PROSPECTS OF INDIA AND CHINA

INDEX

Sr. No. Particulars Page No.

1. The future of India-China trade  02-04

2. Current Prospects of Chinese Economy 05-07

3. Current Prospects of Indian Economy 08-10

4. INDIA vs CHINA: Investment attractiveness 10-19

5. Key features of India’s attractiveness 20-21

6. Devaluation of Yuan and effect on India and Chinese

economy

22-24

7. Falling oil prices impact India's economy 25-28

8. Conclusion 29-30

9. Bibliography 31

Page | 1

THE FUTURE OF INDIA-CHINA TRADE

Economic ties between India and China are rapidly emerging as one of the most important

bilateral relationships in the world. We address three questions of utmost interest to policy

makers in both countries: Is the current magnitude of trade between India and China too little or

too large? Should India grant Market Economy Status (MES) to China? Finally, what are the

prospects for investment links between India and China? Regarding the magnitude of India-

China trade.  

First, trade between the two countries has grown very robustly. Each country's aggregate

international trade is expanding by 23-24% annually. In comparison, India-China trade grew at a

50% rate during 2002-2006 and will increase by a further 54% during 2007 to reach $37 billion. 

Second, after adjusting for partner GDP (i.e., bilateral trade divided by the trading partner's

GDP), India's trade with China is greater.

Future Prospects of Indian Economy

Prospects for the Indian economy look 'very bright' with the remarkable turnaround witnessed in

recent months on the back of lower current account deficit and the slew of reforms unleashed by

the new government, Chief Economic Advisor Arvind Subramanian said here today.

"In July last year India was on the verge of macro- economic crisis... However, 16 months on,

the picture is very different. There has been a remarkable turnaround in the economy since the

last few months".

"The biggest change is the new government in power that has unleashed a slew of reforms.

Prospects for the Indian economy should be very bright going forward," Subramanian said while

speaking at a workshop.

Page | 2

Stating the current account deficit ( CAD) is now within "manageable territory", Subramaniam

said: "India has benefitted a lot from the falling commodity prices which have helped bring down

the current account deficit".

In the global context India is looking "very special", he noted, adding that World Bank yesterday

revised downwards the growth for "every major country except India".

Pointing out that the cash balances of state-owned enterprises look "exciting", Subramanian

suggested they invest more, adding that the PSUs could make a "real contribution to kickstart the

economic growth".

Speaking on the occasion, Union Heavy Industries & Public Enterprises Minister Anant

Geete said his Ministry had a 'zero interference' policy in the day-to-day functioning of public

sector enterprises.

"The Boards of CPSEs have been provided with a large measure of flexibility and autonomy to

deal with day to day management issues. We will give more autonomy, if needed, to the public

sector enterprises," the Minister said at the international workshop on 'Performance Evaluation

and Management of State Owned Enterprises'.

The World Bank yesterday said that India would catch up with China's economic growth in the

year 2016-17.

In its report, the multilateral lender also forecast a growth rate of 7 per cent each in the fiscal

year 2016 and 2017 as against China's 7 per cent and 6.9 per cent respectively.

India’s population today is 1.237 billion and growing at 1.3% every year. This makes India the

second most populated country in the world with China leading the charts with a population of

1.35 billion.  According to the most recent census survey, India occupies 17 % of the world’s

population and 65 % of these people are below the age of 35.

For years, such large population weighed heavily on the country’s available resources. Over the

years, a lot of emphasis was placed on skill development and basic education. Today, a large part

of those, who are below the age of 35 are educated and skilled. Over the next 4-5 decades,

India’s young population will transform the country’s overall demographics further. A majority

or people between the ages of 10-19 are all getting access to basic education. I should also add

Page | 3

the fact that English is widely spoken and understood unlike in some other countries, which

gives an edge particularly to the service sector of India.

In fact, a major push to India’s growth came from the business processes that were outsourced to

India mainly between 1996 -2005. Shashi Tharoor, India’s minister of state for human resources

said sometime back, “If we get it right, India becomes the workhorse of the world”.

With the kind of emphasis India is putting on skill development and higher education, over the

next few decades, India could become to service sector, what china is for manufacturing. What

started essentially as a cost effective software outsourcing industry has today transformed into a

full time back office function for a large number of western businesses. Many of these businesses

are continuously working on training their local staff and have made long term investment

plans in the country which is a very positive sign for the future prospects of Indian economy.

It is expected that by the year 2025, up to 70% of Indian population will be moderately skilled

and will of working age. Given the differential in wage differential, the country will keep

attracting more service oriented work.

For businesses which are looking at an inbound investment into India, a ‘young’ economy with

growing disposable incomes and greater exposure to western lifestyles is a fascinating prospect.

More jobs in future will result in higher wages which will further boost the domestic

consumption in the country. As more and more people in India climb the social ladder, their

demands and aspirations for better facilities will boost spending in most sectors like housing,

automobiles, consumer goods, electronics etc.

By many measures, the domestic story in India is fast replacing the initial boom that was created

by the influx of foreign capital. In fact, it was due to the higher dependence on internal

consumption that India was less impacted by the global financial crisis of 2008 -09(70% of GDP

is contributed by personal + Government consumption).

As an investor, if you are positive on the future prospects of Indian economy, then

consumption oriented sectors like FMCG, pharmaceutical, consumer durables etc., will still

prove to be one of the best place to invest your money for the long term, despite their current

high valuation.

Page | 4

CURRENT PROSPECTS OF CHINESE ECONOMY

In the 35 years since China’s transition to a market economy began, the country has grown at an

average rate of 9.8 percent per year—an explosive and unprecedented rise. While it is unlikely to

experience that level of growth going forward, taking steps to ensure that China meets its full

potential presents an enormous opportunity.

