 and occurred in two stages. The first stage, in the
late 1970s and early 1980s, involved the decollectivization of agriculture, the opening
up of the country to foreign investment, and permission for entrepreneurs to start upbusinesses. However, most industry remained state-owned, inefficient and acted as
a drag on economic growth. The second stage of reform, in the late 1980s and
1990s, involved the privatization and contracting out of much state-owned industry
and the lifting of price controls, protectionist policies, and regulations, a lthough state
monopolies in sectors such as banking and petroleum remained. The private sector
grew remarkably, accounting for as much as 70 percent of China's GDP by 2005[4],
a figure larger in comparison to many Western nations. From 1978 to 2010,
unprecedented growth occurred, with the economy increasing by 9.5% a year.
China's economy became the second largest after the U.S..
The success of China's economic reforms has resulted in massive changes in
Chinese society. Poverty was reduced and both wealth and wealth inequality
increased, leading to a backlash lead by the Maoist New Left. In the academic
scene, scholars have debated the reason for the success of Chinese economic
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reforms, and have compared them to attempts to reform socialism in the Eastern
bloc and the growth of other developing economies.
PHASE OFLIBERALIZATION
Economic reforms began after Deng Xiaoping and his reformist allies ousted theGang of FourMaoist faction. By the time Deng took power, there was widespread
support among the elite for economic reforms. As de facto leader, Deng's policies
faced opposition from party conservatives but were extremely successful in
increasing the country's wealth.1978-84-Deng's first reforms began in agriculture, a
sector long neglected by the Communist Party. By the late 1970s, food supplies and
production had become so deficient that government officials were warning th at
China was about to repeat the "disaster of 1959" - the famines which killed tens of
millions during the Great Leap Forward.[9] Deng responded by decollectivizing
agriculture and emphasizing the Household-responsibility system, which divided the
land of the People's communes into private plots. Farmers were able to keep the
land's output after paying a share to the state. This move increased agricultural
production, increased the living standards of hundreds of millions of farmers and
stimulated rural industry.Reforms were also implemented in urban industry to
increase productivity. A dual price system was introduced, in which state -owned
industries were allowed to sell any production above the plan quota, and
commodities were sold at both plan and market prices, allowing citizens to avoid the
shortages of the Maoist era. Private businesses were allowed to operate for the first
time since the Communist takeover, and they gradually began to make up a greater
percentage of industrial output. Price flexibility wa s also increased, expanding the
service sector.The country was opened to foreign investment for the first time since
the Kuomintang era. Deng created a series of special economic zones for foreign
investment that were relatively free of the bureaucratic regulations and interventions
that hampered economic growth. These regions became engines of growth for the
national economy.1984-93-During this period, Deng Xiaoping's policies continued
beyond the initial reforms. Controls on private businesses and government
intervention continued to decrease, and there was small -scale privatization of state
enterprises which had become unviable. A notable development was the
decentralization of state control, leaving local provincial leaders to experiment with
ways to increase economic growth and privatize the state sector. [Township and
village enterprises, firms nominally owned by local governments but effectively
private, began to gain market share at the expense of the state sector. Conservative
elder opposition, lead by Chen Yun, prevented many major reforms which would
have damaged the interests of special interest groups in the government
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bureaucracy. Corruption and increased inflation increased discontent, contributing to
the Tiananmen Square protests of 1989 and a conservative backlash after that event
which ousted several key reformers and threatened to reverse many of Deng's
reforms.However, Deng stood by his reforms and in 1992, he affirmed the need to
continue reforms in his southern tour.He also reopened the Shanghai Stock
Exchange closed by Mao 40 years earlier.
Although the economy grew quickly during this period, economic troubles in the
inefficient state sector increased. Heavy losses had to be made up by state revenues
and acted as a drain upon the economy.Inflation became problematic in 1985, 1988
and 1992. Privatizations began to accelerate after 1992, and the private sector
surpassed the state sector in share of GDP for the first time in the mid -1990s.
