India & China at present are being hailed as the economic engines of the world. The influences of both these economies are being felt by every other nation on the planet & it has become imperative to keep a close watch, daily, on the happenings in these two Asian giants.
Economies of these two great nations have striking similarities and astounding differences.
This essay critically examines & evaluates both of them on a macroeconomic level. Macroeconomics examines the economy as a whole. Demand & supply are examined in totality or at aggregate levels. (Sloman, 2006, pg.367)
"It is the branch of economics that studies economic aggregates such as overall level of prices, output and unemployment in the economy." (Sloman, 2006, pg. 5)
"The 4 main macroeconomic goals that are generally of most concern to governments are economic growth, reducing unemployment, reducing inflation, and avoiding balance of payments and exchange rate problems."(Sloman, 2006, pg. 369)
Historical Description Of Both Countries
India
India became free from British colonial rule on 15th August 1947. Its economic value was so distinguished that it was called as the "Jewel in the Crown" of the British Empire. But the long British rule had greatly impoverished it. The newly freed nation followed an economic policy of undertaking development on a national basis through series of 5 year plans influenced by the erstwhile USSR's developmental style. India followed an economic policy of high regulation & restrictions. The flow of foreign currency was strictly restricted. There was a prevalence of a system known as the 'Licence Raj' under which various licenses had to be obtained from the government by private businesses for conducting commerce. Large government owned enterprises in manufacturing, transportation, communications & banking existed and there was no choice for the consumer at large. Private companies were nationalised & brought under government control. For instance, in 1953 the airline company owned by a private business corporation, was nationalised & made as the national air carrier. In 1969 & 1980 most of the banks were nationalised. Previously these banks had been owned by private businessmen. It can be said that the economy was of rather socialist nature & closed from the outside world.
China
China became an independent nation in 1949 after the end of years of civil war. The formation of the People's Republic of China was proclaimed on 1st October 1949. A system of 5 year plans was adopted based on the economic developmental model of the erstwhile USSR. The system of colossal state owned enterprises [SOE] was introduced. Prices of almost all commodities & agricultural produce were set by the government. Centralised & socialist planning was the key characteristic of the economy. All decisions of procurement, production, management were done by the government. The level of employee morale was seen as loyalty & devotion to the Chinese Communist Party. Private businesses practically were non-existent. Virtually all commerce was done by the SOEs and there were stringent currency exchange laws. Thus the Chinese economy was highly regulated & the government had acute authoritarian control & views of the economy.
The Changes In The Economies
India
In 1990, a serious balance of payment crisis occurred. In 1991, under recommendations from the IMF & the World Bank, a new era of economic reforms was ushered in & the economy was opened up. The previous practice of industrial licensing & the 'Licence Raj' system was completely abolished & a free market economy structure was propounded. Foreign direct investment (FDI) was allowed. Indian currency {Rupee} convertibly was freely & in entirety was allowed on the current account. In 1992, Indian companies were allowed to raise capital from international markets by the issuing a financial instrument called Global Depository Receipts (GDRs). Sectors of the economy previously closed and reserved for public sector were opened to private investment e.g. telecommunications, insurance, electric power transmission, petroleum refining, real estate construction, and airlines. Disinvestment of the government owned equity in numerous government owned enterprises was done. Tariffs on imports were reduced from maximum level of 400% to 150% in 1991-92 and to only 30.8% in 2002-03.
China
China started liberalising its economy from 1978. The agricultural system was changed from communal farming to family style farming and extra agricultural produce was allowed to be sold in free markets. A system called 'Household Responsibility System' was introduced which greatly increased agricultural production. Establishment of private businesses was encouraged & government interference in their working was reduced. Very attractive taxation benefits were announced for foreign companies investing in China, e.g. corporate tax levied only 15%, exemption from taxation for first 2 years & corporate tax rate of only 12.5% charged for next 3 years called the 'Benefit of 2 + 3 years' and special benefits were given to new high technology companies, such as, additional 50% deduction for R&D expenses. Large geographical areas along the coastline called Special Economic Zones (SEZs) were created from 1980 to 1984. Modern & westernized ways conducting business were adopted, for instance, the Shanghai stock exchange, the first stock exchange in the country, was opened in 1990.
Comparison of the two economies
A comparison is being done of the four main macroeconomic objectives of both the economies, namely;
Growth in terms of Gross Domestic Product (GDP).
Inflation.
Unemployment.
Balance of Payments (BOP).
The comparison is being done from 1991 onwards as that is the time period when maximum & major economic activities happened in both the economies, which will be evident from the data shown.
GROWTH
The growth of an economy can be measured by its Gross Domestic Product (GDP). According to Sloman, GDP is, "the value of output produced within the country over a 12-month period." (Sloman, 2006, pg. 373)
(Appendix A)
INDIA
Source: http://uk.ibtimes.com, http://society.ezinemark.com,, http://www.rediff.com, www.adb.org,
http://www.livemint.com, http://en.wikipedia.org, http://www.umsl.edu, https://www.cia.gov,
CHINA
Source: www.chinability.com, http://news.xinhuanet.com
INFLATION
(Appendix B)
INDIA
Source: www.indexmundi.com, www.indiaonestop.com, https://www.cia.gov
CHINA
Source: www.economywatch.com, www.questia.com, https://www.cia.gov
UNEMPLOYMENT
(Appendix C)
INDIA
Source: www.isid.ac.in, www.nationmaster.com, www.igovernment.in, www.photius.com, https://www.cia.gov
CHINA
Source: http://data.worldbank.org, http://laborsta.ilo.org, www.china-labour.org.hk
Balance of Payments (BOP)
"It is often regarded as undesirable for a country to have a current account deficit, even if it is matched by a surplus on the two other accounts".(Sloman, 2006, pg. 419)
The current account is vital in analysing the BOP condition of a country as it is considered as a comprehensive measure of a country's trade with the rest of the world. India & China have allowed only current account convertibility when it comes to their foreign trade policy. Therefore the current account balance is being analysed as a representative of the BOP situation of both countries.
