LMTSOM, THAPAR UNIVERSITY

Roaring Tiger and the Transforming Elephant

Impact of globalization on economies of China and India
4/8/2012

China and India now are widely acknowledged as the planets next economic superpowers

The Context

China and India are two neighbouring countries in Asia who share the two largest population of the world and in fact added together they represent nearly one third of humanity. Globalisation has imposed internal pressure and external pressure to bear on both India and China. For most Chinese and Indians alike, economic life is hard despite the fact that reforms and globalisation have created various new opportunities1 and as such both countries have witnessed an emerging middle class with Americanised tastes and preferences, irrespective of this however, both countries remain very poor. Although the two countries went to war in 1962 due to some border dispute, they have since tried to normalise relations and in 1995 for the first time trade had exceeded US$1 billion between them. They have lately received a lot of international attention being viewed as emerging giant economies as they both play key roles at the international level. For example China has been a permanent member of the Security Council at the UN, while India who has lead the NonAligned Movement for years and is still vying for a similar position. Furthermore, India has been one of the founding members of the WTO and has played a prominent role as one of the developing nations whereas China has had to fight for decades to obtain its admission into this international organisation. While both China and India have an extended history of international trade going back centuries ago, both their economies were until recently highly protected and controlled to a large extent albeit that their political systems are very different. China is still a very unique

case in the sense that while it has allowed its economy to be opened to Capitalists MNCs, it is still governed by the Communist Party with a strong leadership not giving away state power. The phenomenon of globalisation has however affected both these countries. Given their large populations, big land mass and abundant resource bases, they have both relied on indigenous capabilities to a large extent to develop a wide range of goods for their internal markets. The changes incurred on the road to globalisation are explored as well as some of their differences and similarities are discussed and furthermore some of the reasons as to why China has overtaken the Indian economy is highlighted.

Background
India became independent in 1947 from the British and its population grew from 340 million to exceed one billion in 2000. Its per capita GDP is US $475 making it one of the poorest countries, although paradoxically it has had nuclear capabilities since 1974 and is one of the few countries in the world which has its own satellite in orbit due to an indigenous space program. India has always faced internal problems connected to caste and wealth, religion and language issues amongst others and as a democracy it has survived and can boast to have a free press, regular elections and an independent judiciary2 . It has definitely opened itself to globalisation especially as a result of changes in economic policies in the early 90s and will have to face increasing world competition given its commitments at the WTO.

China is the worlds most populated country with 1.3 billion people. The GDP per head is US$ 870 and had a total GDP of US$1.1trn in 2000 as compared to Indias total GDP of US$2233 billion for the same period. Plagued by a series of civil wars and invaded by Japan until the end of World War II, China then experienced communism under Chairman Mao. Relying strongly on autarky to achieve labour-intensive industrialisation which subsequently failed, China suffered from a severe setback during the cultural revolution which saw several cadres being taken to the countryside to work as peasants. Deng Xiao Ping however

recognised the backwardness of China and realised the suffering done to their own people. He then steered the country towards a progressively open economy under the control of the Communist party whereby in the 1980s various special economic zones were established to attract foreign capital3 . Also the approach to reforms in China have been different to that of the Soviet Union in what has been termed a gradualist strategy as opposed to shock therapy.

Introduction

What is globalisation? This contemporary issue has been formulated differently by many academics while the basic notion that some cross-border trade and investment are happening between nations due to interdependency and an increasingly integrated international

economic system, should be a starting point in developing any such paradigm. One could then argue about whether the concept is new and if not how does it differ from the old globalisation? The main difference comes from the impact of technological progress and also from the idea of free trade with receding barriers promoting Ricardos agenda of comparative advantage. The worlds national economies are being redefined and interconnected at an unprecedented rate due to an increase in the mobility of capital as a consequence of deregulation, new communications and information technology. A number of contemporary academics would emphasise economic globalisation and that such a construct would lead to new forms of social organisation that are supplanting or that will eventually supplant traditional nation-states as the primary economic and political units of world society according to hyper- globalizers.

Encounters with globalisation

Some of the major impacts feared by nations due to globalisation are: The giving away of national sovereignty and some new forms of colonialism by MNCs.