China's government slowly expanded recognition of the private economy, first as a
"complement" to the state sector (1988) and then as an "important component"
(1999) of the socialist market economy.
Post-2005
The conservative Hu-Wen Administration began to reverse many of Deng Xiaoping's
reforms in 2005.Observers note that the government adopted more egalitarian and
populist policies. It increased subsidies and control over the health care sector ,
halted privatization, and adopted a loose monetary policy, which lead to the
formation of a U.S.-style property bubble in which property prices tripled. The
privileged state sector was the primary recipient of government investment, which
under the new administration, promoted the rise of large "national champions" which
could compete with large foreign corporations.
Diffe e p li ies use uri g
liberaliza i
I ia
Dr, Man Mohan Singh proposed The thrust will be to increase the efficiency and
international competitiveness of industrial production, to utilize foreign investment
and technology to much greater degree than in the past to improve the performance
and rationalize the scope of the public sector, and to reform and modernize the
financial sector so that it can more efficiently serve the needs of the economy.
We review policy changes in five major areas covered by the reform program: fiscal
deficit reduction, industrial and trade policy, agricultural policy, infrastructure
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development and social sector development. Savings, Investment and Fiscal
Discipline.
Fiscal profligacy was seen to have caused the balance of payments crisis in 1991
and a reduction in the fiscal deficit was therefore an urgent priority at the start of the
reforms. The combined fiscal deficit of the central and state governments wassuccessfully reduced from 9.4 percent of GDP in 1990 -91 to 7 percent in both 1991-
92 and 1992-93 and the balance of payments crisis was over by 1993. However, the
reforms also had a medium term fiscal objective of improving public savings so that
essential public investment could be financed with a smaller fiscal deficit to avoid
crowding out private investment. This part of the reform strategy was unfortunately
never implemented.
Public savings deteriorated steadily from +1.7 percent of GDP in 1996 -97 to 1.7
percent in 2000-01. This was reflected in a comparable deterioration in the fiscal
deficit taking it to 9.6 percent of GDP in 2000 -01. Not only is this among the highest
in the developing world, it is particularly worrisome because Indias public debt to
GDP ratio is also very high at around 80%. Since the total financial savings of
households amount to only 11 percent of GDP, the fiscal deficit effectively preempts
about 90 percent of household financial savings for the government. What is worse,
the rising fiscal deficit in the second half of the 1990s was not financing higher levels
of public investment, which was more or less constant in this period.
These trends cast serious doubts on Indias ability to achieve higher rates of growth
in future. The growth rate of 6 percent per year in the post -reforms period was
achieved with an average investment rate of around 23 percent of GDP. Accelerating
to 8 percent growth will require a co mmensurate increase in investment. Growth
rates of this magnitude in east Asia were associated with investment rates ranging
from 36-38 percent. While it can be argued that there was overinvestment in East
Asia, especially in recent years, it is unlikely t hat India can accelerate to 8 percent
growth unless it can raise the rate of investment to around 29 -30 percent of GDP.
Part of the increase can be financed by increasing foreign direct investment, but
even if foreign direct investment increases from the p resent level of 0.5 percent of
GDP to 2.0 percent -- an optimistic but not impossible target -- domestic savingswould still have to increase by at least 5 percentage points of GDP.
Private savings have been buoyant in the post-reform period, but public savings
have declined steadily. This trend needs to be reversed. Both the central
government and the state governments would have to take a number of hard
decisions to bring about improvements in their respective spheres.
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Total tax revenues of the center were 9.7 percent of GDP in 1990-91. They declined
to only 8.8 percent in 2000-01, whereas they should have increased by at least two
percentage points. Tax reforms involving lowering of tax rates, broadening the tax
base and reducing loopholes were expected to raise the tax ratio and they did
succeed in the case of personal and corporate income taxation but indirect taxes
have fallen as a percentage of GDP. This was expected in the case of customs
duties, which were deliberately reduced as part of trade refo rms, but this decline
should have been offset by improving collections from domestic indirect taxes on
goods and by extending indirect taxation to services. This part of the revenue
strategy has not worked as expected. The Advisory Group on Tax Policy for the
Tenth Plan recently made a number of proposals for modernizing tax administration,
including especially computerization, reducing the degree of exemption for small
scale units and integration of services taxation with taxation of goods These
recommendations need to be implemented urgently.
