China Going Global and its implications for India

8/7/2019 China Going Global and its implications for India

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Term Paper On

China Going Global&

Its implications for India

Submitted by:

Group No. 9

PGDM Finance

Aashish SinghAdesh Dalal

Ravi KumarUmashankar VatsaUtkarsh MishraVikram Mayuri

ACKNOWLEDGEMENT


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We acknowledge with immense pleasure and our deep sense of gratitude and

indebtedness to Ms. Megha Chandiok, who acted as a guiding and

motivating spirit behind the successful completion of the Term Paper on

China Going Global-Implications for India.

Submitted by:

Group No. 9PGDM Finance

Aashish SinghAdesh DalalRavi KumarUmashankar VatsaUtkarsh Mishra

Vikram Mayuri


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Table of Contents

1) Introduction

2) History

3) Growth

Infrastructure Trucking & rail

Retailing


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Pharmaceuticals & Chemicals

Services

Manufacturing

4) Indian Economy

5) Chinas Economy

6) Comparison

7) Globalization of China

8) Implications for India

9) Future Prospects

10) Conclusion

China Going Global and its implications for India

INTRODUCTION

Chinas emergence as a global power has significant implications for India. Its massive

investment in manufacturing capacity has put downward pressure on global prices andmargins.Now, as India goes through a similar process characterized by historically highrates of growth and further integration into the global economy, it appears that the paththat China and India follow will influence the global economy and business environment.


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Yet China and India, despite their massive populations and growing importance, are quitedifferent. Their economic structures, sources of growth, areas of competitive advantage,and the impact they have will remain different in the coming years.

Today, many global business leaders believe that they must have a strategy for China and

India. For many, China is seen as the place to produce or procure goods while India is theplace to procure business and IT services. Yet in the future this discrete division of labormight not be so clear, or even relevant. Moreover, both countries are increasingly seen asburgeoning markets in their own right, although only China has attracted significantinvestment in this regard.

After a long chill, China and India are developing a significant economic relationshipwith one another. Trade and investment are booming, potentially creating competitivechallenges and opportunities for global companies based in developed countries.Moreover, this relationship will likely contribute to the rapid emergence of globalcompanies based in India and China.

The integration of more than one billion Chinese and Indian workers into the globaleconomy in the past quarter century was one of the most important economic events ever.Indeed it can be argued that their addition to the global economy was, in part, responsiblefor the spectacular rise in productivity growth in the West. And as incomes in China andIndia rise, the addition of more than two billion consumers to the global economy willcontribute to global growth as well.

HISTORY

For much of human history, what China and India had in common was the fact that theywere the richest nations on earth. Long before Europe emerged, China and India hadhigher standards of living and more numerous technical and scientific inventions. Yetstarting in the early nineteenth century this began to dramatically change with bothcountries experiencing a long relative decline, eclipsed ultimately by Europe and NorthAmerica. By mid twentieth century, both countries were relatively poor. The reversal ofChinas fortunes began in 1978 when Deng Xiao Ping came to power and institutedmarket oriented economic policies. Indias reversal began in the early 1990s when, inresponse to a financial crisis, the government reversed decades of socialistic policies andbegan a gradual path toward market orientation. Since those policy reversals, bothcountries have grown rapidly. For the first time since the early nineteenth century, they

have expanded their share of global GDP.

GROWTH

China and India together account for nearly 40% of the worlds population. Thecombined output of China and India accounts for almost 25% of global GDP whenmeasured appropriately. Specifically, when GDP is measured using PPP (purchasingpower parity) exchange rates which reflect the actual purchasing power of a countrys


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currency, China has the worlds second largest economy after the US. India is fourth afterthe US, China, and Japan. Moreover, China and India together accounted for roughly halfof global GDP growth in 2005. On a per capita basis, however, China must be considereda lower middle income country with a per capita GDP roughly one seventh that of theUS. Indias per capita GDP is a little more than half that of Chinas. In addition, Chinas

economy has grown faster than that of India throughout the period of economic revival.

Another factor that has enabled China to reach a higher stage of affluence than India isthe fact that more Chinese take part in the labor force especially Chinese women.Consider the fact that, in the period 1993-2001, 53% of adult Chinese worked while only37.7% of Indians worked. This was largely due to the lower female participation in India,itself the result of cultural factors. On the other hand, as India modernizes and morewomen enter the labor force, this could provide the basis for faster growth.

INFRASTRUCTURE

One argument often made is that Chinas growth prospects are boosted by its relativeabundance of infrastructure. Indeed China has greater modern infrastructure and spendsconsiderably more on developing that infrastructure. For example, in 2002 China spentUS$128 billion on power and transport infrastructure compared to US$18 billion forIndia. Chinas highway network amounts to 1.4 million kilometers compared to 200,000kilometers for India. Finally, due to insufficient port capacity, the lead time for Indianexports to the US is roughly three to four times greater than Chinese exports.Yet Chinasrapid growth in the 1980s took place before the massive investment in infrastructure. Thisoffers hope to India with its paucity of infrastructure. On the other hand, the Chinesetakeoff owed much to the proximity of facilities to modern Hong Kong. The city-state

acted as a distribution depot, a source of capital, and a source of modern management andproduction techniques. India lacks a similar physical resource although, like China, it cantap into a large skilled diaspora. Instead, India has benefited from the satellite revolutionwhich has enabled the easy export of digitized information rather than the more costlyexport of tangible products.