 The decline of the State as a protector of individuals and groups and the rise of virtual states depending on investment and production abroad, not to mention the fact that due to the size of the the top forty MNCs having GDPs bigger than a country like Turkey for example, this creates an impression that governments have surrendered their power to capitalism4 .

This sort of argument is very common in India to date and has been used to attract a lot of support from nationalist parties (swadeshi philosophy) and trade unions specially because they associate the presence of MNCs with colonialism.

Opposers of globalisation in India emphasise the link between promotion of FDI and the international institutions like the World Bank, the International Monetary Fund and the World Trade Organisation who all support economic liberalism and reduction of government intervention while fully supporting privatisation. In the case of China, in the absence of democracy has meant that socio-political tendencies which may be latent but are invisible, do not hinder the march to globalisation. However the Chinese government will fairly soon have to change a series of policies when adhering to WTO rules and regulations, in other words, the State will have to give away some of its sovereignty on economic matters and international trade. Although it can be argued that these two giant economies have to face a different set of challenges because of the major differences in their political systems, they are both attracting

a significant volume of foreign direct investment due to their size and low level of capital intensity. Foreign direct investment is the locomotive of globalisation and because both China and India unlike many other third world countries have a sizeable number of highly skilled workers as well as an enormous supply of low unskilled labour, their development are closely linked to similar sectors in which they have comparative advantage and therefore face similar challenges.
Given the capacity of China and India to be competitive in both labour intensive sectors as well as in capital intensive product lines, this particularity has reduced the dependence of the region on trade with industrial countries and open up further opportunities for intra-asian trade and will be reinforced furthermore by the flow of direct investment from Japan and other industrial countries5 . They both have a substantial number of people who have migrated all around the world for various reasons and while this migrating process was very common at the time colonisation had just started many are still emigrating to countries having higher standards of living and the days of migration of cheap labour are over. Most of the migrants are now highly demanded professionals. While the Chinese overseas network has played a major role in bringing FDI into China, India has tried promoting a similar policy towards its Non Resident Indian(NRI) and the Global Organisation of People of Indian Origin(GOPIO) is also actively engaged in the promotion of International business.

Is the Overseas Chinese Business Network a model for India in the globalisation process?

It would be good to mention that at the time China had started economic reforms there were some set of objective conditions which coincided with the stages of development in Hong Kong, Taiwan and Singapore when they had in fact shifted their economies from labourintensive import-substitution policies to export promotion. Subsequently when Communist China opened its doors, china benefited enormously from Overseas Chinese investors living in Hong Kong, Taiwan and Singapore6 . Due to the globalised economies of the Asian Tigers, a corridor to China was swifly established whereby the latter benefited from technology transfer at a rapid pace. The cultural affinity of the Overseas Chinese network definitely became a strength and according to studies conducted by the Nomura research institute an economic synergy developed as a result of the Chinese overseas Network specially from Hong Kong which for years had been the main investor in China mostly in the manufacturing sector. Sharing a similar language with mainland China very often, training Chinese workers, conducting research and labour management turned out to be fairly straightforward for the overseas Chinese.

While the aim of the Chinese government was to induce linkages in the economy, it inversely used Hong Kong as a middleman between China and the global economy in networking formation in the services sector. Just like in India, the overseas Indian based in America, contributed to considerable extent to the globalisation of the economy, China similarly benefited from overseas Chinese business networks with the exception that this particular link had started much earlier. It would have been interesting to know whether without this cultural affinity and the objective conditions present at the beginning of the 80s, whether the globalisation of the Chinese economy would have taken place? Had the Asian Tigers been culturally different from China, would they have diverted investment into India had they been offered similar facilities? Recently a group of people of Indian Origin around the world have created an organisation known as GOPIO to promote international Business with India and the Indian Government is banking on the Non resident Indian to attract investment into India in a similar way with the Chinese overseas Business network. While the diaspora of Chinese origin people approximate some 55 million, according to GOPIO there are some 21million people of Indian origin residing outside India7 .