There is also room to reduce central government subsidies, which are known to be
highly distortionary and poorly targeted (e.g. subsidies on food and fertilizers), and to
introduce rational user charges for services such as passenger traffic on the
railways, the postal system and university education.Overstaffing was recently
estimated at 30 percent and downsizing would help reduce expenditure.
State governments also need to take corrective steps. Sales tax systems need to be
modernized in most states. Agricultural income tax is constitutionally assigned to the
states, but no state has attempted to tax agricultural income. Land revenue is a
traditional tax based on landholding, but it has been generally neglected and
abolished in many states. Urban property taxation could yield much larger resources
for municipal governments if suitably modernized, but this tax base has also been
generally neglected. State governments suffer from very large losses in state
electricity boards (about 1 percent of GDP) and substantial losses in urban water
supply, state road transport corporations and in managing irrigation systems.
Overstaffing is greater in the states than in the center.
I us rial Poli yIndustrial policy has seen the greatest change, with most central government
industrial controls being dismantled. The list of industries reserved solely for the
public sector -- which used to cover 18 industries, including iron and steel, heavy
plant and machinery, telecommunications and telecom equipment, minerals, oil,
mining, air transport services and electricity generation and distribution -- has been
drastically reduced to three: defense aircrafts and warshi ps, atomic energy
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generation, and railway transport.Industrial licensing by the central government has
been almost abolished except for a few hazardous and environmentally sensitive
industries. The requirement that investments by large industrial houses ne eded a
separate clearance under the Monopolies and Restrictive Trade Practices Act to
discourage the concentration of economic power was abolished and the act itself is
to be replaced by a new competition law which will attempt to regulate
anticompetitive behavior in other ways.
The main area where action has been inadequate relates to the long standing policy
of reserving production of certain items for the small -scale sector. About 800 items
were covered by this policy since the late 1970s, which meant t hat investment in
plant and machinery in any individual unit producing these items could not exceed $
250,000. Many of the reserved items such as garments, shoes, and toys had high
export potential and the failure to permit development of production units with more
modern equipment and a larger scale of production severely restricted Indias export
competitiveness. The Report of the Committee on Small Scale Enterprises (1997)
and the Report of the Prime Ministers Economic Advisory Council (2001) had both
pointed to the remarkable success of China in penetrating world markets in these
areas and stimulating rapid growth of employment in manufacturing. Both reports
recommended that the policy of reservation should be abolished and other measures
adopted to help small-scale industry. While such a radical change in policy was
unacceptable, some policy changes have been made very recently: fourteen items
were removed from the reserved list in 2001 and another 50 in 2002. The items
include garments, shoes, toys and auto components, all of which are potentially
important for exports. In addition, the investment ceiling for certain items was
increased to $1 million. However, these changes are very recent and it will take
some years before they are reflected in economic performance.
Industrial liberalization by the central government needs to be accompanied by
supporting action by state governments. Private investors require many permissions
from state governments to start operations, like connections to electricity and water
supply and environmental clearances. They must also interact with the state
bureaucracy in the course of day-to-day operations because of laws governing
pollution, sanitation, workers welfare and safety, and such. Complaints of delays,corruption and harassment arising from these interactions are common. Some states
have taken initiatives to ease these interactions, but much more needs to be done.
Tra e Poli y
Trade policy reform has also made progress, though the pace has been slower than
in industrial liberalization. Before the reforms, trade policy was characterized by high
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tariffs and pervasive import restrictions. Imports of manufactured consumer goods
were completely banned. For capital goods, raw materials and intermediates,
certain lists of goods were freely importable, but for most items where domestic
substitutes were being produced, imports were only possible with import licenses.