Trucking and rail

A very small share of Indias roads is composed of highways.Of 3.3 million kilometers ofroadway, only 195,000 kilometers are highways. China, on the other hand, has roughly1.4 million kilometers of highway. Recently, however, the Indian government committedto a $24 billion project to dramatically improve the countrys roads as part of a larger$150 billion program to substantially upgrade infrastructure. It is not clear where all thismoney will come from. After all, the governments budgetary plans call for spendingonly a small portion of this. Instead, some funding will have to come from the private


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sector. Also, the government will have to reduce subsidies in order to free funds forgovernment investment.

Retailing

Another important issue concerns the role of foreign investment in the retail sector. Chinahas recently ended most restrictions on retailing and is experiencing massive investmentin modernization of the retail sector. Not so India. There, foreign investment is mostlybanned and local retailers remain very small by global standards. The result is a highlyfragmented industry with inefficient distribution. The importance of this transcends theretail sector itself. Modernization of retailing in China has played a role in modernizingconsumer goods production and distribution thereby enabling lower costs. In India, retailliberalization would probably accelerate the process of modernization and consolidationin the manufacturing sector thereby enabling the development of world class processes.

Demographics

Chinas demographics are not dissimilar to those of the leading developed countries. Thebirth rate having fallen, and life expectancy continuing to rise, the outlook is for anabsolute decline in the number of children and young adults as well as a big increase inthe number of middle aged and elderly. The end result will be a much older population.Moreover, as the working age population shrinks as a share of the total, economic growthcould slow due to slow growth in the labor force barring an increase in productivitygrowth. On the other hand, further privatization could lead to more productiveinvestments and, hence, faster productivity growth. Also, an older population couldeventually lead to a lower personal savings rate.In India, on the other hand, the

population is much younger and continues to grow more rapidly. In the coming years, thenumber of young adults will continue to rise. Thus India may possess a window ofopportunity for a few decades during which its growth could accelerate due to acceleratedlabor force growth. This depends crucially, however, on having sufficient economicflexibility to allow for the creation of millions of new jobs. Regulatory obstacles to jobgrowth, combined with inadequate saving, high government deficits, and poorinfrastructure could stymie the type of job creation India needs. Still, all other thingsbeing equal, demographics should work in Indias favor.

Pharmaceuticals and Chemicals

India emerged as a major producer of generics by the mid 1990s in large part because Indiaspatent laws of the period did not offer patents to producers but only to processes. As long asthe process used by the Indian generics producers differed from the process used by theproducers of the corresponding branded drug under patent protection elsewhere, they werefree to produce and market the generic product at home and also export it to those countrieswhere the branded drug was not under patent protection. Alas, this has changed with Indiassigning of on the Uruguay Round agreement of 1994, including Trade Related IntellectualProperty Rights (TRIPS). After the period of 10 years from 1995 allowed to bring its patent


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laws into conformity with TRIPS, India amended its law in 2005 and now has to offerproduct protections as well. It would take too much afar here to discuss the merits of TRIPSand its possible consequences for developing countries. It suffices to say that the recentclarification of the compulsory licensing (and public health) provision of TRIPS has openedthe door for Indias highly competitive generic producers of life saving drugs, includingretroviral for HIV/AIDS, to expand their markets abroad. More generally, with Indiaemerging as an inexpensive and attractive place for trials of new drugs, and also the risingconfidence of major Indian pharmaceutical companies in their ability to innovate andcompete in the post TRIPS era, India could emerge as a significant pharmaceutical hub. Thepotential growth of China and India as suppliers of industrial chemicals is also high, withboth having nearly doubled their share in global exports of chemicals.

Services

Can growth in services carry India, or must it become an industrial powerhouse in orderto achieve sustainable high growth? Will China become a services powerhouse incompetition with India? Before trying to answer these questions, some facts are in order.In 2003, Indias exports of commercial services other than travel, transportation, andfinance amounted to US$18.9 billion. The figure for China was US$20.6 billion. In otherwords, China may already be ahead of India in selling IT services to the world. Therelatively greater attention paid to India is due to rapid growth and strong investment byWestern companies. Also, services account for 51% of Indias GDP versus 32% of GDPfor China. The figure for India is relatively high for an emerging country.Indias vauntedinformation technology and IT services industries contributed to 4.1% of GDP in 2005according to NASSCOM. Yet due to the relatively high productivity of IT workers, this

industry employed roughly one quarter of one percent of Indian workers. Hence IT, whilehaving contributed significantly to Indias recent growth, has not come close to resolvingthe countrys employment problem. Moreover, while India produces some immenselytalented professionals, 75% of Indias children leave school before finishing 8th grade.Indeed it is expected that global firms hiring professionals in India will soon faceshortages of skilled workers. Consequently, it must be said that the world is hardly flatwhen it comes to skills and education.

China is actually quite well placed to succeed in services.Roughly 15% of Chinaspopulation aged 18 to 23 is enrolled in higher education compared to 7% in India. Inaddition,91% of Chinese adults are literate versus 61% in India.Among females, the

numbers are 87% and 45% respectively.In China, there are 18 pupils per teacher insecondary schools versus 34 in India. Clearly, China has an advantage when it comes toeducation. Yet that is not all. China spends more money on research and development,has greater ubiquity of computers and internet users, and publishes more articles inscientific and technical journals. On the other hand, India has one great advantage when itcomes to exporting services. That is the high number of fluent English speakers. YetChinas government has decreed that all students must study English after the age of five.This means that, within a generation, Indias advantage could be undone. Perhaps this


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leaves India with a brief window of opportunity to cement its strong position ininformation related industries. Despite Indias great success in exporting IT relatedservices, this industry remains a small part of Indias economy and growth. If India is tomaintain sustainable growth and shift millions of poor into the middle class, it is probablythe case that a larger manufacturing industry will be needed.