China’s economic growth has been slowing over the past five years. In the third quarter of 2014,

it was just 7.3 percent, and the country is likely to continue to face stiff headwinds, at least when

compared with previous decades. As policy makers in 2015 draw up the country’s 13th Five-

Year Plan (2016–20), they will grapple with two fundamental questions: how fast can China

expect to grow, and what should they do to support that growth?

As Adam Smith discussed in An Inquiry into the Nature and Causes of the Wealth of Nations,

economic growth depends on improvements in labor productivity, which today result from either

technological innovation or industrial upgrading. Here, China should be able to benefit from the

“latecomer advantage.” Unlike developed countries that are already fully exploiting advanced

technology, China can achieve technological advances through imitation, importation,

integration, and licensing—a lower-cost and lower-risk avenue to productivity improvement.

That helps to explain how developing countries have sometimes been able to sustain annual

growth rates of 7 percent or higher for periods of 20 years or longer. The trajectories of such

countries as Japan, South Korea, and Singapore would suggest a potential growth rate for China

of roughly 8 percent for at least the next decade. Weak conditions elsewhere in the world,

however, are likely to diminish exports and thus lower that rate to between 7 to 7.5 percent.

But potential growth is just one part of the story. Actually achieving it depends on domestic

conditions and the international environment. To exploit the latecomer advantage, China must

deepen its reforms and eliminate its economy’s residual distortions—for instance, liberalizing the

financial market; removing the Hukou (household registration) system, which restricts labor

mobility; and enhancing the social safety net, to name just a few things. Meanwhile, the

government should play a proactive role in overcoming the market failures, such as externalities,

that are certain to accompany technological innovation and industrial upgrading.

Page | 5

China has a second advantage. It has the potential to fuel robust growth with domestic demand—

and not only household consumption. The country suffers no lack of investment opportunities,

with significant scope for industrial upgrading and plenty of potential for improvement in urban

infrastructure, public housing, and environmental management. Moreover, with low government

debt and private savings that amount to 50 percent of GDP as well as $4 trillion of foreign

reserves, it has the resources to fund those investments. Even under comparatively unfavorable

external conditions, China can rely on investment to create jobs in the short term; and as the

number of jobs grows, so will consumption.

As policy makers plan for the next five years, they should set China’s growth targets at 7 to 7.5

percent, adjusting them within that range as changes in the international climate dictate. Such a

growth target can help to stabilize employment, lower financial risks, and achieve the country’s

goal of doubling incomes by 2020.

China will become the world's safest and largest investment economy in times to come given the

following factors: huge market potential, rich labour resources, comparative advantage in labour

cost, sound corporate governance and stable government and society. All these factors will

further attract the inflow of foreign capital into China. In short, China's economy will grow even

faster in the future.

In the next ten years, China's economy will still increase at a rate 7% - 8%. In 2020 years, should

price index remains the same as today, GDP will amount to 38 trillion, per capita GDP will reach

26,000 yuan.

However, the level of per capita GDP is still very low in China at the moment, GDP per capita’s

growth is still at a slow rate. GDP per capita will have to be further increased in order to raise

China’s standard of living so as to bridge the present income gap between the rich and poor.

Satisfaction of consumers’ needs can be the main driver in raising China’s living standards.

Domestic demand will increase as the economy grows. Therefore, extensive production of goods

and services can further push and sustain the economy’s growth.

Moreover, there are abundant human resources in China, and labour cost in China is much lower

than the other industrialized countries. China's education system is also being fast developed;

thus more people will achieve higher level of education than in the past. With comparative

Page | 6

advantage in cheap labour cost and increase of human capital brought about by education, future

for China's economy can be only even brighter.

China’s labour force will get even bigger as the China is urbanizing at a fast pace, changing from

a rural and agricultural society to an urban and industrialized society. Through this transition,

more manpower can be utilized. Urban infrastructure will be further enhanced and an increase in

urban population will bring about higher consumption level, thus driving the economy further.

The presence of such a big market, coupled by the increase in consumption power of the

population brought about by urbanization, will create greater prospects for almost every industry.

Market will become more efficient and industries will grow even faster than before. Domestic

demand for goods and services will grow, creating better opportunities for production and

investment.

Page | 7

CURRENT PROSPECTS OF INDIAN ECONOMY

Prospects for the Indian economy look 'very bright' with the remarkable turnaround witnessed in

recent months on the back of lower current account deficit and the slew of reforms unleashed by

the new government. In July last year India was on the verge of macro- economic crisis.

However, 16 months on, the picture is very different. There has been a remarkable turnaround in

the economy since the last few months.

India's economic prospects have dimmed since April due to the government's inability to pass

much-needed reforms, a Reuters poll found, but the central bank will probably hold rates steady

this year as inflation nudges up gradually.

The Reserve Bank of India has already cut benchmark interest rates three times this year to 7.25

percent and eased credit conditions to boost loan growth and the broader economy, with limited

success so far.

The economy is expected to expand 7.6 percent this fiscal year ending in April 2016, only

slightly faster than 7.3 percent last year, according to the median forecast of 31 economists

polled by Reuters. Growth is seen picking up to 8.2 percent next fiscal year.

Growth forecasts were nudged down from April owing to concerns the government still faces

substantial challenges in kick-starting a reform-driven growth cycle, stifling optimism

engendered by Prime Minister Narendra Modi's election win over a year ago.

"Restarting of stalled projects were expected to jump-start the investment cycle, alongside

stabilisation in consumption and higher public sector spending to boost overall growth," said

Radhika Rao, economist at DBS in Singapore.

"However, a delay in the passage of crucial reforms, high financing costs and a stressed banking

sector have hurt the government's plans."

India's parliament has just begun a session in which Modi is seeking to pass major legislation

that would unite the whole country into one tax zone and make it easier for businesses to procure

land.