The criteria for issue of licenses were nontransparent, delays were endemic and
corruption unavoidable. The e conomic reforms sought to phase out import licensing
and also to reduce import duties.
Import licensing was abolished relatively early for capital goods and intermediates
which became freely importable in 1993, simultaneously with the switch to a flexible
exchange rate regime. Import licensing had been traditionally defended on the
grounds that it was necessary to manage the balance of payments, but the shift to a
flexible exchange rate enabled the government to argue that any balance of
payments impact would be effectively dealt with through exchange rate flexibility.
Removing quantitative restrictions on imports of capital goods and intermediates wasrelatively easy, because the number of domestic producers was small and Indian
industry welcomed the move as making it more competitive. It was much more
difficult in the case of final consumer goods because the number of domestic
producers affected was very large (partly because much of the consumer goods
industry had been reserved for small scale production) . Quantitative restrictions on
imports of manufactured consumer goods and agricultural products were finally
removed on April 1, 2001, almost exactly ten years after the reforms began, and that
in part because of a ruling by a World Trade Organization disp ute panel on a
complaint brought by the United States.
Progress in reducing tariff protection, the second element in the trade strategy, has
been even slower and not always steady. As shown in Table 3, the weighted
average import duty rate declined from the very high level of 72.5 percent in 1991 -92
to 24.6 percent in 1996-97. However, the average tariff rate then increased by more
than 10 percentage points in the next four years. 1 In February 2002, the government
signaled a return to reducing tariff prote ction. The peak duty rate was reduced to 30
percent, a number of duty rates at the higher end of the existing structure were
lowered, while many low end duties were raised to 5 percent. The net result is that
the weighted average duty rate is 29 percent i n 2002-03.
1 The sharp increase in average duty rates in 2000 01 reflects th imposition of tariff on many agricultural
commodities in anticipation of the removal of quantitative restrictions. Since these items were protected by
quantitative restrictions in the mid-1990s, the combined protection provided by tariffs and quantitative
restrictions was probably higherin the mid-1990s.
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Although Indias tariff levels are significantly lower than in 1991, they remain among
the highest in the developing world because most other developing countries have
also reduced tariffs in this period. The weighted average import duty in Chi na and
southeast Asia is currently about half the Indian level. The government has
announced that average tariffs will be reduced to around 15 percent by 2004, but
even if this is implemented, tariffs in India will be much higher than in China which
has committed to reduce weighted average duties to about 9 percent by 2005 as a
condition for admission to the World Trade Organization.
Foreig Dire I ves me
Liberalizing foreign direct investment was another important part of Indias reforms,
driven by the belief that this would increase the total volume of investment in the
economy, improve production technology, and increase access to world markets.
The policy now allows 100 percent foreign ownership in a large number of industries
and majority ownership in all except banks, insurance companies,
telecommunications and airlines. Procedures for obtaining permission were greatly
simplified by listing industries that are eligible for automatic approval up to specified
levels of foreign equity (100 percent, 74 percent and 51 percent). Potential foreign
investors investing within these limits only need to register with the Reserve Bank of
India. For investments in other industries, or for a higher share of equity than is
automatically permitted in listed industr ies, applications are considered by a Foreign
Investment Promotion Board that has established a track record of speedy
decisions. In 1993, foreign institutional investors were allowed to purchase shares of
listed Indian companies in the stock market, opening a window for portfolio
investment in existing companies.
These reforms have created a very different competitive environment for Indias
industry than existed in 1991, which has led to significant changes. Indian
companies have upgraded their technology and expanded to more efficient scales
of production. They have also restructured through mergers and acquisitions and
refocused their activities to concentrate on areas of competence. New dynamic
firms have displaced older and less dynamic ones: of the top 100 companies
ranked by market capitalization in 1991, about half are no longer in this group.Foreign investment inflows increased from virtually nothing in 1991 to about 0.5
percent of GDP. Although this figure remains much below the levels of foreig n
direct investment in many emerging market countries (not to mention 4 percent of
GDP in China), the change from the pre-reform situation is impressive. The
presence of foreign-owned firms and their products in the domestic market is
evident and has added greatly to the pressure to improve quality.