Top 15 manufacturing nations of the world

1 2 3 4 2006 US Japan China Germany 1 2 3 4 2025 China US Japan Germany

5 6 7 8 9 10 11 12 13 14 15

France UK South Korea Italy Brazil Canada Russia India Spain Mexico Indonedia

5 6 7 8 9 10 11 12 13 14 15

South Korea France India UK Italy Brazil Russia Indonesia Mexico Taiwan Canada

The era of scepticism is over. The era of awe, for better or worse, has begun. China and India now are widely acknowledged as the planets next economic superpowers
Taken together, though, the economic emergence of both countries if it can be sustained in the decades ahead without triggering disruptive social unrest represents a seismic event that promises to alter the worlds economic, geopolitical, social and environmental landscape. That is why China and India provoke, in equal measure, so much fear and anticipation. And why we are beginning to see the appearance of an increasing number of books that seek to chronicle and compare developments in these two giants. It is not surprising that business journalists are among the first to tackle the challenge. They have been on the front lines observing and interpreting the dramatic changes underway in both countries. What is happening there, for all of its political and social implications, is being driven foremost by the economic forces freed by the policy reforms China and India have embraced.

India drew inspiration from the despair its leaders initially felt at having been left behind by Chinas rapid economic growth. When Indian Prime Minister Atal Bihari Vajpayee visited Beijing in 2003, more than a decade after New Delhi had launched its own on-again, offagain economic reforms, he was struck by the jolting differences between Chinas ultramodern infrastructure and Indias pitiful roads and decrepit airports. That visible contrast which often informs how international business people compare China and India when they first visit the two countries nevertheless can mislead.

While Chinas strengths are on display to Mr. Vajpayee and the rest of the world, many of Indias are less visible.

Chinas strength has been its ability to mobilize capital and labour to develop its manufacturing sector, fuelled by massive injections of foreign direct investment (FDI) and enormous government infrastructure spending. India, on the other hand, crippled by decades of inefficient government, has had to rely more on its large pool of highly educated knowledge workers and the sheer savvy of its private sector managers. As a result, China dwarfs India as a manufacturing powerhouse, while India shines in its software and business outsourcing services.

Is China Cheaper than India?

One of the most frequently asked questions about China is an attempt to verify the competitive cost structures variables for sourcing business consulting, IT consulting, applications development, maintenance and management or some type business process management services. And more specifically, many clients ask about labor costs as it is one of the single largest components of total cost of sourcing calculations. A comprehensive analysis of the total cost of sourcing for a business or IT process involves an analysis of two components: standard costs (such as labor, real estate, telecommunications and project management) and incremental globalization costs (such as remote management, communications, project trips and incremental legal costs). Also, enterprises should consider the costs of managing or mitigating potential risks (such as country risks, security risks or maturity risk) to arrive at a risk-adjusted total cost of sourcing.

The analysis of a comparative cost structure assessment between India and the China reveals that a total cost of sourcing business case for a vendor or a captive centre varies widely depending on enterprise specific business and IT requirements, scope, scale and appetite for risk. The variability is based on city locations (where coastal China cities might be as much as 30% more expensive that inland China locations), availability of specific skill sets, risk factors (country, security, competency, and maturity risk) as well as available vendor options. Based on analyzing over 240 business case analyses over the last 2 years, Gartner research shows that there is not a simple or absolute ranking of global sourcing country locations by cost. Furthermore, given the current volume levels for China global sourcing, there is not

enough critical mass of completed deals, or a critical mass of established vendors with extensive track records, and authenticated data. However, based on extensive analysis including breakdowns of major variables of costs, Gartner has concluded that the cost structures in China for the largest components of standard costs (namely, labour, real estate, telecommunications) are indeed within an extremely competitive range relative to many of the leading global delivery locations (including India). Therefore, the continued cost is king mentality of clients will inevitably continue to drive interest in the analysis of China as a global sourcing destination. Unfortunately, there is no clear yes or no answer as to whether China is cheaper than India, the answer is deal specific and primarily driven by scope, scale, skill set requirements, language requirements and risk thresholds. A more detailed look at costs reveals that there a several factors that have a large variability across city locations in China, therefore, it is imperative that enterprises understand the factors with extensive hi-low ranges. These factors include: (1) The variability of wage rates and attrition across various cities in China (2) The short versus long term cost of real estate as rates vary dramatically over multi year periods given short term government or technology park subsidies (3) Large standard deviations in the investment ranges required for human resources readiness (technical, language and soft skills training) as well as IT Services process business models (4) Economic variations based regulatory requirements (5) Government and legal requirements to manage risk

(6) Security issues (7) Additional investment needed for low English speaking capability and/or cultural affinity.