Page | 8

Strong opposition from rival parties coupled with the ruling coalition's minority in the upper

house, however, means it could prove difficult for any consensus to be reached.

Slowing growth expectations may warrant calls for the RBI to ease policy again. But with its

mandate to keep inflation below 6 percent over the medium-term, and consumer prices expected

to rise 5.3 percent this year and 5.5 percent next, that is easier said than done.

While a slight majority predict there will be no further easing by the RBI, as risks to inflation

from poor monsoon rains of the last few weeks remain high, 14 of 31 analysts polled this week

called for one more cut in the final months of 2015.

In a survey last month, when an initial spell of good rains prompted positive sentiment amongst

analysts, a large majority expected another cut this year.

But the latest consensus trimmed 25 basis points off the repo rate to 7.0 percent only in early

2016 and another just before moving into 2017.

Monetary policy easing in India puts it out of step with the United States, the world's largest

economy, where interest rates are expected to rise later this year, perhaps as early as September.

India's situation, however, is much better than emerging market peer Brazil, where the central

bank has been jacking up interest rates to fight off high inflation even as the economy slips into a

deepening recession. Cash balances of state-owned enterprises look "exciting", that

the PSUs could make a "real contribution to kick start the economic growth".

The biggest change is the new government in power that has unleashed a slew of reforms.

Prospects for the Indian economy should be very bright going forward. Stating the current account

deficit ( CAD) is now within "manageable territory. India has benefitted a lot from the falling commodity

prices which have helped bring down the current account deficit.

In the global context India is looking "very special", he noted, adding that World Bank yesterday

revised downwards the growth for "every major country except India. The Boards of CPSEs

have been provided with a large measure of flexibility and autonomy to deal with day to day

management issues. We will give more autonomy, if needed, to the public sector enterprises, the

Minister said at the international workshop on 'Performance Evaluation and Management of

State Owned Enterprises.

Page | 9

The World Bank yesterday said that India would catch up with China's economic growth in the

year 2016-17. In its report, the multilateral lender also forecast a growth rate of 7 per cent each in

the fiscal year 2016 and 2017 as against China's 7 per cent and 6.9 per cent respectively.

INDIA VS CHINA: INVESTMENT ATTRACTIVENESS

China investment attractiveness Factors: China ranks as the number 1 attractive destination in

the world for foreign direct investment (FDI) in AT Kearney's 2007 FDI Confidence Index

survey: a survey of global executives conducted regularly by the management consulting firm

AT Kearney. China leads Index rankings for the fifth consecutive year and ranks first among

Asian investors - 34 percent of whom plan to invest here in the next three years. 

China's rising domestic market has great growth potential and will provide global opportunities,

according to Yu Guangzhou, China's vice-minister of commerce.

"The nation's consumer market not only drives its own growth but also propels the global

economy," Yu said at the three-day China Development Forum that concluded on March 24 in

Beijing.

The Kearney survey report points out that investors from both developed and developing country

will continue to cite China as their most preferred destination for initial investment. As an

emerging market, China is universally appealing to foreign capital; and will continue to attract

investors in high value-added services industries – particularly financial and non-financial

services. Additionally, the investment will also pour into the country's booming heavy and light

manufacturing industries; and is strongly echoed by respondents from outside Asia who are

"highly likely" to invest in China over the next few years. 

China has registered the strongest investor optimism for five years in a row. There were more

than 280,000 foreign capital enterprises in China by the end of 2007, up 4.14 percent over last

Page | 10

year; and the total investment volume amounted to $2.11 trillion, 23.5 percent higher. The first

two months of 2008 saw as much as $18.13 billion of actual foreign capital use, an increase of

75.19 percent.

Meanwhile, China is absorbing and using foreign investment based on quality rather than

quantity. As a result, "going global, and attracting foreign capital" will better suit sustainable

development. Accordingly, the threshold for foreign businesses to enter China's market has been

raised to involve more factors, particularly environment-related factors, which are crucial to

China's sustainable economic development.

China's GDP expanded 11.4 percent in 2007, making it the world's fourth largest economy. At

the same time, the nation's role in the global economy has consistently increased over the years.

An earlier forecast made by International Monetary Fund (IMF) said last year, that China was

expected to overtake the US as the largest contributor to global economic expansion. China's

contribution to global economic growth averaged 13 percent over the past five years.

"With domestic consumption on the rise, the nation's demand for imported products will also

increase," said Yu. China's imports have grown at an average of 26 percent annually since its

entry into the WTO. The country's total imports ballooned by 3 billion yuan ($425.38 million ) in

the first two months of 2008.

China's economy is now shifting to one driven by consumption. In the meantime, the rising

purchasing power among Chinese people means a greater demand for high-end products. The

flourishing market will translate into even bigger opportunities for overseas enterprises; and

breed more mature conditions for foreign investment, Yu observed. 

According to the survey report, Choosing China: Improving the investment environment for

multinationals, which is launched today at the China Development Forum in Beijing, more than

half (56%) of CEOs surveyed chose China above other major and emerging economies including

Brazil, Russia, India and the US. 

Page | 11

CEOs say they were attracted to China's expanding consumer markets, skilled talent pool and

government incentives. 

"A major factor in China's economic success has been its ability to attract foreign investment,"

says Dennis Nally, Chairman, PricewaterhouseCoopers International Ltd. 

"In 2012, China attracted US$111.7 billion of global FDI. And we predict that China will

overtake the US as the world's largest economy in purchasing parity terms in four years’ time." 

"But China will face new challenges, as emerging markets become more competitive in

attracting foreign investment, widening the breadth of choice for enterprises globally," he says. 