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One reason why export performance has been modest is the slow progress in
lowering import duties that make India a high cost producer and therefore less
attractive as a base for export production. Exporters have long been able to import
inputs needed for exports at zero duty, but the complex procedure for obtaining the
necessary duty-free import licenses typically involves high transactions cost and
delays. High levels of protection compared with other countries also explains why
foreign direct investment in India has been much more oriented to the protected
domestic market, rather than using India as a base for exports. However, high tariffs
are only part of the explanation for poor export performance. The reser vation of
many potentially exportable items for production in the small scale sector (which has
only recently been relaxed) was also a relevant factor. The poor quality of Indias
infrastructure compared with infrastructure in east and southeast Asia, whic h is
discussed later in this paper, is yet another.
Inflexibility of the labor market is a major factor reducing Indias competitiveness inexports and also reducing industrial productivity generally (Planning Commission,
2001). Any firm wishing to close down a plant, or to retrench labor in any unit
employing more than 100 workers, can only do so with the permission of the state
government, and this permission is rarely granted. These provisions discourage
employment and are especially onerous for labor -intensive sectors. The increased
competition in the goods market has made labor more willing to take reasonable
positions, because lack of flexibility only leads to firms losing market share.
However, the legal provisions clearly remain much more onerous tha n in other
countries. This is important area of reform that has yet to be addressed. The lack ofany system of unemployment insurance makes it difficult to push for major changes
in labor flexibility unless a suitable contributory system that is financiall y viable can
be put in place. The government has recently announced its intention to amend the
law and raise the level of employment above which firms have to seek permission for
retrenchment from 100 workers at present to 1000 while simultaneously increas ing
the scale of retrenchment compensation. However, the amendment has yet to be
enacted.
These gaps in the reforms provide a possible explanation for the slowdown in
industrial growth in the second half of the 1990s. It can be argued that the initial
relaxation of controls led to an investment boom, but this could have been sustained
only if industrial investment had been oriented to tapping export markets, as was the
case in east Asia. As it happened, Indias industrial and trade reforms were not
strong enough, nor adequately supported by infrastructure and labor market reforms
to generate such a thrust. The one area which has shown robust growth through the
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1990s with a strong export orientation is software development and various new
types of services enabled by information technology like medical transcription,
backup accounting, and customer related services. Export earnings in this area have
grown from $100 million in 1990 -91 to over $6 billion in 2000-01 and are expected to
continue to grow at 20 to 30 percent per year. Indias success in this area is one of
the most visible achievements of trade policy reforms which allow access to imports
and technology at exceptionally low rates of duty, and also of the fact that exports in
this area depend primarily on telecommunications infrastructure, which has improved
considerably in the post-reforms period.
I fras ructure Developme t
Rapid growth in a globalized environment requires a well -functioning infrastructure
including especially electric power, road and rail connectivity, telecommunications,
air transport, and efficient ports. India lags behind east and southeast Asia in these
areas. These services were traditionally provided by public sector monopolies but
since the investment needed to expand capacity and improve quality could not be
mobilized by the public sector, these sectors were opened to private investment,
including foreign investment. However, the difficulty in creating an environment
which would make it possible for private investors to enter on terms that would
appear reasonable to consumers, while providing an adequate risk - return profile to
investors, was greatly underestimated. Many false starts and disappointments have
resulted.
The greatest disappointment has been in the electric power sector, which was the
first area opened for private investment. Private investors were expected to produce
electricity for sale to the State Electricity Boards, which would control of transmission
and distribution. However, the State Electricity Boards were financially very weak,
partly because electricity tariffs for many categories of consumers were too low and
also because very large amounts of power were lost in transmission and distribution.