Slumbering Elephant Beginning To Acquire the Stripes of A Lithe And Sinewy And Agile Tiger - Mr. Shahi Tharoor

The elephant and the tiger, I am afraid, are part of the wonderful penchant for stereotype that we have about India. The truth is that for a long time, India has been sort of seen as this elephant, this ponderous, slumbering, lumbering beast, slow to move, covered in flies and dust, and not really doing much more than plodding on through the forest. But over the last few yearsthe last decade and a half, more or lesswe seem to have seen this slumbering elephant beginning to acquire the stripes of a lithe and sinewy and agile tiger. That transformation, of course, is fundamentally economic. Why? Because when India became independent in 1947, our nationalist leaders came to power with a very different view of the world from what you in this country have grown up taking for granted. In the United States, you live in a society where capitalism is almost axiomatically associated with freedom. But for the Indian nationalists fighting colonial rule in many other parts of the worldcapitalism was immediately associated with slavery. The British East India Company had come to trade and stayed on to rule. So our nationalists were immediately suspicious of every foreigner with a briefcase, seeing him as the thin end of a new imperial wedge. The nationalists were convinced that the only way you could preserve your political independence was by ensuring your economic

independence. So economic self-sufficiency became the mantra, and instead of inserting ourselves into the global capitalist system, we subtracted ourselves from it and threw up the protectionist barriers, and essentially attempted to do everything for ourselves. This was, somewhat tongue-in-cheek, referred to by an Indian economist as "the Hindu rate of growth" 2.3-to-3 percent during all of these years, which, frankly, was a darn sight better than the 0.1 percent under the previous 100 years of British rule, but still was not good. But the fact is that, as this carried on India found it really falling back, if you like, on the lead table of global prosperity. Then came a serious economic crisis, in 1991, when we were about to default on our payments. Actually, the government had to ship off the physical holdings of India's gold to London in order to provide security.

Narasimha Rao and Manmohan Singh, then finance minister, began to liberalize the economy and take advantage of the opportunities that globalization was beginning to offeropportunities, of course, that China had already taken advantage of 15 years earlier, but that India had been slower to do.

The Elephant That Became a Tiger

20 Years of Economic Reform in India

Foreign exchange crisis in 1991 induced India to abandon decades of inward-looking socialism and adopt economic reforms that have converted the once-lumbering elephant into the latest Asian tiger. Indias gross domestic product (GDP) growth rate has averaged over 8 percent in the last decade, and per capita income has shot up from $300 to $1,700 in two decades. India is reaping a big demographic dividend just as China starts aging, so India could overtake China in growth in the next decade. India embarked on gradual, erratic, but persistent economic reforms that in two decades transformed its living standards and place in the world. In 1991 India was viewed globally as a bottomless pit for foreign aid, periodically hit by food and foreign exchange crises and hamstrung by an immense web of controls imposed in the holy name of socialism and then used by politicians to line their pockets and build patronage networks. Early that year, The Economist magazine carried a survey on India titled The Caged Tiger, which concluded sorrowfully that India would remain trapped in its cage, unable to join other Asian tigers that had become miracle economies.1 Many analysts saw India as a lumbering elephant, in stark contrast to the Chinese tiger. Twenty years later, the Indian elephant has indeed morphed into a tiger. It averaged 8.5 percent growth in the last decade and survived the Great Recession of 200709 with only

minor bumps before returning to 8.5 percent growth in 201011 (see Table 1).2 Its per capita income has shot up from $300 in 1991 to almost $1,700 today, and its GDP this year will exceed $2 trillion3 in nominal terms and maybe $4.5 trillion in PPP (purchasing power parity) terms, which would make it the third-largest economy in the world after the United States and China. It is hailed today as a potential superpower and has been proposed by the United States for a permanent seat on the United Nations Security Council.