According to the survey, China offers the best prospects for investment among CEOs of

consumer, industrial product and service companies (58%). But Brazil is favoured over China by

technology businesses (80% and 64% respectively) and the financial services sector (55% and

48% respectively). 

b>Policy paying dividends on foreign investment 

Mr Nally says, "China is facing intense competition in some industries it is targeting. But the

government is investing in measures to increase China's long-term attractiveness as an

investment destination." 

CEOs highlighted a drive to increase domestic consumption (48%), deepen financial reforms on

foreign exchange and interest rates (43%), and doubling per capita incomes by 2020 (41%) as the

top three policy commitments that would have the greatest impact on their businesses. 

"These measures are paying dividends, with 70% of CEOs that have operations in China

planning to increase their investments here over the coming five years," Mr Nally says. 

When asked about further measures to improve China's competitiveness, CEOs highlighted

Page | 12

improving government transparency and anti-corruption (73%), reducing economic intervention

(53%), and speeding capital market reforms (30%) as areas for further improvement. 

Mr Nally adds, "Greater transparency and enhanced accountability would strengthen China's

attractiveness and make it easier for foreign enterprises to plan ahead. They would also be a

helpful step towards providing investors with greater certainty and a more level playing field to

do business." 

"By relaxing some restrictions on foreign investors, China could ensure a reciprocal opening-up

of markets, creating a win-win scenario for both Chinese outbound and multinational inbound

investors." 

Strategies for growth 

M&A (43%) and greenfield (44%) investments were the strategies most favoured by CEOs for

growing their businesses in China over the next five years. 

"While transactions and organic growth are the preferred modes of expansion, more

collaborative approaches such as alliances, joint ventures and licensed production will become

increasingly important to succeeding in the China market," says Mr Nally. 

Smaller presence, big opportunities 

Companies with a limited global footprint (with operations in fewer than five countries) could

offer a major opportunity to China in terms of attracting innovation as well as financial capital. 

"As China shifts to become a more knowledge-oriented economy, it could win new investment

from smaller and specialist foreign companies. Firms such as specialist technology and media

enterprises are currently underrepresented," he says. 

Page | 13

Talent perennial challenge 

Talent remains a key area of concern, with only one in four CEOs (27%) indicating the

availability of skilled talent having influenced their decision to invest in China. 

"The war for talent has been well discussed and documented. However, as some CEOs in our

survey have highlighted, China's challenge is about capacity, not capability. Many foreign

companies have already established alliances with local universities and institutions to help

develop a ready pool of talent," Mr Nally says. 

"As local Chinese companies mature and expand – often into other markets – inbound investors

are facing growing competition for the best Chinese candidates, reflected by high staff turnover

rates," says Mr. Nally

Foreign direct investment (FDI) represents capital invested in a country that provides

manufacturing and service capabilities for both native consumers and world markets. FDI is

instrumental in bringing goods and services to the global marketplace, and the influx of foreign

investment not only displays investor confidence in the business and the geopolitical climate of

the host country, such capital also links national economies.

The benefits of FDI flow to both the supplier of capital as well as to the host region. China is one

country that has stepped up to capitalize on these benefits. According to China's commerce

ministry, FDI in 2010 surpassed $100 billion for the first time. Over the entire year ending

December 2010 inbound FDI increasded 17.4% to $105.74 billion. Let's take a look at the factors

that drive foreign investment in China, and examine what this means for investors - and the

Chinese economy. (International investors need to be aware of the staggering correlation

between tax rates and economic performance.

Page | 14

Several factors affect the amount of FDI that pours into China:

1. Capital Availability

In the early 2000s, China overtook the United States as the world's largest recipient of foreign

capital. FDI is comprised of capital that an outside investor is willing to place (and risk) within a

local region. Conditions in the global capital markets and general economic environment play a

role in determining the flow of FDI into China. A thriving global economy, capital markets and

business environment create large swaths of investable capital, a portion of which is converted to

FDI. Large amounts of investable capital that proportionately overwhelm the number of sound

local investment ideas can cause institutional, company and individual investors to invest their

wealth in emerging and developing markets. (Learn more in Understanding Capital And

Financial Accounts In The Balance Of Payments.

2. Competitiveness

China's attractiveness as a destination for investment capital rests on its development

of infrastructure, resource availability (physical and labor), productivity and workforce skills,

and the development of the business value chain. The level of maturation of these elements can

make China more attractive for FDI relative to other nations, such as India, that compete and vie

for the same investment capital. A growing and developing economy requires infrastructure and

resources in order to facilitate the sale of goods and services. Lower transaction costs, due to the

maturation of these elements, enables investors to earn returns on their investments as their

enterprises are able to generate profits. Roads, highways, bridges and other forms of physical

infrastructure should be present, maintained and provide sufficient safety for the transportation

of goods as well as for the commute of employees. (For more on the importance of

infrastructure, see Build Your Portfolio With Infrastructure Investments.)

Another component for attracting FDI involves the availability of low-cost, skilled employees

who possess the necessary aptitudes, experience and proficiencies to create, manufacture, and

provide goods and services that can compete in global markets. (Learn how the Bretton Woods

system got the ball rolling for world trade, read Global Trade And The Currency Market.

Page | 15

3. Regulatory Environment

When a national government enacts and enforces rules and policies aimed at favoring state

entities at the expense of privately held firms, such an environment can be detrimental to

initiatives that aim to attract FDI. As such, the regulatory environment can either encourage or

impede foreign direct investment in China. Excessive regulations tend to hinder entrepreneurial

and commercial activities, as managers and employees must spend more time and money to

comply with rules and regulations. If an investor wants to set up a manufacturing facility in

China, high start-up costs, legal exposure and other cumbersome compliance items may

encourage that investor to set up the facility elsewhere, where the business climate is more

conducive to industry. (For a counterpoint to this articles, see Free Markets: What's The Cost?)