This loss, which should be between 10 to 15 percent on technical grounds
(depending on the extent of the rural network), varies from 35 to 50 percent. The
difference reflects theft of electricity, usually with the connivance of the distribution
staff. Private investors, fearing nonpayment by the State Electricity Boards insistedon arrangements which guaranteed purchase of electricity by state governments
backed by additional guarantees fro m the central government. These arrangements
attracted criticism because of controversies about the reasonableness of the tariffs
demanded by private sector power producers. Although a large number of proposals
for private sector projects amounting to about 80 percent of existing generation
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capacity were initiated, very few reached financial closure and some of those which
were implemented ran into trouble subsequently.
The flaws in the policy have now been recognized and a more comprehensive
reform is being attempted by several state governments. Independent statutory
regulators have been established to set tariffs in a manner that would be perceivedto be fair to both consumers and producers. Several states are trying to privatize
distribution in the hope that this will overcome the corruption which leads to the
enormous distribution losses. However, these reforms are not easy to implement.
Rationalization of power tariffs is likely to be resisted by consumers long used to
subsidized power, even though th e quality of the power provided in the pre -reform
situation was very poor. The establishment of regulatory authorities that are
competent and credible takes time. Private investors may not be able to enforce
collection of amounts due or to disconnect suppl y for non-payment without adequate
backing by the police. For all these reasons, private investors perceive high risks inthe early stages and therefore demand terms that imply very high rates of return.
Finally, labor unions are opposed to privatization o f distribution.
These problems are formidable and many state governments now realize that a
great deal of preliminary work is needed before privatization can be successfully
implemented. i Some of the initial steps, like tariff rationalization and enforci ng
penalties for non-payment of dues and for theft of power, are perhaps best
implemented within the existing public sector framework so that these features,
which are essential for viability of the power sector, are not attributed solely to
privatization. If the efforts now being made in half a dozen states succeed, it could
lead to a visible improvement within a few years.
The results in telecommunications have been much better and this is an important
factor underlying Indias success in information tec hnology. There was a false start
initially because private investors offered excessively high license fees in bidding for
licenses which they could not sustain, which led to a protracted and controversial
renegotiation of terms. Since then, the policy appe ars to be working satisfactorily.
Several private sector service providers of both fixed line and cellular services, many
in partnership with foreign investors, are now operating and competing with the pre -existing public sector supplier. Teledensity, whi ch had doubled from 0.3 lines per 100
population in 1981 to 0.6 in 1991, increased sevenfold in the next ten years to reach
4.4 in 2002. Waiting periods for telephone connections have shrunk dramatically.
Telephone rates were heavily distorted earlier with very high long distance charges
cross-subsidizing local calls and covering inefficiencies in operation. They have now
been rebalanced by the regulatory authority, leading to a reduction of 30 percent in
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long distance charges. Interestingly, the erstwhile public sector monopoly supplier
has aggressively reduced prices in a bid to retain market share.
Civil aviation and ports are two other areas where reforms appear to be succeeding,
though much remains to be done. Two private sector domestic airlines, whic h began
operations after the reforms, now have more than half the market for domestic airtravel. However, proposals to attract private investment to upgrade the major airports
at Mumbai and Delhi have yet to make visible progress. In the case of ports, 17
private sector projects involving port handling capacity of 60 million tons, about 20
percent of the total capacity at present, are being implemented. Some of the new
private sector port facilities have set high standards of productivity.
The railways are a potentially important means of freight transportation but this area
is untouched by reforms as yet. The sector suffers from severe financial constraints,
partly due to a politically determined fare structure in which freight rates have been
set excessively high to subsidize passenger fares, and partly because government
ownership has led to wasteful operating practices. Excess staff is currently estimated
at around 25 percent. Resources are typically spread thinly to respond to political
demands for new passenger trains at the cost of investments that would strengthen
the capacity of the railways as a freight carrier. The Expert Group on Indian Railways
(2002) recently submitted a comprehensive program of reform converting the
railways from a departmentally run government enterprise to a corporation, with a
regulatory authority fixing the fares in a rational manner. No decisions have been
announced as yet on these recommendations.