Key Achievements of 20 Years of Reform India became a miracle economy averaging 8.5 percent growth in the 2000s. Indian companies have become multinational corporations in their own right Companies like Intel and Microsoft came to India initially for cheap labor but now use it as a base for high skills. Economic liberalization has facilitated the rise to the top of a vast array of new entrepreneurs.

Indias Savings Rate Rises Sharply 198081 199091 Savings rate/GD% 18.5 22.8 200001 23.7 201011 34

GDP Growth Accelerates in Poor States Mean % growth 200004 Bihar Chhattisgarh Jharkhand Madhya Pradesh Orissa Uttar Pradesh All India 4.5 6.1 1.9 1.9 4.8 3.3 5.6 Mean % growth 200409 12.4 9.7 8.5 6.6 10.2 6.7 8.5

Literacy Rate Accelerates 195051 196061 197071 198081 199091 200001 201011 Overall Literacy 18.3 28.3 34.4 43.6 52.2 64.8 74.0

Poverty Rates Decline

199394 Poverty ratio, % 45.3

200405 37.2

200910 32.0

Fewer Households Report Any Hunger in Last 12 Months 1983 Hunger ratio, % 17.3 199394 5.2 19992000 200405 3.6 2.5

Nevertheless the unfinished reform agenda remains huge. The Doing Business report of the World Bank ranks India at just 134th of 183 countries in ease of doing business. India ranks only 121st in the United Nations Human Development Index, and its nutritional indicators are among the worst in the world. A quarter of the countrys districts suffer from some sort of Maoist insurrection. India needs major economic and governance reforms in the years to come.

Governance Reforms are Key Today

Indias unfinished reform agenda includes two main areas: economic reform and governance reform.

Of the two, governance reform lags far behind and is thus more important. After all, economic reform has already been deep enough to produce 8.5 percent growth and give India miracle-economy status, but the same cannot be said for governance. Indeed, the real miracle is that India has grown so fast despite so much mis-governance. Whereas economic reform can improve governance in key areas, good governance is desirable in itself and it is an essential ingredient for faster economic growth. Free competition and a level playing field for business are not possible without decent governance. Reform of the police-judicial system will not just improve crime detection and redress of grievances; it will also improve contract enforcement and protection of property rights. If land, mineral licenses, and the telecom spectrum are auctioned transparently and not handed out to favoured parties, that will not only check corruption but will also help make productivity more important than political connections, an essential condition for dynamic competition. Eliminating corruption from government contracts will mean not only cleaner politics and administration but more bidders for every contract, reducing costs and speeding up projects. Eliminating criminals from politics will not just signal that crooks and cronies cannot gain immunity by joining politics, but will reduce a significant cause of corruption and rent-seeking and can thus help create freer markets and increased competition. That is the way India needs to go.

ANALYSIS OF INDIAN ECONOMY

A SWOT ANALYSIS

Strengths :
The strength of the Indian economy lies in its robust nature, which is evident from its constant growth even during times of recession (2008-09). The banking and credit system has been able to survive the downturn due to heavy regulations imposed by the RBI. This brought more transparency to the system. Another important factor that forms the spine of the Indian economy is agriculture, because it employs nearly 50% of the total population. Although agriculture shares only 18.5% of GDP, it makes India self-reliant in terms of food supply. Today, India is a leading producer of a number of agricultural products that give a boost to the export value. The youth of India, which makes a large part of the population is an advantage as it constitutes a huge work force. Huge pool of labour force High percentage of cultivable land Diversified nature of the economy Huge English speaking population, availability of skilled manpower Stable economy, does not get affected by external changes Extensive higher education system, third largest reservoir of engineers High growth rate of economy

Rapid growth of IT and BPO sector bringing valuable foreign exchange Abundance of natural resources

Weakness :

Primary weakness of the Indian economy is its excessive dependence on agriculture. Since agriculture is monsoon dependent trade, production can vary by large margins and cause turbulence in the economy. India also lags behind in social development. A large part of the population is still living below the poverty line. Another weakness is the literacy rate. Although we have achieved high progress rates in terms of GDP, more than a third of the population remains illiterate, thus, easily exploitable.