Other types of regulations include mandatory joint venture partnerships in which, together with

the foreign investor, the business is required to have a Chinese government agency or local

company as a partner. A judicial system that is biased toward protecting Chinese locals - who

conduct what are sometimes perceived as unfair, illegal, or unethical business practices - can also

contribute to making China a less favorable investment destination. (Investing overseas begins

with a determination of the risk of the country's investment climate, read Evaluating Country

Risk For International Investing.)

Another regulatory determinant involves the government's promotion of investment activities by

providing attractive financial incentives in the form of tax breaks, grants, low-cost government

loans and subsidies. Government-sponsored financial inducements provide the possibility of

making a business more profitable and in a shorter amount of time.

4. Stability

Political and economic stability can facilitate an influx of FDI. Stability represents predictability

and the opportunity for enterprises to gain better foresight into the future. Alternatively, constant

social unrest, rioting, rebellions and social turmoil are settings not conducive to business.

Economic instability can also contribute to hyperinflation, which can render the currency

virtually obsolete. To encourage FDI, citizens/workers as well as businesses should have a

reasonable basis for respecting Chinese law and order. Violence, criminal activity, blackmail,

Page | 16

kidnappings, and counterfeit currency and products have all been problems in China that serve to

undermine the efficacy of conducting trade activities. The justice system should also have

effective mechanisms for reducing, or altogether eliminating, rogue and corrupt elements of law

enforcement agencies. (Hedging against currency risk can add a level of safety to your offshore

investments. Check out Protect Your Foreign Investments From Currency Risk.)

5. Local Chinese Market and Business Climate

The most glaring aspect of China is the sheer size of its population and market, and the prospects

for growth that result from this size. The ability of enterprises - backed by foreign capital - to sell

to a sizeable local market makes China an attractive destination for FDI. As the Chinese

economy continues to prosper, evolve and mature, higher-end industries such as healthcare,

information technology, engineering, robotics and luxury goods, among others, can gain a bigger

footprint in China as its local conditions, resources and other FDI determinants are enhanced.

Additionally, economic growth and FDI can start a "success domino effect." The more the region

attracts FDI, the more it grows. The more it grows and matures, the more investors are willing to

provide FDI. This point underscores the advantage of China's sizeable market, which presents

growth opportunities in current and prospective commercial activity. The more FDI flows into

the country, the greater the economic chain reaction, providing a positive effect to sustain such

growth. (Find out how these worldly offerings can spice up your portfolio, see Go International

With Foreign Index Funds.)

6. Openness to Regional and International Trade

Market openness serves several important roles in attracting FDI. Of critical importance is a

business' ability to sell its products and services to both local and foreign markets. If Chinese-

based enterprises have limited or no access to foreign customers - particularly the United States,

Western Europe, Japan and others - then the local market may not be enough to warrant a

significant investment in money and energy. Trade barriers such as tariffs are typically viewed as

disincentives by other nations. An American product that is subject to high tariffs in China will

be less in demand in the Chinese market due to the artificially inflated price. Such actions

typically prompt retaliatory tariffs from the U.S. on Chinese products, or in certain extreme

Page | 17

cases, an outright ban on certain goods and services. (For more insight, read The Basics Of

Tariffs And Trade Barriers.)

Export-friendly policies, then, can play a major role in deciding whether to invest in China,

especially for enterprises that have a large portion of their anticipated market shares located

outside of the local market. In efforts to create a more business-friendly environment, regional

and international free trade agreements are typically initiated by market-progressive governments

as reasonable mechanisms for inducing economic activity and growth.

The Bottom Line

For a developing economy like China's, foreign investment is a key way to spur development

and pull the country's economy toward a competitive spot in the global marketplace. However, in

order for FDI to occur, certain conditions must be in place.

India investment attractiveness Factors: In big endorsement of India's fundamentals and

attractiveness, 32% respondents in EY's annual 'Attractiveness Survey - India 2015' have ranked

the country as the most attractive market this year. A majority 60% have place the country

among top three attractive destinations. The survey is based on response of 505 global CEOs.

"Business leaders find India's macroeconomic and political stability, FDI policy and ease of

doing business more attractive in 2015, compared with.  In an endorsement of India's

fundamentals, almost one-third of the respondents in a survey by EY ranked the country as the

most attractive market this year, while 60% placed it among the top three investment

destinations. China was considered India's main competitor. 

The 'Ready, Set, Grow: EY's 2015 India Attractiveness Survey' is based on the responses of 505

global decision makers collected during March and April. Business leaders said they found

India's macroeconomic and political.

Page | 18

"Our first priority is to do away with the many procedures and rules, followed by bringing in

consistency and clarity in all our policies and tax regime and developing a world-class

infrastructure," Amitabh Kant, secretary in the Department of Industrial Policy and Promotion,

said at the launch of the report. 

Established investors are more confident about India's attractiveness parameters than those who

are still exploring the country for opportunities. 

"Manufacturing has regained its share in FDI capital flows in 2014, amounting to approximately

46%," the survey said, suggesting that the high pitch 'Make in India' initiative seemed to have

had some impact. "Investors are most optimistic about the sector, with 62% of those interested to

expand or enter India over the next year saying that they plan manufacturing activities." 

Among the respondents, 55% were aware of the Make in India programme and 69% of them said

they were likely to in .

India features prominently in many of our respondents’ plans for the future. More than half of

international business leaders surveyed plan to enter or expand their existing operations in the

country over the next year. Nearly a fifth of respondents with an emerging market strategy said

that India accounts for more than 20% of total capital allocated for the developing world. The

infrastructure, consumer products, industrials, technology, media and telecom (TMT), and life-

sciences sectors are set to drive India’s growth over the next two years.

