Why China has grown faster then India

Introduction:

Comparative studies between China and India are becoming more popular now in the international level. China and India are among the largest economies in the world today. While the Chinese economy has surpass India by a wide margin over the past 15 years.

I am comparing the growth experiences of China and India at a broad level, explaining why China has grown faster than India by focusing on the comparison of GDP, Exchange rates policies, Monetary and Fiscal policies, and Unemployment in India and China.

In this study will analyze why per capita national income is so much higher in China than in India? And why China’s GDP is growing so much faster? And why unemployment remains high in both the countries and how the Governments addressing the Unemployment factors?

Why GDP per capita national income is so much higher in China than in India?

In 1978, after years of state controlled productive assets, the Chinese government invests on a major economic reform program. In an effort to awaken economic giant, it encouraged the formation of rural enterprises, private businesses, liberalized foreign trade and investment. China also relaxed state control over some prices, invested in industrial production and stressed on education of its workforce. The growth in the country is accumulated capital assets, such as new factories, manufacturing machinery and communications systems.

Economic development has suggested a significant role for capital investment in economic growth, and a sizable portion of China’s recent growth is in fact attributable to capital investment that has made the country more productive. In other words, new machinery, better technology and more investment in infrastructure have helped to increase its output.

Being hospitable to foreign investment, China’s open-door policy has added power to the economic transformation. Cumulative foreign direct investment, negligible before 1978, reached nearly US$100 billion in 1994. Annual inflows increased from less than 1% of total fixed investment in 1979 to 18% in 1994. The foreign money helped China built factories, creates more jobs, linked China to international markets and led to important transfers of technology. These trends are especially apparent in the more than one dozen open coastal areas where foreign investors enjoy tax advantages. In addition, economic liberalization has boosted exports which rise 19% a year during 1981-1994. Strong export growth, in turn, appears to have fueled productivity growth in domestic industries. (Zuliu Hu, Mohin S.Khan, 1997)

GDP Per Capita (Current US$)

2005

2006

2007

2008

2009

China

1,731

2,072

2,660

3,422

3,744

India

765

855

1,096

1,065

1,134

(Adapted from The World Bank Group, 2010)

Why China’s GDP is growing so much faster?

GDP: Comparative Analysis between China and India

As per IMF (International Monetary Fund) report, China was the fourth largest economy of the world by nominal GDP in 2006, where as India was 12th. China registered GDP growth rate of 14.2% in the first half of 2007, where as India has registered a 9.6% GDP growth in June 2007. Chinese economy is worth $4900 billion, whereas the India economy is worth of $1300 billion.

GDP Growth (Annual %)

2005

2006

2007

2008

2009

China

11.3

12.7

14.2

9.6

9.1

India

9.3

10.1

9.6

5.1

7.7

(Adapted from The World Bank Group, 2010)

GDP (Current US$)

2006

2007

2008

2009

China

2,716,870,000,000

3,505,530,000,000

4,532,790,000,000

4,984,730,000,000

India

949,192,000,000

1,232,820,000,000

1,214,210,000,000

1,310,170,000,000

(Adapted from The World Bank Group, 2010)

China’s economy seems to be a better bet, for unlike China; India is yet to prove that it can sustain high growth rates over a period of time. The general feeling is that despite having a boom in technology, services and IT sector, the Indian economy still eventually depends on good monsoons, meaning that agriculture continues to dominate the Indian economy more than it should. (Arvinder Singh, May/June 2005)

Foreign Direct Investment, Net Inflows (BoP, Current US$)

The FDI flow depends on the market size, market growth rates, political stability, corruption, exchange rates, labor productivity, economic freedom, infrastructure, openness, human capital and taxes.

China got $79 billion in 2005 in FDI and India did not even get $ 7 billion in FDI. In 2009 there is slight change in China’s FDI of about $78 billion dollars but India made a good progress of raising $34 billion in FDI compared to year 2005. The study tried to explore this phenomenon and to understand the drivers for attracting foreign investment in emerging economies.

India despite being the largest democracy in the world has lagged behind due to its focus on services and specialized skill based relatively small manufacturing model in contrast to China. India growth model has been based on IT, ITES and skilled manufacturing which are dependent on the availability of human skill and capital in an emerging market. (Swapna S Sinha, Apr-Sep 2008)

FDI, Net inflows (BoP, Current US$)

2005

2006

2007

2008

2009

China

79,126,731,413

78,094,665,751

138,413,000,000

147,791,000,000

78,192,727,413

India

7,606,425,242

20,335,947,448

25,127,155,852

41,168,605,242

34,577,000,000

(Adapted from The World Bank Group, 2010)

China is regularly getting 10 to 12 times more foreign investment than India. In India the number have come up, they will probably come up more. I believe China has a more competitive manufacturing sector than India and that is derived primarily from China’s greater degree of openness than India. That does not mean that India does not have many world class manufacturing companies, it certainly does, but on an average the competitive environment in China is much stronger because its tariff being much lower. (Wanda Tseng, 2006)

Trade in Goods (Imports, Exports and Trade Balance) in China & India:

Trade with China –

Month

Exports

Imports

Balance

January 2010

6,888.8

25,185.1

-18,296.3

February 2010

6,855.1

23,363.8

-16,508.8

March 2010

7,403.6

24,300.2

-16,896.6

April 2010

6,591.2

25,905.7

-19,314.5

May 2010

6,752.7

29,036.8

-22,284.1

June 2010

6,715.0

32,866.5

-26,151.5

July 2010

7,344.7

33,260.0

-25,915.3

August 2010

7,253.5

35,288.5

-28,035.0

Total

55,804.6

229,206.7

-173,402.1

Note: All figures are in millions of US dollars on a nominal basis, not seasonally adjusted unless otherwise specified.