MANUFACTURING

Chinas success has been related to its vast increase in manufactured exports.Manufacturing accounts for 39% of Chinas output while in India the figure is 16%.Which is a better situation? While there is no simple answer to that question, it should benoted that the situations for both China and India are somewhat outside the bounds ofwhat is normal. China appears to be excessively dependent on manufacturing and has asomewhat underdeveloped service sector. In part this is a legacy of communism whichencouraged industrial output and failed to recognize the value of services. In part it is alsodue to the encouragement of large-scale investment by foreign manufacturing companies.

The result is an export-related manufacturing industry characterized by high productivity,high quality, and low costs.In India, on the other hand, goods production is relatively lowby global standards. This is, in part, due to the legacy of regulations that discouragedeconomies of scale in manufacturing. Most such rules have been rescinded in thepast 15 years. Still, the economic climate in India has been advantageous to small startups(such as service oriented companies) rather than large-scale manufacturers.

On the other hand, India has the benefit of very low labor costs in manufacturing. Forexample, in 2002 the typical monthly wage of a manufacturing worker in India wasUS$23.80 while in China the figure was US$110.80, according to the IMF. This bodeswell for further development of labor intensive manufacturing in India such as textiles

and apparel. Yet despite this fact, India has benefited far less than China from theliberalization of global trade in these products. In the first six months after trade quotaswere abolished at the end of 2004, Chinas exports of apparel and textile products to theUS rose 200% while those of India rose only 20%. In part this reflects massiveinvestment in Chinese capacity in anticipation of the end of quotas. Suchinvestment failed to take place in India for a number of reasons including poorinfrastructure, labor market regulations, and a history of restrictions on foreigninvestment.

Invest for the long-term

In terms of retailing, India is today where China was nearly two decades ago. That meansplenty of low-hanging fruit. Yet it also means plenty of time on the learning curve and aninadequately sized market for discretionary spending. Therefore, investment today will,in part, be geared toward getting a foot in the door in anticipation of a much biggermarket in the future.


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Indian Economy

The economy ofIndia, measured in USDexchange-rate terms, is the twelfth largest inthe world, with a GDP of around $1 trillion (2008). It recorded a GDP growth rate of

9.1% for the fiscal year 20072008 which makes it the second fastest big emergingeconomy, after China, in the world. At this rate of sustained growth many economistsforecast that India would, over the coming decades, have a more pronounced economiceffect on the world stage. Despite this phenomenal rate of growth, India's largepopulation has a per capita income of $2,659, measured by PPP, and $978, measured innominal terms (revised 2007 estimate). India's economy is diverse and consist of variousactivities including manufacturing, agriculture and services. Although most of the Indianworkforce still earns its livelihood directly or indirectly through agriculture andmanufacturing, high tech services are a growing sector and play an increasinglyimportant role in India's economy. The advent of the digital age, and the large number ofyoung and educated populace fluent in English, is gradually transforming India as an

important 'back office' destination for global outsourcing ofcustomer services andtechnical support. India is a major exporter of highly-skilled workers in software andfinancial services, and software engineering. Other sectors like manufacturing,pharmaceuticals, biotechnology, nanotechnology,telecommunication,shipbuilding,aviation , tourism and retailing are showing strong potentials with higher growth rates.

India followed a socialist-inspired approach for most of its independent history, withstrict government control overprivate sectorparticipation, foreign trade, and foreigndirect investment. However, since the early 1990s, India has gradually opened up itsmarkets through economic reforms by reducing government controls on foreign trade andinvestment. The privatisation of publicly owned industries and the opening up of certain

sectors to private and foreign interests has proceeded slowly amid political debate.

India faces a fast-growing population and the challenge of reducing economic and socialinequality. Poverty remains a serious problem, although it has declined significantly sinceindependence.

The government places new restrictions on foreign investment

Foreign direct investment in the retailing sector in India is strictly forbidden in mostcases. Yet that has not stopped large foreign retailers from entering the market throughthe back door. Wal-Mart, for example, will have a joint venture to operate the supplychain and will franchise its store operations to a local company. Others are likely tofollow suit. Yet Wal-Mart has yet to open a store and already there are politicians loudlycomplaining. The prospect of other global retailers entering India in the same manner hascaused alarm in some circles. Hence, the risk exists that, either formally or informally,new restrictions on foreign entrants could emerge. This would certainly suit the needs of
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Indias indigenous chains, eager to roll out modern stores without having to deal withforeign competition.

Chinas Economy

China has the 2nd-largest economy in the world with a GDP of over$6.9 trillion (2007)when measured on a purchasing power parity (PPP) basis. In November 2007, it becamethe third largest in the world after the US and Japan with a nominal GDP ofUS$3.42trillion (2007) when measured in exchange-rate terms. Since free market reforms in 1978China's GDP has grown an average 9.9 percent a year. China's per capita income hasgrown at an average annual rate of more than 8% over the last three decades, drasticallyreducing poverty, but this rapid growth has been accompanied by rising incomeinequalities. The country's per capita income is classified as low by world standards, atabout $2,000 (nominal, 107th of 179 countries/economies), and $7,800 (PPP, 82nd of179 countries/economies) in 2006, according to the International Monetary Fund.