Fi a cial SectorReform
Indias reform program included wide-ranging reforms in the banking system and the
capital markets relatively early in the process with reforms in insurance introduced at
a later stage.
Banking sector reforms included: (a) measures for liberalization, like dismantling the
complex system of interest rate controls, eliminating prior approval of the Reserve
Bank of India for large loans, and reducing the statutory requirements to invest in
government securities; (b) measures designed to increase financial sou ndness, likeintroducing capital adequacy requirements and other prudential norms for banks and
strengthening banking supervision; (c) measures for increasing competition like more
liberal licensing of private banks and freer expansion by foreign banks. Th ese steps
have produced some positive outcomes. There has been a sharp reduction in the
share of non-performing assets in the portfolio and more than 90 percent of the
banks now meet the new capital adequacy standards. However, these figures may
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overstate the improvement because domestic standards for classifying assets as
non-performing are less stringent than international standards.
Indias banking reforms differ from those in other developing countries in one
important respect and that is the policy towards public sector banks which dominate
the banking system. The government has announced its intention to reduce its equityshare to 33-1/3 percent, but this is to be done while retaining government control.
Improvements in the efficiency of the banking system will therefore depend on the
ability to increase the efficiency of public sector banks.
Skeptics doubt whether government control can be made consistent with efficient
commercial banking because bank managers are bound to respond to political
directions if their career advancement depends upon the government. Even if the
government does not interfere directly in credit decisions, government ownership
means managers of public sector banks are held to standards of accountability akin
to civil servants, which tend to emphasize compliance with rules and procedures and
therefore discourage innovative decision making. Regulatory control is also difficult
to exercise. The unstated presumption that public sector banks cannot be shut down
means that public sector banks that perform poorly are regularly recapitalized rather
than weeded out. This obviously weakens market discipline, since more efficient
banks are not able to expand market share.
If privatization is not politically feasible, it is at least neces sary to consider
intermediate steps which could increase efficiency within a public sector framework.
These include shifting effective control from the government to the boards of the
banks including especially the power to appoint the Chairman and Executi ve
Directors which is at present with the government; removing civil servants and
representatives of the Reserve Bank of India from these board; implementing a
prompt corrective action framework which would automatically trigger regulatory
action limiting a banks expansion capability if certain trigger points of financial
soundness are breeched; and finally acceptance of closure of insolvent public sector
banks (with appropriate protection for small depositors). Unless some initiatives
along these lines are taken, it is highly unlikely that public sector banks can rise to
the levels of efficiency needed to support rapid growth.
Reforms in the stock market were accelerated by a stock market scam in 1992 that
revealed serious weaknesses in the regulatory mechanism. Reforms implemented
include establishment of a statutory regulator; promulgation of rules and regulations
governing various types of participants in the capital market and also activities like
insider trading and takeover bids; introduction of elec tronic trading to improve
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transparency in establishing prices; and dematerialization of shares to eliminate the
need for physical movement and storage of paper securities. Effective regulation of
stock markets requires the development of institutional expe rtise, which necessarily
requires time, but a good start has been made and Indias stock market is much
better regulated today than in the past. This is to some extent reflected in the fact
that foreign institutional investors have invested a cumulative $2 1 billion in Indian
stocks since 1993, when this avenue for investment was opened.
An important recent reform is the withdrawal of the special privileges enjoyed by the
Unit Trust of India, a public sector mutual fund which was the dominant mutual fund
investment vehicle when the reforms began. Although the Unit Trust did not enjoy a
government guarantee, it was widely perceived as having one because its top
management was appointed by the government. The Trust had to be bailed out once
in 1998, when its net asset value fell below the declared redemption price of the
units, and again in 2001 when the problem recurred. It has now been decided that infuture investors in the Unit Trust of India will bear the full risk of any loss in capital
value. This removes a major distortion in the capital market, in which one of the
investment schemes was seen as having a preferred position.