(Adapted from U.S. Census Bureau, 2010)

Trade with India –

Month

Exports

Imports

Balance

January 2010

1,295.5

2,079.4

-783.9

February 2010

1,235.2

1,958.1

-722.9

March 2010

1,454.8

2,472.4

-1,017.6

April 2010

1,671.2

2,650.0

-978.8

May 2010

1,852.9

2,672.6

-819.7

June 2010

1,690.6

2,532.6

-841.9

July 2010

1,800.2

2,591.4

-791.2

August 2010

1,716.8

2,773.5

-1056.7

Total

12,717.1

19,729.9

-7012.7

Note: All figures are in millions of US dollars on a nominal basis, not seasonally adjusted unless otherwise specified.

(Adapted from U.S. Census Bureau, 2010)

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Exchange Rate Policies in two countries:

China policy – The debate over the exchange rate between the Renminbi (RMB) and the Dollar is usually framed in terms of global imbalances, excessive US consumption beyond its savings on the one hand, and excessive Chinese production and savings beyond its own spending on the other. This quickly leads to a conclusion that the United States should export and save more and China should import and spend more.

Leaders in the United States would like the RMB to appreciate significantly and quickly to encourage an expansion of US exports and employment. The argument for a sustained appreciation of the RMB is rooted not only in short term concerns about China’s large current account surplus, but also in long term trends of China’s economic fundamentals, including high growth rate, rapid urbanization and industrialization, low national debt and low fiscal deficits. These trends are the result of three decades of reform in China that have opened the country to trade with the rest of the world and led to strong productivity gains. Based on the experience of other fast growing industrializing economies, these forces will increase Chinese wages, the value of the RMB and China’s price level over time. (Steven Dunaway, 2010) (Geng Xiao, 2010)

Indian Policy – With the appreciation of the rupee/dollar exchange rate in early May and the expectation of interest rate hike, there was some appreciation of the rupee and that could hurt exports. In particular, it would hurt the low value added exports from small and medium enterprises.

The recent recovery in exports happens to be the biggest factor for a sharp rise in industrial output growth; this imminent rate hike was opposed. There were calls for the Reserve Bank of India to intervene in the forex market to contain the strength of the rupee largely to support the export sector recovery. There were even suggestions to continue the export incentives that were part of the overall stimulus packages of 2009.

These suggestions are based on the assumption that in India, a weak rupee would encourage exports and thus, help the overall growth recovery. Many economists have argued for intervention in the forex market, and some Asian economies, notable China maintain artificially undervalued exchange rates to maintain international competitiveness. (N R Bhanumurthy, 2010)

Monetary and Fiscal Policies in two countries:

Indian Monetary Policy – The Reserve bank continues its tightening cycle as inflation pressures are building, by raising reserve requirements and its main interest rates since the beginning of the year.

Indian Fiscal Policy – The budget for the 2010-11 fiscal year projects improvements for the deficit after the fiscal stimulus of last year and the large one off expenditures of the year before. As a share of GDP, the deficit is expected to reach 7.8% of GDP from 9.6% last year and 11.8% in 2008-09. The improvement will come from a combination of weaker expenditure growth from reduced subsidies and greater revenues from the acceleration of economic growth. The reversal of indirect tax cuts that were part of the fiscal stimulus package, the expansion of the tax base and the revival of the privatization program, as well as the one time sale of G3 licenses, which generated over US$ 15 billion. Solvency indicators will improve again, but are expected to remain above comfortable levels, with public debt to GDP reaching 68% by 2014-15. (Export Development Canada, 2010)

Unemployment in China & India and Remedial Measures by the Government:

Causes of Unemployment in China – This country has largest population in the world. The work force available is too large. Every year new generation is added to the already available work force. It is very difficult for any government to find jobs for millions of young people entering in the job market. In 2004 the estimation was that 15 million young people will enter the job market and only about 8 million jobs were expected to be created in that year. The other major reason behind the unemployment is the type of jobs offered. There is lack of jobs for the graduates and literate young people.

I feel that the ever increasing population and lack of the English speaking workforce are the two major causes of unemployment in China.

Causes of Unemployment in India – There are individual factors like age, slow pace of development, high growth rate of population, slow industrialization, slow growth rate of agriculture etc. Every year Indian population increases manifold. More than this every year about 5 million people become eligible for securing jobs. Self employment field is subject to ups and downs of trade cycle and globalization. Technological advancement contributes to economic development, but unplanned and uncontrolled growth of technology is causing havoc on job opportunities.

The Chinese government is addressing the unemployment issues by promoting growth of tertiary industries, by increasing financial support and implementing favorable policy for non state sector especially small & medium companies in private sector. It is also readjusting the employment concept and is preparing laborers with practical job training and education.

Conclusion:

The main reason why China’s GDP is higher than India’s is that the growth of China has resulted from the rapid rise in the manufacturing of high-tech goods in the country under the large scale high tech manufacturing firms like Lenovo, Baidu.com and Huawei Technologies. The infrastructural development in China has also been quite high than that of India, which has added to growth of the Chinese GDP. China spends 11% of GDP on infrastructure and India spends 6% of GDP on infrastructure. (Geethanjali Nataraj, 2010)