Since the late 1970s and early 1980s, the economic reforms initially began with the shiftoffarming work to a system of household responsibility to start the phase out ofcollectivized agriculture, and later expanded to include the gradual liberalization in ofprices; fiscaldecentralization; increased autonomy for state enterprises that increased theauthority of local government officials and plant managers in industry thereby permittinga wide variety ofprivate enterprise in services and light manufacturing; the foundation ofa diversified banking system; the development ofstock markets; the rapid growth of thenon-state sector, and the opening of the economy to increased foreign trade and foreigninvestment. China has generally implemented reforms in a gradualist fashion, includingthe sale ofequity in China's largest state banks to foreign investors and refinements in

foreign exchange and bond markets in mid-2000s. As its role in world trade has steadilygrown, its importance to the international economy has also increased apace. China'sforeign trade has grown faster than its GDP for the past 25 years. As of 2007, most ofChina's growth came from the private sectorinstead of exports. Particularly the smallerpublic sector, which was dominated by about 200 large state enterprises concentratedmostly in utilities, heavy industries, and energy resources.

China has emphasized raising personal income and consumption and introducing newmanagement systems to help increase productivity. The government has also focused onforeign trade as a major vehicle foreconomic growth. China's GDP has increased tenfoldsince 1978, largely due to economic reforms including liberalization of their economy.

Some economists believe that Chinese economic growth has been in fact understatedduring much of the 1990s and early 2000s, failing to fully factor in the growth driven bythe private sector and that the extent at which China is dependent on exports isexaggerated. Nevertheless, key bottlenecks continue to constrain growth. Availableenergy is insufficient to run at fully-installed industrial capacity, the transport system isinadequate to move sufficient quantities of such critical items as coal, and thecommunications systemcannot yet fully meet the needs of an economy of China's sizeand complexity.
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The two most important sectors of the economy have traditionally been agriculture andindustry, which together employ more than 70 percent of the labor force and producemore than 60 percent of GDP. The two sectors have differed in many respects.Technology,labor productivity, and incomes have advanced much more rapidly inindustry than in agriculture. Agricultural output has been vulnerable to the effects of

weather, while industry has been more directly influenced by the government. Thedisparities between the two sectors have combined to form an economic-cultural-socialgap between the rural and urban areas, which is a major division in Chinese society.China is the world's largest producer ofrice and is among the principal sources ofwheat,corn (maize), tobacco,soybeans,peanuts (groundnuts), and cotton. The country is one ofthe world's largest producers of a number of industrial and mineral products, includingcotton cloth, tungsten, and antimony, and is an important producer ofcotton yarn, coal,crude oil, and a number of other products. Its mineral resources are probably among therichest in the world but are only partially developed. China has acquired some highlysophisticated production facilities through trade and also has built a number of advancedengineering plants capable of manufacturing an increasing range of sophisticated

equipment, including nuclear weapons and satellites.

The government restricts foreign investment

Foreign investment in Chinas retail sector is relatively free. This is due largely tocommitments made by China when it joined the World Trade Organization (WTO). Thelaw today allows foreign retailers to operate without a partner, to open stores whereverthey want, and to source merchandise from foreign owned local factories that, in the past,were obligated to export most of their output. Yet there are rumblings within China aboutthe growing power of foreign retailers. As giant retailers such as Wal-Mart and Carrefour

rapidly open new stores and acquire local retail companies, concern is rising that thesector will ultimately be dominated by foreigners as is true in disparate emergingcountries such as Poland, Thailand, and Brazil. The risk exists that the government willimpose restrictions or, more likely, create a hostile environment for foreign retailinvestment. Indeed it is possible that the furious pace of such investment today is aimedat obtaining a large footprint in China before the government has a change of heart.

External Capital Inflows

The role of external capital inflows, particularly foreign direct (FDI) and portfolioinvestments (FPI) in the growth and global integration of these two countries has captured theattention of analysts. China has attracted and continues to attract far more FDI than India.The difference in FPI flows is smaller, but in terms of net private capital inflows China is farahead. A significant part of FDI inflows to China are from the Chinese Diaspora (includingresidents of Hong Kong and Taiwan). In India also FDI inflows from Mauritius, a countrywith a large number of Indian residents of Indian origin accounts for a significant part of totalinflows. Also, Chinas policy of creating special economic zones (SEZs) to attract foreigninvestment by exempting investors from regulations applicable elsewhere in China(particularly relating to hiring and firing and foreign ownership) and also providing excellent
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infrastructure (power and communications) was highly successful5. India is only nowcreating SEZs like Chinas. But limits to foreign ownership apply to different entrants indifferent sectors and restrictive labour laws continue. Lastly, Chinas FDI was exportoriented and also directed in part to investment in infrastructure. Given the significantlylarger shares compared to Indias of private capital flows in Chinas GDP and investment andits tilt towards exports and growth promoting infrastructure, it is clear that greater integrationof China in world capital flows contributed to its faster growth and at the same time, theirexport orientation increased integration in goods markets as well.Taken together, the likely evolution of factor accumulation and total factor productivity in themedium term, it is very likely that China would be able to sustain its average growth in therange of 8% - 10% per year. India would be able to raise its growth from around 6% of thelast two and a half decades to 8% or more. Chinas integration with the world economy isalready high. Indias integration will continue to increase so that it will play a larger role ininfluencing the growth of the world economy than in has done until now. Also, Chinaspolicies towards external private capital flows were successful in attracting substantial flowsand their use in export oriented and infrastructural activities not only contributed to growthbut also increased Chinas integration in goods markets. This trend is likely to continue in the

medium term. India is only now instituting Chinese- like policies towards capital inflows andtheir impact is as yet uncertain.