Investors are considering India for both their services and manufacturing supply chain. With the

services sector forming the backbone of India’s economy, the Indian Government is placing

more weight on strengthening the country’s manufacturing ecosystem. Our research shows that

global investors are starting to recognize relevant efforts, with the vast majority expecting India

to be a leading manufacturing hub by 2020. But for that to happen, the environment must be

more enabling and measures on other competitive issues, including currency stability and ease of

doing business, must be implemented.

Page | 19

KEY FEATURES OF INDIA’S ATTRACTIVENESS

1. In the top Five

India was the fourth-largest recipient of FDI in terms of projects started in 2012, and in

terms of value, it accounted for 5.5% of global FDI. Although the number of jobs declined

slightly in 2012 (due to a drop in industrial projects) India still accounts for 9.4% of jobs

created by FDI around the world.

2. Increased interest rates from the Middle East and Southeast Asia:

Investors across the world recognize India’s FDI potential. Between 2007 and 2012, the US

invested the most in India, with 30.2% of projects, followed by Japan with 10.4%. Seven of

the top 10 investors in India during 2007-12 were from Western Europe, led by the UK and

followed by Germany and France. India's pool of business partners is growing, with a

striking 123.3% rise in the number of projects from the Middle East in 2012, mostly in

financial services. Southeast Asian countries are also expanding their investment in the

country, with projects mainly originating from Singapore, Malaysia and Thailand.

3. Top FDI Destination:

Actual FDI performance and our survey results both show that metropolitan cities, such as

Mumbai, Bengaluru, the National Capital Region (NCR), Chennai and Pune, remain key

attractions. On the other hand, there is a significant awareness gap about tier-II and tier-III

Indian cities, which also offer opportunities for investment. Forty-three percent of

respondents could not think of any city other than the main metropolitan areas. Among those

who responded, Ahmedabad was the preferred choice in emerging cities, followed by Jaipur,

Chandigarh, Coimbatore and Surat.

4. Opportunities rising in Infrastructure:

TMT is the most attractive sector to investors, followed by industrial and business services.

While TMT will remain the leading sector, investors expect the infrastructure and industrial

sectors to become more attractive in the next two years.

Page | 20

5. New wave of competition:

China remains India’s main competitor for FDI as both economies are strongly competing to

obtain a greater share of world trade and investment. Alongside, new destinations such as

Indonesia, the Philippines and Vietnam, are also emerging as competitors. The Philippines is

competing with India in the outsourcing industry, whereas Indonesia and Vietnam are also

gaining significance due to their huge domestic market.

6. An attractive market with a challenging business environment:

India’s appeal lies in its competitive labor costs, lucrative domestic market, and its skilled

workforce. Foreign investors also applaud its strong management and business education

system, as well as its improving telecommunications infrastructure. However, the country’s

weaknesses are its under-developed infrastructure and a restrictive operative environment.

7. High expectations for 2020:

Respondents to our 2014 survey expect India to be among the top three economies of the

world in 2020, particularly for economic growth and manufacturing. This is consistent with

our 2012 results. Also, this year only 5.2% of respondents expect India to be surpassed by

competition from more dynamic countries, compared with 11% last year. Strengths such as a

burgeoning middle class, growing domestic consumption levels and a skilled workforce are

helping India to strengthen its position in the global marketplace.

8. Sic steps for improvement:

In order to realize its FDI potential, India needs to improve its operating environment and

develop infrastructure. Other priorities should include boosting production, improving the

taxation system, easing FDI regulations and increasing awareness about emerging cities.

Page | 21

DEVALUATION OF YUAN AND EFFECT ON INDIA AND CHINESE ECONOMY

China tightly controls the value of its currency by setting a daily rate for the yuan versus the

dollar. In China’s domestic market, traders are allowed to push the yuan 2% stronger or

weaker for the day. But the People’s Bank of China often ignores those market signals when

it sets the next day’s rate, sometimes setting the yuan stronger versus the dollar when the

market is signaling it sees the yuan as weaker. The central bank said it will now take the

previous day’s trading into account. China’s important export sector has weakened – and

overall economic growth looks sluggish. Over the weekend, Chinese customs officials

said July exports fell 8.3% compared with a year ago. A weaker currency helps China’s

exporters sell their goods abroad.

India and China officially resumed trade in 1978. In 1984, the two sides signed the Most

Favoured Nation Agreement. India-China bilateral trade, which was as low as $2.9 billion in

2000-01, reached $72.3 billion in 2014-15 (exports: $11.9 billion and imports: $60.4 billion),

making China India’s largest goods trading partner. India has a whopping trade deficit with

China close to $50bn in 2014-15 on account of rising imports coupled with weak export

dynamics.  

The devaluation of the yuan will not have a significant impact on Chinese exports, as the

currency is still highly overvalued. In addition, the Indian rupee also lost some value against

the US dollar following the decline in yuan, thereby supporting a modest short-term impact

on India.

However, if this adjustment of the currency continues then as per the J-curve effect, Chinese

exports will only increase as they become more competitive. This, in turn, will have a

negative impact on Indian exports. Further, there will be an influx of Chinese goods into

India, which will result in widening the already rising trade deficit with China.

India’s major export items to China consist of primary commodities with cotton, copper and

mineral fuels alone constituting more than 45 per cent of the total exports. Meanwhile,

India’s major imports from China are electrical machinery and nuclear appliances (45 per

cent of total imports).  

Page | 22

A reduction in the cost of Chinese goods can also exacerbate the problem of dumping into

India from China. Tyre makers, steel industry and organic chemicals, petrochemicals

industry are already reeling under the increasing dumping cases from China as lower

currency incentivizes the country’s exports.

In the joint statement between India and China during Prime Minister Narendra Modi’s visit

to China in May 2015, it was agreed that both sides will take necessary measures to remove

impediments to bilateral trade and optimally exploit the present and potential

complementarities in identified sectors, including Indian pharmaceuticals, Indian IT

services, tourism, textiles and agro-products. The two sides resolved to take joint measures

to alleviate the skewed bilateral trade so as to realize its sustainability.

