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China, India and the World Economy

Extracts from this essay...

Introduction

China, India and the World Economy T.N. Srinivasan* Introduction Among countries with at least 10 million people in 2003, China and India have been growing very rapidly since 1980. The World Bank (2005, Table 4.1) reports that China's GDP grew the fastest at an average rate of 10.3% per year during 1980-90, while India's grew at 5.7%. Of the five countries that grew faster than India during this decade, none did so subsequently during 1990-2003. In the latter period, China's GDP again grew fastest at the rate of 9.6% on an average per year, while India and Malaysia, at 5.9% per year, were the third most rapidly growing countries, with Mozambique at 7.1% being the second. In 2003-04, India's GDP growth rate jumped to 8.5%, fueled by recovery from a severe drought in the pervious year. The estimated growth rate for 2004-05 is 7.5% and the projected rate for 2005-06 is 8.1% (CSO, 2006; RBI, 2006). China's GDP growth rates, based on revised data, were 10.1% and 9.9% respectively in 2004 and 2005 and the projected rate for 2006 is 9.2% (World Bank, 2006, Table 1). Thus both countries continue to grow rapidly. In terms of absolute level of Gross National Income (GNI) at Purchasing Power Parity (PPP) exchange rates in 2003, China, with $6.4 trillion in GNI, was second largest in the World, second only to the United States at $11 trillion. India with $3 trillion in GNI was fourth after the U.S., China and Japan (3.6 trillion) (World Bank, 2005, Table 8.1). It is likely that in 2005, India replaced Japan as the country with the third largest GNI. IMF (2005, Box 1.4) estimates India's share in global output at PPP exchange rates to have risen from 4.3% in 1990 to 5.8% in 2004, and India's growth during 2003 and 2004 to have accounted for one-fifth of Asian growth and one-tenth of World growth, as compared to China's contribution respectively of 53% and 28%.

Middle

From about 50,000 cars in the early 1980s, India produced over 1,200,000 in 2004, and exported 160,000 cars, many to the developed world. (Rajan, 2006, p4). Sutton (2005) examined the extent to which Chinese and Indian auto component producers have advanced towards international best practice levels of productivity and quality through a survey of nine car manufacturers in China and six in India and a range of general component suppliers in both countries with detailed bench-marking of six seat producers and six exhaust suppliers in each country. The main finding of the study is that "the development of the auto industry supply chain in both China and India has proceeded very rapidly at the level of car makers and their first-tier suppliers: here current standards of supplier quality are at, or close to, world standards. The main weakness of the supply chain lies in the fact that best practice techniques are permeating down to second tier suppliers in a very slow and uneven manner. The similarity in the pattern across both countries is striking" (Sutton, 2005, Executive Summary). It found also that "While the development of the local supply chain in both countries has in large part been driven by the presence of multinational car makers, component exports are driven equally by multinational and domestic firms. Both India and China have a substantial body of purely domestic firms that have achieved major successes in export markets; of the top ten component exporters in China, six are domestic firms; of India's top 10, half are domestic firms (and three of these belong to a single domestic industrial group" (ibid). It would seem that the prospects for both China and India to play a major role in the evolution of global auto and parts market are bright. This will intensify the competitive pressure on established auto (particularly auto parts) firms in industrial countries. This is already evident from the bankruptcy of the component makers Delphi in the US.

Conclusion

In concluding the paper let me refer to the provocative questions raised by Huang and Khanna (2003) and Huang (Financial Times January 23, 2006). The first article articulated the view that although India was not outperforming China overall it is doing better in key areas and that success may enable it to catch up with and perhaps overtake China. The key areas in which India performed better included (1) the spawning of internationally competitive homegrown small companies. Out of Forbes 200 of the World's best small companies in 2002, there were 13 Indian firms as compared to China's four (2). India's stronger infrastructure in terms of far more efficient and transparent capital markets to support private enterprise so that entrepreneurship and free enterprise are flourishing. In a survey of leading Asian companies through polling of 2500 executives and professionals in a dozen countries by the Far Eastern Economic Review, only two Chinese firms had high enough scores to qualify for being rated among India's top 10. In the second article, Huang points to the booming stock market in India in contrast to market collapse in Shanghai, and the better functioning of India's financial system despite its many faults in not discriminating as much against innovative small enterprises as compared to China's system. Wolf(2006) also notes some of India's institutional advantages over China noted earlier: a well-developed private sector; a relatively entrenched legal system; a stable democracy and freedom of speech; a modestly better score on corruption and rule of law in World Bank's governance indicators. He concludes that India's prospects for overtaking China depend on implementing difficult reforms in five pivotal areas: deregulation of labour markets and an end to the small-scale sector; revitalization of agricultural growth; increased investment in infrastructure; elimination of fiscal deficits; and, finally, across-the-board privatization and further trade liberalization Whether or not India overtakes China in the next two decades, it is clear that both countries will be economic powerhouses in the medium term. Undoubtedly, their growth will have significant impacts on the World economy.

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