Current Account Balance
(Appendix D)
INDIA
Source: http:/indiabudget.nic.in, www.imf.org, www.thehindubusinessline.com
CHINA
Source: www.tradingeconomics.com, www.consensuseconomics.com, www.chinability.com
Foreign Direct Investment (FDI)
(Appendix E)
INDIA
Source: www.thehindubusinessline.com, http://ict4dblog.wordpress.com, indiabudget.nic.ines2003-04,
www.financialexpress.com, www.indiaat75.in, www.indiaonestop.com, www.bis.org
http://economictimes.indiatimes.com, www.hindustantimes.com
CHINA
Source: www.chinability.com, www.uschina.org, www.southasiaanalysis.org
Brief of graphical data
As it is evident from the data given, China is ahead of India on all macro economic factors. It has achieved double digit economic growth for a many years, whereas India has never done so. China's unemployment rate is far lower, inflation is under control, and its current account balance is in robust surpluses whereas India's is continually in deficit & only intermittently in surpluses. FDI in India, when compared to China, is like comparing a laggard student with a class topper.
In 2004, China's economy was 7th largest in the world, whereas, in that year, India's was the 10th largest and, had just entered the league of world's top ten economies.
In 2009, as per the World Bank, the GDP of China was more than 4.9 trillion US$ and & that of India's more than 1.3 trillion US$.
As of 2010, the Chinese economy has become the 2nd largest economy in the world and is projected to become the world's largest in another decade.
India's is ranked at 4th place in the world.
All these facts clearly indicate that even though India might be growing fast and trying to catch up, it still has a long way to go.
Pest Analysis Of Both The Economies
Political Economic Social Technological factors
India
Political factors
India is the largest Democracy of the world. It is the 7th largest country in the world in terms of land area. Most elected governments have completed the set five year term. There is low threat of invasion from any other country. It possesses the 2nd largest land army, 4th largest airforce & 3rd largest navy in the world.
However, the government and government bodies are riddled with corruption. India's public sector has been called as one of the world's top 10 problems. Government officials demanding bribes are common phenomena. The Indian bureaucracy is ranked as least efficient in the whole of South East Asia.
Economic factors
It is one the worlds fastest growing economies. India's remarkable economic growth is largely in the private sector. In 2009, India was ranked 3rd in the world for global foreign direct investments. There is mediocre infrastructure in surface, air & sea transportation in place.
As per latest exchange rates of 2010, 1 GB £ equals 71 Indian Rupees & 1 US$ equals 44 Indian Rupees, approximately.
Social factors
It is the 2nd most populas country in the world & is slated to become world's most populas country by 2045. Population is more than 1.15 billion.
Literacy rate is only 65%. There are extremely high absent rates of school teachers in government run schools.
Extreme disparities in distribution of income exist. Around 25% of the population is below the international poverty line i.e. below 1.25 US$ a day.
India is home to approximately 1/3rd of the world's poor.
There are more poor people in India than whole of Africa.
Technological factors
India has nearly 50% of its total land area as being of arable nature. The per hectare crop yields in China are remarkably higher than that of India. Only 23% of total crop land is irrigated.
There are 81 million users of internet in the country in 2010.
China
Political factors
China has a very stable government and follows a Communist form of government.
It has the single political party system. There is very low threat of invasion from any other country. It possesses the world's largest land army, 3rd largest airforce & 2nd largest navy. It is the 3rd largest country of the world in terms of land area.
Economic factors
It is the fastest growing economy in the world. It is projected to become the biggest economy beating even the USA in another decade. Average GDP growth rate of more 9% per annum was achieved in last ten years.
As per latest exchange rates of 2010, 1 GB £ equals 10 Chinese Yuan & 1 US$ equals 6 Chinese Yuan, approximately.
Social factors
It is the most populas country in the world. The total population is more than 1.3 billion.
China's 'One Child Policy' started in 1979 has curbed population growth, & continues to be enforced.
Literacy rate of more than 90% has been achieved and only 2.8% of the total population is below the international poverty line.
Technological factors
Modern & scientific technology is used in agriculture. Out of the total land area available to China, only 15% is of arable quality. It is the highest consumer of fertilizer in the world & 40% of the crop land is irrigated. The average yield per acre in China is double that of India
There are 420 million users of internet in the country in 2010.
Conclusions
Historically, both India & China had similar economic policies and both took somewhat alike measures in making economic reforms.
Presently, both economies are hailed as future economic powers and shapers of the world economy. Both countries are being looked on by the rest of the world as the rescuers from the current worldwide economic recession, as can be determined from the amount of FDI flowing into them in the past few years.
In both countries, the growth of foreign direct investment is increasing tremendously, laissez faire market economy structure is propagating, and consumerism is an accepted norm. It can be said that, economically, both these Asian behemoths have shed the shackles of socialism, of restricted & draconianly regulated commerce and have embraced the concept of free trade & market economy with open arms.
Recommendations
India needs to make improve greatly in education, infrastructure and technology penetration if it wants to catch up with China. India's BOP condition also needs urgent addressing to as a deficit in the current account, which India continually shows, results in outflow of interests & dividends and raises the standard of living of the population only temporarily. (Sloman, 2006, pg. 419)