The impact of this devaluation will depend on the horizon one takes. The short term impact

can be negative in some sectors like tyres, pharmaceuticals, textile and capital goods due to a

sudden change in terms of trade and fear of dumping. However, in the long run there will not

be material impact particularly in services till such time China dismantles the state monopoly

over services. However, India has all options at its disposal under the WTO frame-work to

tide over the short run impact.

If the yuan continues to lose value, then it might create pressure for the Reserve Bank of

India governor to intervene to provide relief for the exporters and cut the key interest rate

else the Indian goods would become less competitive.  

The fall in Rupee will trigger some foreign investors to pull money out of the Indian stock

market (probably they've already done by now), this should cause a fall in the Indian stock

market. They would then like to convert their money back to Dollar which will again cause

the Rupee to fall.

India imports more than it exports. So if all other things remain equal then you can expect

the current account deficit to increase. This deficit - especially in case of emerging market

currencies worry foreign investors and they would sell the Rupee. 

This fall in Rupee, should (in theory) make Indian exports competitive - just like the Chinese

devaluation made China's export competitive. But whether this happens, how long that takes,

Page | 23

whether we go back to the old state are really impossible to predict with any degree of

accuracy.

Bear in mind also that, just like the Chinese central bank there are other actors in the market

like Reserve Bank of India and other central banks who will have their own policy aims to

pursue. So, they too will react to contain the impact of Chinese devaluation. There's fear that

the sharp devaluation in yuan will help China dump goods into the Indian market, which will

impact domestic manufacturers. The fear is already playing out on the Dalal Street with tyre

stocks and steel makers falling sharply over the last two days.

Page | 24

FALLING OIL PRICES IMPACT INDIA'S ECONOMY

Crude oil prices are now nearly at a 6-year low in the international market. While the global

benchmark Brent crude has hit a low of USD 47.22 per barrel, US WTI crude is trading at

around USD 45 per barrel.

 

Oil prices have already plummeted 60 percent from their 2014 peak. Back in June 2014, the

price of Brent crude was at USD 115 per barrel (June 23, 2014). In the last one year, Brent

has weakened by nearly 54.04 percent.

 

The fall in prices is largely due to an over-supply situation, triggered by rising US shale oil

exploration. Currently, US oil output levels are at their highest in almost 30 years. The oil-

drilling boom in the United States has increased crude production by over 70 percent since

2008.

 

Further lower demand from the European countries and China, due to insipid economic

growth coupled with a stronger US dollar, have also added to oil woes.

 

The US dollar index, which measures the greenback against a basket of six major currencies,

has gained steadily for months and was last quoted at 92.52, the highest level in 12 years. A

stronger US dollar typically dents oil prices as investors who buy crude and other

commodities as hedges against inflation start dumping their positions to cut their losses. A

rising greenback also makes dollar-denominated commodities more expensive for holders of

other currencies, further tempering demand.

 

OPEC states, the world's largest oil cartel, could support global crude oil prices by cutting

back their own production, but there is little sign they want to do this.

 

World's second-largest crude producer, Saudi Arabia is loudly backing the game of OPEC

by deliberately restraining itself from supply cut. The main purpose of this calculated step is

to make shale oil exploration uncompetitive in the United States.

Page | 25

 

For Saudi Arabia's economy, the current level might not be disastrous in the short- term due

to its large reserve fund of around USD 750 billion which it will use to finance its deficits.

However in the long-term, the country needs oil prices to be at around USD 80 per barrel.

 

If the prices sustain at their current levels or see more decline then it will be very difficult for

the US shale oil producers to continue their operations and Riyadh might hope to increase its

market share in the longer run by throttling the US oil boom.

 

As per experts, shale oil exploration is not competitive below the level of USD 60 per barrel.

 

As far as India is concerned, falling crude is certainly a blessing for the economy as it helps

macro-economic management (both budget and fiscal) by improving macro fundamentals

(inflation, fiscal deficit and current account deficit).

 

India imports more than two- thirds of its requirement, which constitutes around 30 percent

of total imports. A fall of one-dollar in the price of oil saves the country about Rs 40 billion.

Adding to that the fall in international oil prices will reduce subsidies that help sustain the

domestic prices of oil products (LPG, kerosene).

 

Moreover, lower crude price will surely facilitate room to the Reserve Bank of India in

adopting growth-centric approach while reviewing monetary policy. It is estimated that a fall

of USD 10 in crude could reduce the Current Account Deficit by roughly 0.5 percent of GDP

and the fiscal deficit by around 0.1 percent of GDP.

 

Investment bank Nomura estimates that the windfall up to a level of USD 40 can potentially

boost growth by up to 0.4 percent in the current financial year.

 

Page | 26

Also, a recent research report says that a 10 percent decline in oil prices could reduce retail

inflation (Consumer Price Index-based inflation) by around 0.2 percent and push up the

gross domestic product (GDP) growth by 0.3 percent.

 

But on the flip side, analysts are also highlighting the potential downside risks associated

with lower oil prices. It would be wrong to ignore implications of falling oil prices on

markets and the way businesses and companies operate.

Many oil projects will face shutdown if black gold retains current levels or slides further,

they opine.

 

Around USD 2 trillion is now involved in oil exploration business and the companies are

trying hard to shelve their production cost. It is going to be very tough for the companies to

continue production under these circumstances. There will be either production cuts or the

company might declare bankruptcy when production becomes unviable for a long period.

 

Besides oil companies, many countries like Russia and OPEC states, are also relying upon

high crude prices, and we should therefore expect to see a surge in economic meltdown,

bankruptcies and sovereign defaults.