Comparison

Stock Markets:

The market capitalization of the 10 largest companies today in China is $1.8 trillion,whereas the market capitalization of the 10 largest companies in India is only $0.5trillion.Similarly, at year-end 2006 the total stock market capitalization of China was $2.4trillion versus India where it was only $0.8 trillion.

Direct Investment:China has received more than 10 times the total foreign direct investment as India ($700billion versus $68 billion).China has made direct investments abroad that are more than 3times that of India ($67 billion versus $21 billion).

GDP:

The Chinese GDP expressed in US dollars is three times the Indian GDP ($2.5 trillionversus $0.8 trillion). On a purchasing power parity basis, the Chinese GDP is two and ahalf times the Indian GDP ($10.2 trillion versus $4.2 trillion).

Current Account Balance:

Chinas current account balance is positive and growing strongly, while Indias hasmeandered and recently gone negative.

Energy:

China produces 3 times the electricity of India; more than 4 times the oil; and more than1.5 times the natural gas. On the consumption side, China consumes more than twice theoil of India and almost 1.5 times the natural gas.


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Population:

Approximately 1/3 of the worlds population is either Indian or Chinese, but thepopulations of China and India are quite different from each other.

Indias population is smaller than Chinas, but is growing more rapidly. In 1995, China

had nearly 33% more people. By 2005, China had less than 20% more people. By 2025,their populations will be about equal. After that, India will have a larger population.

India has a population that is growing younger and that will continue to supply youngpeople to the labor force for a long time. China has an aging population that will showlabor supply problems without net inflow of migrants. India today has 6 times the numberof people migrating out of the country as China. China has a 40% lower infant mortalityrate than India, and a longer life expectancy.

Labor and Income Distribution:

China and India have roughly equal acreage of arable land, but China has a much smaller

portion of its people in agriculture than India (45% versus 60%). China has twice theproportion in industrial jobs (24% versus 12%), and a similar portion in service jobs(31% versus 28%).China has a lower rate of urban unemployment (4.2% versus 7.8%)and far fewer below the poverty line (10% versus 25%) although we dont know howreliable that may be. Both have about 1/3 of total income in the hands of the top 10% ofhouseholds.

Literacy:

Literacy is dramatically different. Only 61% of Indians over the age of 15 can read andwrite, while nearly 91% of Chinese over 15 can read and write. The development andtherefore economic value of women is higher in China where 86.5% are literate, whereasin India only 47.8% of women are literate.

Religion:

The religious composition is dissimilar.

Hindus account for over 80% of the Indian population, but are negligibly represented inChina. Muslims account for over 13% of the India population, but are only about 1% to2% of the China population. Christians are about 2.3% in India and 3% to 4% in China.

China does not report religious composition as thoroughly as India, but China is greatlyinfluenced by Taoism and Confucianism which have ancient roots there. India and Chinado not have similar populations in terms of guiding belief systems.

Languages:

India has numerous regional languages with English as the official government andbusiness language. China has one basic language with regional variations. MandarinChinese is the standard language.


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Legal system:

Indias legal system is based on English common law while Chinas is based on civil lawderived from the Soviet Union and continental European legal principles. Indiasjudiciary reviews legislation, while Chinas legislature retains the right to interpret itslaws. India accepts compulsory International Court of Justice jurisdiction, while China

does not.Political System:India is a multi-party democracy. China is a single-party controlled state.

Telecommunications:

China has more than 3 times as many cell phones as India and 7 times as many land linesas India.China has more than 4 times as many internet users as India.

Military:

China spends 4.3% of its GDP on its military versus 2.5% by India. In total US dollars,

the Chinese military budget is five times the size of the Indian military budget.

From almost every metric, China and India are very different countries. They areneighbors. They are important and disruptive to the old order of things. They areinteresting investments, but they are a unified portfolio concept that could lead tounwarranted conclusions and allocations. Both have great investment values that need tobe considered separately.To better understand what India is and what it is not, lets compare it to China. First,forget the hype about both China and India. Keep in mind that despite all the talk ofChina or Indias rising status, both China and India are still desperately poor countrieswith large disparities in incomes across each country. In China nearly half of thecountry's labor force remains in agriculture (about 60 percent in India). Also, despite allthe talk about Indian software engineers and Nobel laureates and Chinese engineeringwhizzes, India has the largest number of illiterate people in the world and China also isburdened with a large number of rural poorly educated who will offer continuedchallenges for economic development. (Indias illiteracy rate is nearly 40 percent andChinas is nearly 10 percent according to World Bank statistics.) Of the total of 2.3billion people in these two countries, nearly 1.5 billion earn less than US$2 a day,according to World Bank calculations. The opportunities in both countries aresubstantial; the challenges are also large.

With this in mind, lets compare the two countries by size: China is the worlds third-largest country after Russia and Canada and is the second largest country by land area.India is about a third of Chinas size. In terms of population, China tops India at 1.3billion people compared to India at just over 1 billion but India is growing at a faster rateand has a younger population. In terms of political systems, China is a communistcountry which economically is following market reforms that encourage free trade andcapitalist-based business models. India, by comparison, is the worlds largest democracy,but with a system of commerce that until the 1980s was based on the Soviet model andhas since been reforming itself to follow more free trade and capitalist-based models.


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China has been reforming its economy since 1978; India has been working since 1991 butat a faster rate of speed.