Very high percentage of workforce involved in agriculture which contributes only 23% of GDP

Around a quarter of a population below the poverty line High unemployment rate Stark inequality in prevailing socio economic conditions Poor infrastructural facilities Low productivity Huge population leading to scarcity of resources Low level of mechanization Red tapism, bureaucracy Low literacy rates

Unequal distribution of wealth Rural-urban divide, leading to inequality in living standards

Opportunities :
India has ample opportunities for growth. The agriculture sector and SMEs need to be encouraged and assisted as they have high potential. Indian government should focus on defining and properly implementing the policies for rural development, as most of the population resides in rural India. Also, there is a scope for large-scale infrastructure development and a need to properly carry out the MNREGA, JNNURM and other schemes, so that the benefits penetrate to the lower level of the population. Tourism is a thriving industry in India and we need to harness its potential. It will help raise our foreign reserves and create employment opportunities. Scope for entry of private firms in various sectors for business Inflow of Foreign Direct Investment is likely to increase in many sectors Huge foreign exchange earning prospect in IT and ITES sector Investment in R&D, engineering design Area of biotechnology Huge population of Indian Diaspora in foreign countries (NRIs) Area of Infrastructure Huge domestic market: Opportunity for MNCs for sales Huge matural gas deposits found in India, natural gas as a fuel has tremendous opportunities

Vast forest area and diverse wildlife Huge agricultural resources, fishing, plantation crops, livestock

Threats :
Terrorism and corruption are the greatest threats that India faces. It is because both hamper the growth of people and trade, which is a must for overall economic growth. The rising inflation, hording and black-marketing, also pose a threat to economic development . Economic growth, mainly the exports, has seen a downward trend due to the worldwide economic downturn and has become a cause of concern. The Indian government needs to redefine its policies and bring more stringent reforms to steer out of this turbulence.

Global economy recession/slowdown High fiscal deficit Threat of government intervention in some states Volatility in crude oil prices across the world Growing Import bill Population explosion, rate of growth of population still high

SWOT ANALYSIS OF CHINA

Strengths
China is the fastest-growing major economy in the world and this has lifted hundreds of millions of people out of poverty over the past generation. China has a massive trade surplus and its huge foreign exchange reserves serve as a major cushion against external shocks. China's economic policymakers are committed to continuing their gradual reform of the economy. China is continuing to open up various sectors of its economy to foreign investment. With its vast supply of cheap labor, the country remains the top destination for foreign direct investment in the developing world.

Weaknesses
China's economic growth boom has led to major imbalances and environmental degradation. The country's dependency on exports to boost growth has made it vulnerable to the global recession. Private consumption remains weak at less than 40% of GDP

The close relations between provincial leaders and local businesses are fostering corruption, making it harder for the central government to enforce its policies.

Foreign companies continue to complain about the poor protection of intellectual property in China.

Chinese corporate governance is weak and non-transparent by Western standards. There is a considerable risk for foreign companies in choosing the right local partner.

Opportunities
China's economic growth is slowly becoming more broad-based, with domestic consumption likely to rise in importance vis--vis exports, thanks to a middle class of 200-300mn people. China's ongoing urbanization will be a major driver of growth and new cities will emerge in less developed inland provinces. The UN forecasts China's urban population rising from 40% in 2005 to 73% in 2050: a gain of 500mn people. As China moves up the value chain, it will develop its own global brand name companies, fostering innovation and growth. China's ongoing urbanization and infrastructure drive will provide major opportunities for foreign investment in landlocked provinces as well as the transfer of skills and know-how. The Chinese government is giving more protection and encouragement to the private sector, which is now the most dynamic in the economy and accounts foremost of the country's job growth.

Threats

China's government will block attempts by foreign firms to take over assets of national importance.

China is experiencing rising labor costs, prompting some investors to turn to cheaper destinations such as Vietnam