 

Russia is one of the world's largest oil producers, and its dramatic interest rate hike to 17

percent in support of its troubled Ruble underscores how heavily its economy depends on

energy revenues, with oil and gas accounting for 70 percent of export incomes.

 

Russia incurs a loss of about USD 2 billion in revenues for every dollar fall in the oil price,

and the World Bank has warned that Russia's economy would shrink by at least 0.7 percent

in 2015 if oil prices stay low.

Page | 27

 

Here, it must be noted that India is heavily dependent upon foreign institutional investors

(FIIs) and foreign direct investment (FDI) inflows and when bank funding of such a high

magnitude and budgets of oil exploring companies go haywire, Indian markets would feel

the pinch.

 

Also, these bankruptcies and sovereign defaults will aggravate the economic slowdown at

the global level, which might impact India's exports. A whole range of other issues are also

linked with lower oil prices. Servicing of high foreign debt and cash flows of Indian

companies might also be a concern.

 

Page | 28

CONCLUSION

India and China are definitely facing tough times due to global slowdown and also due to falling

oil prices and exports. Due to falling exports and to kick start the economy china devalued its

Currency “YUAN”. Due to this there was a huge turmoil in world economy, also Asian markets

were hit due to this move.

Indian exports have signifanctly been affected by this, the CAD has increased and there has been

a huge sell in the stock markets. Indian currency has dropped to its lowest level of Rs. 68 per

dollar.

Even after all these factors affecting Indian economy, the country is expected to grow @ 7% -

7.5% in the near term. The rupee is one of the best performing currency in the world market and

probably one of the best in the world. IMF and World Bank has still estimated Indian’s GDP to

grow at 7%.

Chinese economy has been affected due to over utilization of industrial capacity and also

because of supply exceeding demand, which has resulted in drop in world commodity prices.

Also, fall in oil prices has majorly benefited India as import’s cost has gone down.

While income distribution and GDP growth indicators in India and China are neck and neck

most of the other numbers thrown up by the WEF survey suggest China is doing a much better

job of taking care of its population of more than one billion people. More of China’s populace is

getting educated, more Chinese citizens are covered by healthcare and that country has a much

larger middle class. Play with the interactive chart above to see how the two Asian heavyweights

performed on these and other indicators. Of course it makes sense that China would be delivering

better services to its people. Its economy is more than four times the size of India’s. By many

indicators India is still around 13 years behind China.

India is now clearly outperforming the other emerging nations, particularly China, a nation

hobbled by a command economy and one of the most corrupt political systems on the planet.

Page | 29

India, on the other hand, has not needed to stoke private demand because it already has a vibrant

private-sector economy, albeit one that still struggles with bureaucracy and official corruption on

a large scale. Yet even with all of India’s structural problems, the fact that its people are free to

compete economically and express themselves politically puts them light years ahead of their

counterparts in authoritarian China.

Instead of rebalancing its economy to greater consumer consumption, China seems instead to be

heading toward a “new normal” of slower growth. While China’s official statistics suggest that

the country met exactly the requisite target of 7.5 percent GDP, other indicators indicate that the

years of artificial growth predicated on massive government spending on infrastructure is coming

to an end. With economic statistics tightly controlled for political reasons, investors and other

foreign observers lack accurate insight into how China's economy will evolve as the panacea of

state “investment” allocations decline.

One of the key factors driving economic growth is population, a factor that is most visible in the

United States, which has seen population growth fall from 1.6 percent in the years following

WWII to just over 0.5 percent today. Many experts note that the big change in the future will be

the slow growth in population in many nations as fertility rates decline and the average age of the

populations in these nations rises. While the working-age population of China is set to peak in a

decade and then decline, India’s population is going to continue to expand.

China’s peak employment is expected to occur in 2024. The working age population in the G19

countries plus Nigeria is expected to decline from 68 percent to 61 percent over the next 50

years. By 2064 India’s employment could expand by 54 percent, while China’s could shrink by

20 percent. The number of employees in the United States is expected to continue to rise, but at a

slower rate than in the past. By employing more women and encouraging people to stay at their

jobs beyond age 64, the expected .3 percent rate of working population growth could double, but

that would still be well below the pace of the last 50 years.

When you combine the advantage of a dynamic free society with strong population growth, the

economic case for India becomes compelling. The World Bank estimates that India will grow at

7.5 percent in 2015 vs. estimates several points lower, and that growth is poised to accelerate, as

policy changes gather momentum to unlock needed infrastructure investments.

Page | 30

BIBLIOGRAPHY

1) http://philadelphia.cbslocal.com/2016/01/16/chinese-economy-low-oil-prices-fuel-stock-

market-sell-off/

2) http://pis.net.in/crude-price-and-its-impact-on-indian-economy/

3) http://nationalinterest.org/feature/china-the-real-reason-the-great-oil-price-crash-12002

4) http://in.reuters.com/article/economy-poll-india-rbi-rates-idINKCN0PX0OM20150723

5) http://www.google.co.in/url?

sa=t&rct=j&q=&esrc=s&source=web&cd=9&ved=0ahUKEwjpzcWF4r_KAhUPCY4KH

Rd7DE8QFghBMAg&url=http%3A%2F%2Fwww.cnbc.com

%2F2015%2F06%2F25%2Findia-vs-china-its-not-all-about-

growth.html&usg=AFQjCNGQcisW-ExqFyqMFowfF5-

r3rAGPw&sig2=GjTL9zMXX0eSY29ZTRya7g&bvm=bv.112454388,d.c2E

6) http://blogs.wsj.com/indiarealtime/2015/09/07/india-or-china-which-asian-giant-has-

more-inclusive-growth/

7) http://blogs.wsj.com/indiarealtime/2015/09/07/india-or-china-which-asian-giant-has-

more-inclusive-growth/

Page | 31