Company Development

Tax incentives are not the only area that India is ahead of China in. Generally, Indiancapital markets far exceed their Chinese counterparts in terms of transparency andpredictability. Indian companies can list domestically on the Bombay Stock Exchange,Asias oldest exchange. China has both the Shanghai and Shenzhen stock exchanges.Shanghai is larger than Bombay in terms of capitalization (Bombay has US$1 trillionwith 4,833 companies and Shanghai has US$1.7 trillion with 849 companies) but whatdiffers the two exchanges is not just their size but that Bombay is run to internationalstandards and has tremendous stability in the quality of its companies. On the other hand,Chinas Securities Commission has no powers to impose punishments, which must beimposed by the courts. Further as the government is the major stockholder of its State-owned enterprises all these firms are not subject to independent policing and true

financial analysis meaning that the value of many of these firms is suspect. This meansthat generally India has the more transparent economy.

Company Management Capabilities

India, however, is not only ahead in financial transparency. Although there are manyexcellent Chinese companies, generally the management abilities of many Chinesebusinesses is not as strong as their Indian counterparts. Part of this is due to the fact thatreform in China started barely 30 years ago and that management training has not becomeof interest till recently. Also, it is a factor that in many respects it is the rest of the worldthat came to China to produce in the last decade and not Chinas homegrown exportindustry that has driven exports. In fact, if one looks at cross-border activity, China hasyet to become active in acquisitions to-date, although there is indications this is startingto change. Big acquisitions by Chinese businesses include Lenovos takeover of IBMsPC business and more recently the Chinese acquisition of an interest in Blackstone,which is a different twist on things.

On the other hand, Indian companies have been on a tear building up international assetsand expanding throughout the world. Recent examples:

Tata Steels $13.6 Billion Acquisition of Corus Mittal Steels even larger $31 billion purchase of Arcelor Tata Groups acquisition of U.S.-based Glaceau, a health drinks and water

manufacturer, for US$677 million Tata Teas purchase of a controlling stake in Britains Tetley for US$407 million Indias wind energy firm Suzlons acquisition of Hansent Transmission for $324

million Infosyss $28 million acquisition from Phillips of BPO centers in Chennai; Lodz,

Poland and Bangkok, Thailand. Indian Phamaceutical giant Ranbaxys acquisition of Romanias Terapia


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Ballarpur Industries (an Indian Paper and Pulp company) and JP Morgansacquisition of Malaysias Sabah Forest Industries

As can be seen from the above examples, Indian companies are actively becoming world

players. Chinese companies really cant match the breadth or the depth of acquisitionsand this is giving Indian companies a lead over their Chinese counterparts.

Globalization of China

Although joining late, China has joined the globalized system much more enthusiasticallythan Japan. Chinas economy is much more open than Japan. Chinas trade in 2004 wasequal to 70% of its GDP, Japans to 24%. China received $60.6 billion of foreign direct

investment in 2004, while Japan, with an economy several times larger and in a phase ofrestructuring that should have attracted disproportionate foreign investment, receivedonly $20.1 billion.Chinas globalization is not confined to opening the economy but more importantly toglobalization of institutions. Here the development strategy of contemporary China bearsa striking resemblance to that of early Meiji (mid-nineteenth century) Japan, when theJapanese government was sending missions around the world to choose for emulation thebest foreign navy (Britain), the best foreign education system (Germany), and so forth.Inthe intervening century and a half, Japanese practice has become more inward-looking,while China has evolved from Qing defensiveness and Maoist peasant xenophobia to anassimilative cosmopolitanism.Today China is the country that sends missions throughout

the world seeking best practice. It adapts not just foreign technology and foreigncorporate management techniques but also a wide variety of foreign institutions andpractices: international accounting standards; British, U.S. and Hong Kong securitieslaws; French military acquisition systems; a central bank structure modeled on the U.S.Federal Reserve Bank;Taiwan-style regulations for foreign portfolio investment; aneconomic development strategy adapted from South Korea, Singapore and Taiwan; andmany others. Among themost important of these changes are the decision to adopt the Western concept of rule oflaw; adoption of competition as a centrally important economic practice; and adoption ofEnglish language as virtually a second language for the educated Chinesepopulation.Today I can lecture in Peking University and interview senior officials in

Beijing and Shanghai without a translator. Perhaps most importantly, China has sent itselite youth abroad for education in an exercise of internationalism comparable to theRomans turning over their children to the Greeks.

China is also experiencing globalization of tastes. The exposure of the Chinesepopulation to foreign brands has been incorporating them into global culture. To takeone example, I spent many months studying the Chinese car industry. One of the


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backlash in the eighties, it is now Chinas turn to be at the receiving end of US pressure.

Chinas emergence is clearly one of the most important forces currently reshaping theworld economy and because of its manufacturing dominance it is strongly influencing theother countries such as Europe, USA and India to name a few.

Chinas growth affects and influence many countries but as Ted Fishman observed, itaffects them differently. For example he says that in Canada the rise of China makepeople euphoric because they are a resource selling economy: They have oil, they haveminerals, they have wood, they have all kinds of things that feed Chinas internaleconomic boom. In addition, he went to Spain and saw that people were also thrilled ofthe rise of China because Spain is a big provider of infrastructure investments in LatinAmerica which is itself going well by selling to China. As a result Latin America keepsgrowing making Spain going even better.

Since 1979, China began to make majorreforms to its economy. The Chinese leadership

adopted a pragmatic perspective on many political and socioeconomic problems, andsharply reduced the role ofideology in economic policy. Political and social stability,economic productivity, and public and consumer welfare were considered paramount andindivisible. In these years, the government emphasized raising personal income andconsumption and introducing new management systems to help increase productivity.The government also had focused on foreign trade as a major vehicle foreconomicgrowth. In the 1980s, China tried to combine central planning with market-orientedreforms to increase productivity, living standards, and technological quality withoutexacerbating inflation, unemployment, and budget deficits. Reforms began in theagricultural, industrial, fiscal, financial, banking, price setting, and labor systems.