The insurance sector (including pension schemes), was a public sector monopoly at
the start of the reforms. The need to open the sec tor to private insurance companies
was recommended by an expert committee (the Malhotra Committee) in 1994, but
there was strong political resistance. It was only in 2000 that the law was finally
amended to allow private sector insurance companies, with f oreign equity allowed up
to 26 percent, to enter the field. An independent Insurance Development and
Regulatory Authority has now been established and ten new life insurance
companies and six general insurance companies, many with well -known
international insurance companies as partners, have started operations. The
development of an active insurance and pensions industry offering attractive
products tailored to different types of requirements could stimulate long term savings
and add depth to the capital markets. However, these benefits will only become
evident over time.
Social SectorDevelopme t i Health a E ucation
Indias social indicators at the start of the reforms in 1991 lagged behind the levels
achieved in southeast Asia 20 years earlier, when t hose countries started to grow
rapidly .For example, Indias adult literacy rate in 1991 was 52 percent, compared
with 57 percent in Indonesia and 79 percent in Thailand in 1971. The gap in social
development needed to be closed, not only to improve the we lfare of the poor and
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increase their income earning capacity, but also to create the preconditions for rapid
economic growth. While the logic of economic reforms required a withdrawal of the
state from areas in which the private sector could do the job jus t as well, if not better,
it also required an expansion of public sector support for social sector development.
Much of the debate in this area has focused on what has happened to expenditureon social sector development in the post -reform period. Central government
expenditure on towards social services and rural development increased from 7.6
percent of total expenditure in 1990 -91 to 10.2 percent in 2000-01. As a percentage
of GDP, these expenditures show a dip in the first two years of the reforms, when
fiscal stabilization compulsions were dominant, but there is a modest increase
thereafter. However, expenditure trends in the states, which account for 80 percent
of total expenditures in this area, show a definite decline as a percentage of GDP in
the post-reforms period. Taking central and state expenditures together, social
sector expenditure has remained more or less constant as a percentage of GDP.
China
After three decades of reform, China's economy experienced one of the world's
biggest booms. Agriculture and light industry have largely been privatized, while the
state still retains control over some heavy industries. Despite the dominance of state
ownership in finance, telecommunications, petroleum and other important sectors of
the economy, private entrepreneurs continue to expand into sectors formerly
reserved for public enterprise. Prices have also been liberalized
Industry
In the pre-reform period, industry was largely stagnant and the socialist system
presented few incentives for improvements in quality and productivity. With the
introduction of the dual price system and greater autonomy for enterprise managers,
productivity increased greatly in the early 1980s. Foreign enterprises and newly
formed Township and Village Enterprises, owned by local government and often de
facto private firms, competed successfully with state-owned enterprises. By the
1990s, large-scale privatizations reduced the market share of both the Township and
Village Enterprises and state-owned enterprises and increased the private sector's
market share. The state sector's share of industrial output dropped from 81 percent
in 1980 to 15 percent in 2005. Foreign capital controls much of Chinese indust ry and
plays an important role.
From virtually an industrial backwater in 1978, China is now the world's biggest
producer of concrete, steel, ships and textiles, and has the world's largest
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automobile market. Chinese steel output quadrupled between 1980 and 2000, and
from 2000 to 2006 rose from 128.5 million tons to 418.8 million tons, one -third of
global production. Labor productivity at some Chinese steel firms exceeds Western
productivity. From 1975 to 1992, China's automobile production rose from 139,800 to
1.1 million, rising to 9.35 million in 2008.Light industries such as textiles saw an evengreater increase, due to reduced government interference. Chinese textile exports
increased from 4.6% of world exports in 1980 to 24.1% in 2005. Textile output
increased 18-fold over the same period.
This increase in production is largely the result of the removal of barriers to entry and
increased competition; the number of industrial firms rose from 377,300 in 1980 to
nearly 8 million in 1990 and 1996; the 2