Rural and agricultural reforms began with major price increases for agricultural productsin 1979. In 1981 the authorities began to dismantle the collectively farmed land, and itwas with the introduction of the household responsibility system that these fields werecontracted out to private families to work, which provided peasants greater decision-making in agricultural activities. During this time, the size of private plots (land actuallyowned by individuals) was increased, and most restrictions on selling agriculturalproducts in free markets were lifted.

Urban economic reform was aimed at integrating China more fully with the internationaleconomy. The development of the private sectorwas allowed and it was permitted tocompete with state firms in a number of service sectors, and increasingly in infrastructureoperations, such as construction. Authorities rationalized the pricing structure andtransferred investment somewhat away from the metallurgical and machine-buildingindustries and toward light and high-technology industries, while an emphasis onresolving the energy, transportation, and communications bottlenecks was retained.Individuals were allocated state jobs for which they had specialized training, skills, ortalents, and material incentives for individual effort and a consumer ethos were created inorder to encourage people to work harder and be more productive.Resource allocation by
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state planning was reduced and enterprises were made ultimately responsible for theirown profits and losses.

During the 1980s, these reforms led to average annual rates of growth of 10% inagricultural and industrial output. The variety of light industrial and consumer goods

increased. Industry posted major gains especially in coastal areas nearHong Kong andacross the strait from Taiwan, where foreign investment helped spur output of bothdomestic and export goods. Rural per capita real income doubled. China became self-sufficient in grain production; rural industries accounted for 23% of agricultural output,helping absorb surplus labor in the countryside. Efforts to create a freerlabor marketwere also part of the overall stress on achieving greater efficiency. As with price reform,tampering with a system that kept many citizens living more comfortably and securelythan would an economically more rational system risked serious repercussions inrelations with the public. Changes had proceeded slowly in this sensitive area.

Implications for India and the World:

The most important Chinese growth impact has been on India when China which was theworlds greatest opponent of globalisation became one of its better advocates. Indeed,India which had strict and protectionist trade policies because it was afraid of directforeign investment has been hit by the Chinese success showing that a more openapproach to globalisation could also lead them to successfulness. Following the path ofChina, India significantly increased its economic growth rate as well as its exports andforeign exchange activities.India will accelerate its growth in less than ten years. WhileIndia is at present one tenth in size of China some experts even believe that its growth

rate will surpass the one of China.

That impact on India is just one of many and is likely just the beginning. Indeed, asWilliam Overholt states: The success of China at balancing debt with equity leading tosome changes on the way the world manages economic developments. This isparticularly true in Asia where the way they are making business is gradually changingbecause of the Chinese influence. In fact, until recently the Asian way was to be hostileagainst foreign investments. Therefore, governments encouraged people to take domesticand foreign bank loans to avoid the dependences of those foreign investments. That wayof acting positioned the government as a driver of the development of the industrybecause it could easily controlled the bank loans. As a result, many companies which

were dependant of banks loans were also supporting the periodic financial crises. Thatgave too much power to the government on the control of the industry and led to inequitybetween large, politically favoured companies and smaller Asian or foreign companies.The new transformation induce by China which brings more balance is now forcing mostof the company to be not hostile to foreign investment but on contrary open to them. As ithas already significantly changed China, this change also affects and benefits the entireworld. Many countries such as India, South Korea and Japan have seen themselves grown
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when welcoming foreign investments. In fact, as William Overholt says, Japan went outits recession thanks to the Chinese demand .

In USA Chinas growth had several impacts. Obviously China has become a profitablemarket for the selling of U.S goods but there are also benefits directly into the country.

For example the lifting of Chinese goods off the ships has significantly increased thenumber of employees in southern California. Besides as Ted Fishman observed, it hasalso created several kind of jobs in southern California where Wal-Mart is growing bycreating data centres, software centres and other structures to follow these Chinese goods.In addition, these low price Chinese goods enable to enhance the American standard ofliving. Indeed, firstly those goods are cheaper but there are also feeding the competitionleading the other countries to produce even less expensive goods for the consumer.According to William Overholt, those inexpensive goods combined with the Chinesepurchases of U.S have helped the U.S to keep their inflation rate at a minimum allowingthem to extend their business cycles .

Europe has also benefited from China's economic rise kind of the same way as USA.Indeed, in the past when China was a closed market, Europe and China traded almostnothing but now China is Europe's single biggest source of manufactures and is its fastestgrowing export market (COMMISSION OF THE EUROPEAN COMMUNITIES, 2006).China has become the largest export market for Europe leading to a two-fold increase ofChina and Europe trade between 2000 and 2005. These bilateral trades have beenundoubtedly beneficial to Europe since it brought cheaper goods in the European marketcheaper inputs for European business, more competitive European companies, growingmarkets for Europe's exporters and lower interest rates and inflation in Europe.

Additionally, other countries are not spared by Chinas rise. Because China is

overpopulated and also has and high rate of demands from its domestic market it hasenormous need for industrial and other natural resources as well as raw materials.Although China is now the worlds largest producer of coal, steel and cement, it is alsothe second largest consumer of energy and the third largest importer of oil .Therefore,since a vast majority of these resources are available in other dormant or emergingeconomies such as Africa, Latin America, Central Asia and Russia, the rise of China willcreate an economic boom for those natural-resource-based countries. On the other hand itwill make China dependent on a lot of unstable countries

Future Prospects:

China growth is beneficial for the world since in part it needs enormous natural resourcessuch as oil, gas, iron and steel to name just a few, because it is one of the manufacturingcentre of the world and also because it have to feed its own expanding domesticconsumer market. But according to Sheth, it is expected that China takes the same path asJapan, Singapore and Taiwan which have become affluent nations. This means, Chinawill start to level its economy and outsource to other resource-rich nations. Besides, its


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domestic economic growth will also be affected by the aging of the populationconducting by their one child policy. Furthermore, yet according the Chindia risingChina growth is going to be more focus on its domestic market through globalacquisitions. Indeed, thanks to its physical infrastructure and its numerous large scaleenterprises such as Lenovo, Haier or China mobile, China has already started capitalized

on the domestic demand particularly in consumer markets. As a result, all companiespower enough to control the domestic market will grow until they have to expandthemselves to other emerging countries via trades and foreign direct investments.Therefore, Sheth predicts as Taiwan has already integrated its economy with China,Japan and South Korea will do the same leading to an increase of the rate of mutualtrades and foreign direct investments and maybe to a new currency equivalent to theactual euro.

Obviously China is a world leader in production will continue to be a major player inglobal manufacturing and will definitely be the leader in resource importations.

a. Indias economic growth will move roughly equal to Chinas at 10 % by 2008 but willthen exceed Chinas as Chinas economy slows to less than double digit figures

b. India will increasingly start to replace China as a site for lower-end exportmanufacturing and for projects that have higher content of labor

c. Indian companies will continue to globalize at a faster rate than their Chinesecounterparts.

d. Every company needs an India strategy both for sourcing, review for potentialfactory relocation and long-term as a sales base.

The acceleration of China's reforms, opening-up and its modernization drive has providedforeign investors with good business opportunities. China's pursuance of its policy ofboosting domestic demand and acceleration of strategic economic restructuring offers awide scope for overseas investment in fields of agriculture, water conservancy, energy,transportation, communication, raw material, environmental protection and high-tech.China is now embarking on the strategy of developing its west. The industrial

infrastructure, technical strength, rich natural and labor resources existed now in thecentral and western regions of China will provide attractive conditions for overseasinvestors to participate in the development of these regions.

Since 1990 India has emerged as one of the wealthiest economies in the developingworld; during this period, the economy has grown constantly, but with a few majorsetbacks. This has been accompanied by increases in life expectancy, literacy rates andfood security.


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Conclusion

At the beginning of the 21st Century China has become one of the world largest exporterand importer thanks to the open up of its market policy through several reforms andespecially the adherence to WTO. Hence after the open up of its market policy the

foreign direct investments increased such a way that China has become one of the mostattractive destinations for foreign direct investments in the world and also became a low-cost manufacturer centre.

However the impressive rise of China is threatened by its inefficiency in several keyoperational parts such as: logistics infrastructure, trade environment, access totechnology, management capabilities, and protection of intellectual property which hasled to an altered vision of china as a top exporter because of several products safetyproblems and quality. Besides, the enforcement of labour and environmental standards aswell as the rise of energy price and taxes does not help China since it makes leaving somemanufacturers to lower cost markets such as Vietnam or Indonesia. Moreover, several

dormant and emerging countries learned from the rise of China that by opening theremarket to the world could lead to prosperity and could be the blessed weapon to competeagainst China on the global market. Therefore China is facing a growing pressure comingfrom those new opponents now playing on the global market and making thecompetitions tougher.

In addition, because of its big domestic market demands and its overpopulation, Chinaneeds a lot of for industrial and other natural resources from cement and copper to oil andgas. Hence it turns to dormant or emerging natural based resources countries such asAfrica, Latin America, Central Asia, Russia and others creating an economic boom forthem but on the other hand getting dependent on a lot of unstable countries.

Chinas globalization successes have deeply influencing the entire world. It has broughtmany new markets such that South Americans see China as a market for their natural-resource-based exports. Besides, the abundance of inexpensive products on developedcountries such as Europe or U.S has considerably improved the standard of living ofmany people and help U.S to keep its inflation rates down enough to allow them toextend their economic business cycles. Furthermore, Chinese growth has also profoundlyinfluenced its Asian neighbours. As emerging countries such as Vietnam or Indonesiahave learned from China the advantages of a more open economy India did it too and isnow also a driver of globalisation. Chinas fast growth also helped its neighbourhood toget out the recession and revived the Japans economy.

China and India are 'poor but powerful' countries whose rise to global prominence ischallenging both developed and developing countries alike. Their rapid growth, large sizeand increasing assertiveness in global affairs demands attention. What China and India domatters in areas as diverse as global governance (notably, climate change), globalcompetition and development aid.


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These points are now widely accepted, but the rush to come to terms with this newphenomenon frequently overlooks three important facts:

China and India are themselves both changing rapidly. Therefore, research on theimpact of China and India on other countries must understand the processes that

are changing both their economies and the politics of their engagement with othercountries. Despite the frequent lumping together of China and India, these two economies

are very different in terms of their impact on the rest of the world and willdevelop in very different ways.

These countries do not engage with the world in a vacuum. Countries increasinglyplace demands on them. They are not economic and political juggernauts whoseimpacts overwhelm the rest of the world. How OECD and developing countriesengage with China will be critical for both defining its impact on the globaleconomy and politics.

Date post:	08-Apr-2018
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China Going Global and its implications for India

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